Super Size Your Startup

Success Magazine

 

HIS BUSINESS CARD SAID CHIEF EXECUTIVE OFFICER, BUT IN FACT HE REGULARLY PUT IN STINTS AS COMPANY RECRUITER, CONTROLLER, BUSINESS DEVELOPMENT MANAGER AND CUSTOMER SERVICE REPRESENTATIVE. IT WAS 2004, AND SALES AT ICE.COM, THE ONLINE JEWELRY STORE SHMUEL GNIWISCH AND HIS TWO BROTHERS OWNED, WERE ON SCHEDULE TO HIT $15 MILLION. SUCCESS SEEMED CLOSE …

… BUT THE CEO FELT THINGS WERE SPINNING OUT OF CONTROL. “I WAS BURNING AT ALL ENDS BECAUSE I WAS TRYING TO DO EVERYTHING,” GNIWISCH REMEMBERS.

From the outside, it looked like the Montreal-based company had achieved the impossible. Ice.com’s founders–Gniwisch, his two brothers, and a brother-in-law–had rescued the business when investors wanted to shut down operations after the dot-com bust. The foursome scraped together $600,000, bought back the company from investors, and drew up version 2.0 of the business model. By 2001, Ice.com had broken even by selling $3.5 million worth of baubles.

But on the inside, chaos was spreading. Take customer service. Orders for rings and necklaces flew in each hour, but the company couldn’t keep up with the demand and needed three working days to process an order. Worse, Ice.com’s temporary warehouse employees were stealing from the company: Some $60,000 of merchandise went missing in 2001.

Despite Gniwisch’s best efforts, the founders’ elbow-grease philosophy–everyone had to pitch in to make the company survive–wasn’t working anymore now that the business was bigger. And Ice.com’s growing pains extended far beyond the packing center. The finances needed help, the executive team had no process for making decisions, and employees were receiving mixed signals. “When you’re an entrepreneur, you do things by the seat of your pants,” says Gniwisch. “You sit in a room, have a great idea, do high fives, and walk out all excited. But there’s a whole other group of people who get left in the dark because the communication isn’t there.”

Ice.com’s growing pains certainly weren’t unique. Regardless of industry, executives often find that as their company grows, the organization lacks the systems and strategies to cope with the long-term. Entrepreneurs who propelled the business into existence on startup momentum may not have the concrete leadership skills required for future growth. The creative and sales skills that got the business off the ground aren’t enough; eventually companies reach a plateau–some say $10 million in revenue or 50 to 100 employees–that calls for a different type of leadership, says Andre Hinton, an executive coach who works with the Kauffman Foundation. So how can a CEO help his or her company transition from an ambitious startup to a firm with staying power? The first step may seem counterintuitive: Stop being so hands-on.CEOs that want to pilot large enterprises need to ditch the entrepreneurial mind-set altogether and become true managers. Successful entrepreneurs like Gniwisch realize that the difference between a $2 million company and a $20 million–or $200 million–company all comes down to professional management.

Hinton calls the change going from working in the business to working on the business. A CEO may be able to solve all ten of a small company’s problems, but at a big firm, he needs to know which five of 100 different crises are doing the most damage. Instead of running day-to-day operations, says Hinton, CEOs must focus on the big picture: building a management team, developing long-term strategies, and cultivating relationships with the outside world–lenders, customers, and partners. It’s a tough transition to make, which explains why some entrepreneurs prefer to start new ventures rather than break the $20 million barrier. But for those who want to stay in the race, there are five critical steps for crossing the finish line.

MAKE IT A TEAM EFFORT

Most two-year-old startups run lean and obsess over sales. Chicago-based media firm Star Farm Productions was no different, but it did enjoy one luxury: a team of experienced senior managers. Cofounder CEO Trish Lindsay, a third-time entrepreneur, believed she would require their expertise early on if she was to create an organization that could reach $100 million to $300 million in revenue. And since Lindsay knew that business development was her strength, she hired managers in operations and finances to complement her skills.

Hiring experienced managers is crucial when transforming a successful mom-and-pop business for long-term growth, and it’s one of a CEO’s biggest challenges, says Hinton, who is a firm believer in assembling the right team. “You need your Paul McCartney to go with your John Lennon, your Keith Richards to go with your Mick Jagger,” he explains. No CEO can do everything, so why not gather a team that can do everything together?The senior managers at Star Farm brought with them invaluable connections that gave the company access to top media executives. Hiring great talent for TV productions was also a breeze, because Barbara Ferro, Star Farm’s head of production, had spent years in the TV and film industry. “If we called up as an unheard-of company, well, at least they’d heard of Barbara,” says Lindsay. Star Farm is on track to exceed $12 million in sales this year, but senior management is already preparing for even bigger growth. For instance, the company is already compliant with Sarbanes-Oxley rules, a move that will make the company attractive to potential acquirers in the future.

Back at Ice.com, CEO Gniwisch realized he lacked the knowledge that comes from an MBA and decades of managing large organizations. After all, he and his cofounders were trained to be rabbis, not executives. So he took a deep breath and in 2004, started making changes. Over the next two years, Gniwisch went on a hiring binge, recruiting VPs of customer service and operations, a chief information officer, and a chief financial officer.

It wasn’t long before Ice.com had a disciplined program to measure the efficacy of each e-mail and phone call interaction with a customer. The number of thefts plummeted after the company handed out uniforms to warehouse employees and installed a strict sign-in system as well as metal detectors. The VP of operations, a logistics expert, reorganized the fulfillment center and set up detailed metrics to maximize worker and workload efficiency. Today, Ice.com ships orders 2.5 hours after they are placed–“Basic stuff that we don’t learn in rabbinical school,” Gniwisch jokes. The CEO can afford to make light of his former woes: Sales at Ice.com should skip past $60 million this year.

WORK THE SYSTEM

At a small outfit, the boss is the boss is the boss. Everybody pretty much reports directly to the CEO. But as the chain of command gets more complicated, companies in transition can struggle to adopt new layers of management. The same happens with business goals: Taking on bigger clients or new markets can split an organization into internal factions. The key is to ensure accountability through a mix of management policy and technology.

It’s not easy, but you must resist the urge to micromanage your managers. Identify the company’s mission, and establish goals and ways to measure achievement. Then let go of some control. Allow the systems you’ve built within the business to take over. “Any company that relies on the strength of one manger will be stifled by that choke point and won’t be able to sustain growth,” stresses Ted Zoller, executive director of the Center for Entrepreneurial Studies at the University of North Carolina at Chapel Hill.

One of the biggest mistakes entrepreneur Arvid Huth ever made was giving too little power to his managers. “When you try to stick your nose in, you undermine your manager, and pretty soon, you’ve taken away his ability to manage,” said Huth, who co-owns P.M. Bedroom Gallery, a $13 million chain of furniture stores in Minnesota, Illinois, and Wisconsin. He admits he’s meddled too many times, like when he prevented a manager from firing an employee he thought was doing a good job. Huth eventually realized the manager was right, but by that time, the manager had lost the respect of many of his subordinates.

For years, decision making at Ice.com was haphazard, occasionally descending into high-volume shouting matches between the cofounders in front of the whole company. Because they were family, the brothers always patched things up quickly, but still, something had to change. When Gniwisch’s brother who led marketing, Pinny, wanted to launch a jewelry blog, for instance, he was met with opposition from the three other cofounders.

“Pinny said, ‘We’re doing it.’ I said, ‘We’re not doing it,'” Gniwisch remembers. “Pinny does it anyway.” To prove his idea had merit, Pinny recruited bloggers and financed the effort from his own paycheck. The blog was ultimately a hit, but that type of disagreement would never happen today, Gniwisch says. These days, Ice.com has a formal process for making decisions, just as a Fortune 500 company would. The manager proposes a project, sets a budget for the project, and is given freedom to succeed–and accountability in case of failure.

As internal departments start to specialize, investments in technology can help keep the whole organization informed and on track. InfoMentis, a training and consulting firm in Alpharetta, Ga. that focuses on the customer experience, found its managers struggling to track employees’ billable hours when business picked up in 2005, said founder and CEO Wendy Reed. Without knowing how many man hours the company devoted to each job, InfoMentis couldn’t know how profitable the projects were. More alarming was the fact that projects had grown so complicated, involving so many individuals, that InfoMentis found it a challenge to track the different pieces of each project.

At times, the huge volume of documents passed back and forth on e-mail meant the company lost efficiency, as there was confusion about which file was the latest version. The solution, said Reed, was to invest in a calendar system to track project hours and a software tool designed for large-scale group collaboration. Finally, with the administrative headache solved, managers could get back to work.

KNOW YOUR MONEY NEEDS

The wave of accounting scandals several years ago brought down giants like Enron, but it’s not just large corporations that need to keep their books meticulous. Ambitious small companies also must watch their numbers closely for inefficiencies. “If I were to do it over, I’d reach a breakeven point earlier or even go into debt to have a good chief financial officer,” says Chad Monnin, cofounder of Aegis MEP, a professional services company in Columbus, Ohio.

Monnin, a former sales executive who was also in the Army Special Forces and speaks fluent Arabic, began providing language-staffing services to the military in 2004 after an injury ended his career as a soldier. The business ballooned from $400,000 in revenue to $6 million in 2005, but the good fortune sent him, his cofounder, and the company accountant scrambling to keep up with the growth. It wasn’t until Monnin recruited a CFO in February of 2006 that he discovered Aegis’s hiring errors: too many employees in operations and sales and not enough staffing recruiters. Monnin quickly upped the number of recruiters from three to ten, a move that injected $4 million to the top line in 2006. Good accounting also proved to big clients that Aegis’s invoices could be trusted. This year, the company expects to rake in $45 million in sales.

Having a CFO on board means having a dedicated pair of eyes evaluating capital needs. Peter Biro, a technology executive and consultant who works with entrepreneurs and investors, finds that CEOs often fail to ensure they have money at their fingertips: They either literally can’t pay the bills or lack the cash to fund growth. Go out of your way to establish a relationship with a lender or an investor as soon as you can, he advises, even if the business doesn’t actually currently need extra financing. That way, when the need arises–such as when there’s a chance to buy a competitor–you’ll have no problems tapping cash in a hurry.

Star Farm’s Lindsay had to learn for herself how treacherous the path to capital can be without a network or an experienced guide. Last year, the novice fundraiser spent most of her time wooing institutional investors to fund the company’s expansion. In the end, however, Star Farm suffered a blow in the marketplace after an investor changed their terms at the last minute. Lindsay had to walk away, but it came at a high cost. She was forced to halt hiring and suffered a 30% decline in expected sales for the year. “It’s a marathon,” she said of raising capital, “and I learned everything the hard way.”

THINK BIG (BUT DON’T NEGLECT THE DETAILS)

In a company with dozens of employees and hot sales figures, budgeting–a disciplined practice that produces controlled growth–should be a big priority. But too many businesses drag their feet when it comes to this unglamorous task, which calls for hours of labor poring over spreadsheets. The Kauffman Foundation’s Hinton has even worked with companies with revenues as high as $500 million that lacked a budgeting process. “The attitude was ‘We’re making money. What’s the problem?'” he says.

The problem is that without concrete goals, no CEO can know how well the company is performing. One of Hinton’s clients, a construction contractor, appeared robust because employees were busier than ever. After the founder drew up a budget, however, it became clear that most of the extra business brought lower profits; the company was growing in the wrong direction. Similarly, Ice.com had procrastinated for years on creating a budget. But in 2005, the team decided to try something new and drew up a detailed annual budget for each and every department. The result: No more guesswork. For the first time, management saw in black and white what interfered with each department’s ability to meet its financial goals and what eliminating those obstacles would mean for the rest of the company. Every part of the business became healthier.

Fortunately, planning isn’t all nitpicky details. It’s just as important to design a five-year strategic outlook. Here CEOs can indulge in what they do best: thinking big.

“You’re going to end up exhausted at the end of the day anyway, so you might as well be bigger and richer,” says Steve Spinelli, a professor of entrepreneurship at Babson College in Wellesley, Mass. Spinelli traces this philosophy back to his days as part of the founding team behind Jiffy Lube. Spinelli eventually became a franchisee, opening 47 Jiffy Lube stores over the next decade.

Spinelli advises entrepreneurs to put aside the fear and go for the gigantic problems; don’t just tackle a business challenge that is moderately lucrative but small enough to be manageable. And make sure the business model can expand to meet the size of the opportunity. “Look for where the scale is,” he says. “If you’re not thinking in broader terms, you’ll miss those economies of scale.”

Take the case of two entrepreneurs under Spinelli’s tutelage. Matt Lauzon and Jason Reuben, both seniors at Babson, last year cofounded Paragon Lake, an online seller of customized diamond jewelry. They had their share of orders for $20,000 rings, yet it wasn’t long before the students realized that customers ultimately preferred to buy from local jewelers. In short, Paragon Lake had no chance of becoming a big business in its present incarnation.

Instead of giving up, the students returned to the jewelry design software they had developed to produce sophisticated designs. Local jewelers usually had nothing better than paper sketches of custom rings to show potential buyers. Would they buy from Paragon Lake? As it turned out, 80% of the jewelers Lauzon and Reuben approached were thrilled to buy from the startup. Thus was born a new–and improved–business model.

High-growth companies can try on four or five business models as they hone their strategy, according to UNC’s Zoller. The process starts with the startup’s birth and continues for as long necessary. Keeping close to the company’s chief value proposition is essential, however.

Dell, the computer maker, is a perfect example of a company that has managed to successfully take on a bigger opportunity without losing focus. The company had built a regional, national, then international name by selling made-to-order computers on demand. But founder Michael Dell didn’t stop there. He decided he wanted to serve enterprise customers and tinkered with his business model to take advantage of his just-in-time manufacturing method. In the end, he recruited a whole new sales staff to target big corporate buyers. Today, it’s the enterprise market, not retail, that makes up most of Dell’s business.

STAY TRUE TO YOUR VISION

No matter what advisers and business books say, experienced entrepreneurs agree that in the end, instincts should be king. Stay true to the company’s mission and culture, even if it means breaking some rules, urges InfoMentis’s Reed. She is taking her own advice by breaking the conventional wisdom about management structure. Early on, her startup had embraced a reverse hierarchy–management at the bottom, client partners at the top–that placed a lot of power in her employees’ hands. But the senior management team she hired imposed a more traditional system. The consequences were the opposite of what she expected: Morale dropped and red-tape grew. “Everybody gets caught up in the way it’s supposed to be,” said Reed. “But that’s not the way it should be done for your company.” She fired the team and steered the company through a turnaround.

As dramatic as Ice.com’s transformation has been, the business hasn’t lost its upstart predilections, though the company now has offices in New York City’s diamond district, upstate New York, and Montreal. When the brothers decided recently to showcase their products online with video clips and a new show called IceTV, the company was able to fast-track the no-frills project. “A large company would have taken two years to do this,” said Gniwisch. “We did it in four months for less than $1,000.” It’s important for some things to stay the same as other things change. The brothers still argue, no holds barred. But now they close their office doors.

RELATED ARTICLE: EIGHT STEPS FOR SUPERSIZING YOUR BUSINESS

Entrepreneurs looking to transition their companies for long-term growth need to follow these eight steps.

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1. MAKE IT A TEAM EFFORT. No CEO is an island. Figure out what your strengths are as a leader, and hire people to do everything else. Recruit staff to fill in the gaps, creating a well-rounded team that’s ready to meet new challenges.

2. WORK THE SYSTEMS. Identify points of weakness in your processes, and work with your team to reinvent your systems. Then use the new processes to their full advantage.

3. KNOW YOUR MONEY NEEDS. Hire a CFO you can trust, and take capital seriously. Even if you don’t need extra funds now, it’s important to have them available for when new opportunities come along. Make your money ready to respond when needed.

4. THINK BIG (BUT DON’T NEGLECT THE DETAILS). It may not be glamorous, but a realistic budget is essential to successful growth. Having a long-range financial plan is equally important.

5. STAY TRUE TO YOURSELF. Don’t lose sight of the passion and instincts that got you where you are. The more things change, the more some things should stay the same.

6. TRACK THE NUMBERS. Every week, look at sales, operating expenses, gross margins, gross profits, and income. You don’t need to be a financial wiz–that’s your CFO’s job–but having a firm grip on these five numbers will give you an early warning sign before anything goes wrong.

7. BUILD AN ADVISORY NETWORK. Knowledgeable advisers can explain the nature of the market, introduce you to important customers, and even coach your managers.

8. COMMUNICATE YOUR COMPANY’S MISSION. Everyone on the payroll should understand your business’s purpose and, by extension, its value to customers. Without that shared intelligence, employees won’t be able to take initiative.

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