Growing Pains

No Man's Land

What to Do When Your Company

Is Too Big to Be Small But Too Small to Be Big

By Doug Tatum

Portfolio Hardcover -- $24.95

Gazelles are companies rapidly transforming from the very small to the clearly midsize, and they face obstacles wholly different from those of tadpoles or elephants. They may, for example, be so eager to respond to the needs of potential customers that they gradually morph into companies their founders never envisioned. Doug Tatum, chairman of the Atlanta-based financial and technology consultant Tatum LLC and of the Gazelle Institute, a nonprofit research organization that studies growing companies, advises entrepreneurs in that position to reassess their company's place in the market and make some tough decisions. Such is the main lesson of his book, No Man's Land: What to Do When Your Company Is Too Big to Be Small But Too Small to Be Big.

Tatum defines growth companies as those whose revenues increase 20% over a four-year period and have 20 to 100 employees. Whether startups or established enterprises, these gazelles enter an awkward adolescence when they exceed 20 workers. Until they reach 100 employees, they are at a critical point, the author asserts, and many entrepreneurs are ill-equipped to recognize and conquer the challenges. In a style often informal and overly wordy, he uses anecdotes and sometimes frustratingly cursory case studies to illustrate his point. Entrepreneurs, Tatum writes, must assess their companies' competitive advantages, calculate the financing they need to keep growing, bring in experienced management, and begin to systematize operations. Otherwise they face a bleak future.

One company Tatum thinks did it right was Heritage Information Services, a Richmond (Va.) company that detects fraudulent insurance claims. After a decade in business, Heritage turned its expertise into highly specialized data analysis software. Revenues exploded. Tatum writes: "Heritage had become not merely a different kind of company but an attractive target for acquisition by a larger competitor." It eventually sold for tens of millions of dollars, which the author considers as much a triumph as remaining independent.

Of course, entrepreneurs can choose to keep their companies small and maintain quality. But the author warns that there is no litmus test to help you determine whether even to try to become a much larger operation. "To achieve true success," Tatum writes, "entrepreneurs must look into their hearts and assess whether running the business in a way that is satisfactory to investors is consistent with their deepest dreams and values." He tells the story of Burt Prader, founder of EMR, a medical surveillance outfit that found itself at a crossroads in 1995. Prader had two options: deemphasize his core business and accept an outsourcing contract from a huge corporation, or reorganize to keep up with new, lower-priced competitors and ultimately sell the company. After a rigorous financial analysis of the choices (which is included in the book and may be helpful to those in a similar position), Prader decided to reorganize and stay independent for a time, a plan that benefited his team and shareholders alike when the business was later sold.

In addition to pontificating on the challenges facing gazelles, Tatum uses this book to urge the federal government to offer such businesses more support. He writes most concisely and persuasively in this final section, probably because, as he points out, he has testified before Congress and met with the Federal Reserve on the issue. Citing research by small business consultant David Birch, Tatum maintains that, at any given time, only about 350,000 of the country's 20 million businesses are growth companies. Yet between 1994 and 1998, they accounted for 95% of total job growth. Despite their importance, these mighty mites still struggle to compete with big companies. Tatum wants governments here and abroad to roll back incentives to public corporations, revise accounting and tax policies that threaten growth companies, limit administrative impediments to innovation, and play a greater role in funding basic scientific research. Few gazelle owners would disagree.

By Marilyn Harris

Before it's here, it's on the Bloomberg Terminal.