One of the key questions for any entrepreneur is how to achieve growth. However companies often suffer the highest failure rate while making the transition from small to big. Those firms that do manage to get through this period help drive the American economy in terms of job creation. Doug Tatum, the founding chairman of Tatum, an executive services and consulting firm, examines this seminal process in a company's success cycle in his forthcoming book, No Man's Land: What to Do When Your Company is Too Big to Be Small but Too Small to Be Big.
Recently, BusinessWeek.com's Stacy Perman spoke to Tatum. Edited excerpts of their conversation follow:
What is No Man's Land?
It is a transition that a company goes through when it is too big to be small and too small to be big. It's something every company has to go through in order to grow to scale. It's a highly fatal transition and many companies don't make it.
How do you know if you are too big to be small and too small to be big?
What I have found is that CEOs of companies and entrepreneurs are struggling with a series of issues and decisions that they have never faced before. They often feel that they are losing control of their business. There is a series of symptoms that happens to a business when the number of employees approaches north of 20 to 40 employees and is full blown by the time it reaches 100.
The reality is that the complexity of a business is driven by the number of employees that it has; that's one good measure. A good way to think about it is when a business can't perform based on the personal efforts of the entrepreneur and a coterie of those who believe in the business—then you are in the middle of No Man's Land. You have to think about how to build a business and scale.
The statistics on startups are staggering, with nine out of ten failing within the first three years. Why is that?
Well, there are some rules that I call navigation rules that have to be executed if a business is to keep growing through No Man's Land. It has to have a scalable value proposition. By that I mean that there is something the business does outside of the personal efforts of the entrepreneur that the market is willing to applaud. In other words, look at the business of a world-class chef of one restaurant. The guests receive the direct efforts of the chef and they keep coming back. Now take that chef to four restaurants. The business has to have a value proposition beyond the personal efforts of the chef because he can't be in four places at once. A lot of businesses fail because they don't. It's a real shame because there are some perfectly wonderful businesses just built around the efforts of the entrepreneur—then they grow themselves right out of business.
You say that fast growth is every entrepreneur's dream, but it never comes easily. What accounts for that?
I think everyone gets into it to grow and maybe we haven't let everyone know that it's O.K. to have business on a more human scale—what author Bo Burlingham calls "small giants" (see BusinessWeek.com, 5/1/07, "Resisting the Temptation to Grow"). Some businesses and entrepreneurs demand growth and continue to grow and some don't, but we never define what it takes to grow a business.
Then is it necessary to have fast growth? Is there an alternative?
The alternative is to be a small giant and to have pride in something that doesn't have to grow to scale. I say that if you want and have the capability to do that and the [business] merits growth and it continues to grow, you are [still] going to have to go through No Man's Land, where there are excruciating issues. Can a [larger] business become good at what you were good at [as a smaller business]? If it can't, then it's better to stay small. There is nothing unethical, dishonest, or immoral about running a small business profitably, having an impact, and having fun.
Where do entrepreneurs misstep when they reach No Man's Land?
They miss the fact that all of the rules are going to change on them. The people that got them up and running are not going to get them through it and grow. They miss that they have to take on capital from markets and the responsibility that goes with that. They literally don't know how to get through the wilderness. Nobody has given them a road map. When they face these issues, they don't realize that they're going to have to bring in new management with people with different skill sets. [They don't realize that] if a big mistake happens, it's terminal.
What are the most common mistakes an entrepreneur makes in growing their business that often lead to failure?
It goes back to scalable value. Also, they wait way too long to transition to new senior management. Another common mistake is that they don't understand capital requirements. It's like they don't know how much water to take with them through the desert and then they run out when they are almost to the other side.
What are the tell-tale signs that they need to switch from their routine?
For starters, the business stalls and the revenue side stops growing. The second issue is that everyone knows part of the inner circle is not capable of performing, but they're not dealing with it. The third common symptom is that they run into a capital gap. They have to go into the capital markets but they are not big enough to attract the capital they need.