If you started a three-month sabbatical today, what would your business look like when you returned?
Small business owners may shudder at the thought. But entrepreneurs whose young companies are graduating from the startup stage need to move from running the show to building an organization that can sustain itself, experts say.
"CEOs in growing companies have to think about creating innovative systems that allow them to have control, but they don't have to be the one looking over the shoulder" of employees, says Dino Signore, who runs leadership programs at the Edward Lowe Foundation, a Michigan nonprofit dedicated to helping second-stage entrepreneurs, which it defines as those who head up companies with about $1 million in annual revenue that are beyond startup stage but not fully mature.
Winning with Infrastructure
Signore says business owners need to understand the changes that come with running a larger organization (BusinessWeek.com, 8/1/07). "They have to start working on their business instead of in their business," he says. While support networks and resources for startups are abundant, much less attention is paid to helping small companies manage their expansion. Edward Lowe, the entrepreneur who made kitty litter a household name when he created the Tidy Cat brand, supports these enterprises with leadership training and peer roundtables through the Lowe Foundation.
The stakes are high. Companies beyond the startup stage thrive or fail based on their organization, according to Eric Flamholtz, a management consultant and co-author of Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm.
"You ultimately win with infrastructure," says Flamholtz. "Most people think you win with markets and products. You're looking in the wrong place." He says there are some key signals that should tell companies they need to change: when many workers don't know what others are doing, for example, or when sales rise but profits stay flat.
Chris Frederick Willis, part of a roundtable of entrepreneurs run by the Lowe Foundation, credits organizational changes with helping her firm clear $1 million in sales. The Grand Haven (Mich.) company, Media 1, develops online training programs for corporations. In 15 years, she expanded it from a two-person startup she ran from home to a company with 19 employees and clients like Hewlett-Packard (HPQ). But four years ago, flirting with $1 million in revenue, Media 1 stalled.
"We were in the fast growth mode, and then suddenly it was like a hard haul," Willis says. After reevaluating her business, she split the functions of sales and marketing and hired a dedicated marketing person. Media 1 also created a quarterly bonus system to motivate staff. Willis says the company's revenues reached $1.75 million last year.
For some entrepreneurs, understanding how their roles change in second-stage companies is the biggest challenge. "What you have to learn is how to effectively delegate, how to effectively motivate, how to instill trust [in employees] and to trust them," says Larry Kooiker, president of Holland (Mich.)-based Agritek, which designs and manufactures metal components. Kooiker describes himself as a "hands-on entrepreneur," but his shop has grown from two to 50 people since he founded it 20 years ago. He now thinks of himself as more of a leader than a skilled worker.
Time Becomes More Valuable
Signore suggests executives make a "stop doing list," a concept developed by management consultant and author Jim Collins (BusinessWeek.com, 9/23/02). Signore recalls counseling one business owner who still opened the mail and distributed it to staff. "The CEO has to think of their time as their valuable asset," he says.
Some entrepreneurs who find themselves suddenly running larger companies need outside guidance (BusinessWeek.com, 11/26/07). Kathie Fuce-Hobohm, president of the Midland (Mich.) workplace design firm SPACE, asked a local executive she knew to mentor her and her partner. "As second-stage entrepreneurs, we spent a lot of time learning about the business of running a business," she says. "Teaching the skills of a CEO is not something you can learn in our business or just on the street."
Of course, business owners seeking organization can overdose on new systems and lose the agility that made their startup successful. Flamholtz, who has worked with companies like Starbucks (SBUX), says businesses need the right balance of internal systems. "If you overbuild it, you can strangle your organization. If you underbuild it, you can choke on your own growth," he says.
Learning to Let Go
The core lesson is that CEOs should create entities that don't depend on them. When Bruce McCully, co-owner of Ann Arbor (Mich.) consulting firm Dynamic Edge, arrived at the Lowe Foundation's campus for a retreat in 2005, he realized his cell phone didn't work. Since he founded the company in 1999, he had never been unreachable before. Out of touch for three days in the middle of the business week, he was unsure what he would return to.
"There was a little crisis that happened, and it was taken care of. When I got back they told me about it," McCully says. "They said, 'But it's done and it's taken care of, and the customer's happy. They don't need to talk to you.'"
The experience showed McCully that he could step back and focus on the company's direction, rather than micromanage every account. "When a customer had a problem and one of our technicians couldn't handle it, I would always be available to help out," he says. "That changed at that point."