GROWTH SECRETS: Your growth potential score
Today SmartCompany finishes the special series it has been running for the last 17 weeks, based on the secrets of high growth companies, from Tom McKaskill's eBook, Ultimate Growth Strategies: A practical guide to engineer high growth into your business.
In any entrepreneurial venture, high growth is a remarkable achievement. Few make it. Most studies show that only about 4% of all privately held companies achieve double-digit growth for a few successive years. Only a very few manage to sustain high growth over a long period of time. Clearly what enabled the spurt of growth was undermined either by internal issues or changes in their competitive environment. Some do manage to get back on track but stumble again several years later.
Most of our knowledge of high growth firms comes from looking backwards in time at firms which have achieved outstanding growth. Generally you can see something which was outstanding about the business or the senior executives that you can point to and say, 'That's why they were so successful.' As you examine more and more of these cases, patterns emerge. Many fast growth firms have similar characteristics but even so, they are not all the same. Those factors which created success in one industry may not have been the ones which underpinned success in another. However, at a more basic level they all tend to demonstrate similar attributes, those which I have selected in this book.
Perhaps the one industry which has the most to gain and the most to lose in getting the mix right is the venture capital (VC) sector. I have read most of the available textbooks on VC investment and most of the textbooks on new venture creation and I have spent considerable time in recent years reviewing business ventures for possible angel or VC investment. This examination has made me increasingly sensitive to what can go wrong with a venture and, more importantly, what you have to get right to provide a high probability of success. The venture capital investment model takes a portfolio view of investment.
VC firms look for ventures which have a high probability of a successful exit. In their eyes this almost always is underpinned by high growth potential. They then choose a number of investments which have high growth potential – note that they do not expect everyone to be a winner. What they expect is that each one has the chance to be a winner but that only time will show which one(s). What you see historically is that they tend to hit a high growth winner about ten percent of the time.
What the VC sector is doing is betting on probabilities. If they have the right components they believe that, on the basis of their accumulated wisdom, they will get it right some of the time. Although to be fair, many of their lower performing ventures would make most of us very happy with the results since these still demonstrate very good profits.
While I have taken account of what academic research and literature has to offer, my main insights into potential growth have come from my own research and work around VC investment. VC firms focus on the process of growth which I consider to be the most challenging aspects of management to get right. They are especially interested in sustainable growth over a three to five-year period.
If they are interested in exiting through an initial public offering (IPO), they are specifically concerned with building a platform for long-term growth. The principles which I have included in my High Growth Wheel of Success are what I consider to be the fundamental attributes which the VC firm concentrates on when investing in high growth potential businesses.
How does this help you? Perhaps you have a business which has some growth potential but you have been unable to see how to kick it into a higher growth rate.
In order to drive a growth strategy, you need a holistic view of the enterprise. You have to seek out those factors which inhibit growth and remove them and exploit those which stimulate growth. In its crudest form, growth is simply growing revenue. Providing you maintain your gross margin, the more transactions you do, the more profit you make. But the smart companies work on several dimensions of growth at the same time. They not only want more transactions per unit of time but they want to increase the profit margin each transaction generates.
They increase their gross margin by increasing their price and/or by decreasing costs. This is then combined with increasing productivity of their sales effort by increasing prospect conversion rates and decreasing sales lead times. Another dimension which they tackle is resource productivity. By reducing the amount of resources taken to secure a sale they reduce the cost of sales thus increasing gross margins. They tackle what we can refer to transaction velocity which is a measure of the rate of transactions per unit of sales and marketing resource.
Given a finite resource to devote to the sales effort, the high growth business directs it efforts to decreasing the time and resources needed to close the sale.
Every sale has a number of steps which the customer goes through before they actually hand over the cash. These stages of sale conversion each consume resources, but more especially consume time. If you decrease the resources used throughout the process, you can support more transactions. If you then reduce the overall time taken for a transaction to covert from interest to sale, you bring in revenue quicker, accumulate profit faster and thus grow quicker. So by focusing on the resources and time taken for each step in the sale process and optimising each one in a systematic way growth can be proactively driven.
Many transactions require the customer to undertake many steps to get to the point of purchase. For example, they might search for a product or service, gain an appreciation of competitive product and service offerings, evaluate the differences, identify points of supply, get references, perhaps try the product out, go through the purchase and take delivery. Thus, there are many steps in this process which can be improved. Your objective should be to make this as easy as possible but to move them as quickly as you can to the purchase decision point. For example, an information dissemination system which enables potential buyers to decide not to buy, might allow greater resources to be devoted to the better qualified leads. You need to work out where to put resources into each step of the process which gains you the highest productivity of conversion.
Comparative marketing research has shown that high growth firms have higher referral levels, higher account penetration and lower marketing costs per unit of sale. They put more effort into satisfying their existing customers in order to cross-sell more products, increase the rate of usage of products and provide a solid base for referrals. They know that prospect fear about making the wrong decision is the biggest impediment to closing a sale. By having their existing customer willingly refer them to others, take part in case studies and conference articles, they can substantially reduce this obstacle in the purchase decision. They spend much less on getting a sale and reduce the time from interest to purchase.
You should break you own customer purchase decision down into the many steps the customer goes through to make a decision and then put the effort in to improving the productivity and reducing the time of each step. The end result will be to increase transaction velocity and thus growth.
You can see how easily transaction velocity fits within the High Growth Wheel of Success. Clearly timing impacts the willingness of customers to want a
new solution, the compelling need reduces customer resistance and competitive advantage ensures yours is the solution chosen. Whether it is selecting a market to compete in or evaluating internal changes, the forecast impact on transaction velocity will demonstrate whether the change will stimulate growth.
At a more holistic level, I think the advantage of the High Growth Wheel of Success is that it does represent the factors which you have to work on to lift your game. However, scoring a 5 on one factor and neglecting the others won't do it. Your business will simply be undermined unless you happen to be especially lucky. You may gain a spurt of growth over a limited period but that will end as the other elements gain in importance.
You can see this again and again with inherited businesses. The founder hands over a profitable and growing business to the children that manage to keep it going for some years, but eventually the business withers and is sold off. That essential component of entrepreneurial talent was missing. In other situations you see the reverse. A lackluster or failing business is handed over to the children who turn it round and build a world class business. Quite often you see a change in direction, some risky decisions that worked and a business that ends up in a very different industry from its origins.
In the case of the failures, they gradually lost their competitive advantage, failed to innovate and the successors were not able to find new directions for continued growth. In the case of the winners, the successors moved the business into new areas, found a strong competitive advantage and aggressively pursued new growth opportunities.
An average management team can keep a venture growing in a situation where they have many advantages going for them – high scores across many of the principles I have outlined. However, it is the outstanding management team which is needed to fix a business which has few of the principles I have identified. Their job is clearly to move the business towards the sweet spot in the High Growth Wheel of Success. While some elements are simply a matter of application and experience, others require creative talent.
The High Growth Wheel of Success won't guarantee that your business will move into high growth, it simply sets out a framework which shows that your probability of moving into high growth is greatly improved if you move towards the sweet spot in the centre. What you should achieve is a more profitable, more resilient and better managed business by going through the process.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia. A series of free eBooks for entrepreneurs and angel and VC investors can be found at his site here.