The Barriers to Growth
What keeps a promising young business from growing?
In large companies, growth is dampened by maturing markets and inflexible organizations. Private technology companies, on the other hand, are built for growth. They operate in a world of innovation, disruptive technologies, and entrepreneurial energy. These agile companies can zero on new markets and ride new growth curves. For small businesses the challenge is not how to grow, it’s how to overcome the inevitable barriers to growth.
Some of these barriers may be out of a company’s control – technology that doesn’t work or regulatory hurdles. But if entrepreneurs were better prepared to overcome the barriers under their control, more small businesses would succeed. The stakes are high for the US economy — small businesses are the engines of GDP growth and job creation.
Here is my list of the ten the most important barriers to the growth of technology companies. Because each of these barriers requires a different response it’s important to diagnose the problem before looking for a solution (like fixing a high performance car or a golf swing.)
1. Market Market barriers take three forms:
- There is no market. To have market you need a customer with a problem. If the customer is really an innovator who mostly thinks your the technology is interesting, then you have what I call technology in search of a market.
- The market isn’t ready. It’s important not to confuse a few early adopters with market traction. If your product is a nice-to-have, no budget will be available.
- The market isn’t big enough. An interesting market needs to be big enough to: allow for a company to recover from early mistakes; accommodate multiple competitors; and provide for 5+ years of 25%+ growth. A good rule of thumb for potential market size would be at least $500M.
2. Team For a small technology company, a business strategy is like a newspaper – it’s out of date the next day. A team needs more than just the right skills – it must also be a learning organization that can respond to change and adjust accordingly. The team also has to be on the same page regarding customer priorities and operational challenges.
3. Positioning Positioning is the high order bit in technology company strategy. The same company with the same product can position itself to can create high shareholder value, or to hit a wall. Compare the positioning of the iPod versus a generic MP3 player. Getting positioning right is really hard work – growing a company without the right positioning is even harder.
4. Value Proposition Why should someone buy your product? What problem do you solve with what benefits in cost reduction, revenue enhancement or operational improvement? The answer will affect product strategy, pricing, sales strategy and messaging. Many companies fail to grow because customers don’t know that there’s a product out there that could help them
5. Go-To-Market Strategies What market segments is the company targeting? How does the company find and qualify prospects, using both traditional and digital media? What mix of sales channels makes the most sense? The largest component of operating expenses is usually Marketing and Sales. Decisions about the efficiency of go-to-market strategies drive capital requirements and the sustainability of the business model.
6. Pipeline If I could have one piece of data to gauge the health of a company, it would be the pipeline coverage ratio. How much new business has the company identified and qualified compared with its committed revenue plan? The predictability of the business model depends on the ability to build sufficient pipeline within a reasonable budget.
7. Sales Productivity The Sales team is often not the cause of sales shortfalls. Making quota matters, of course, as long as the quotas are reasonable and the sales tools are there. But there are two other important measures of Sales effectiveness: one is the close rate (percentage of qualified deals that get closed) and the other is the win-loss ratio. If these metrics look reasonable, it may be better to look at other parts of the growth engine such as the pipeline.
8. Business Model Business models are not just for CFOs. The only way to grow a business without relying on a perpetual infusion of capital is to find a sustainable business model – one that that generates the cash necessary to fund continued growth of the business. This means attractive gross margins and of course positive EBITDA and cash flow. Beware of the business that puts off the discipline of defining a sustainable business model while it pursues downloads, subscribers, and eyeballs in the interests of gaining critical mass.
9. Capital If the business model defines a future stream of profits and cash flow, how much would you be willing to pay to own a piece of that business, considering the risks associated with getting there. This is the question for venture capital and private equity investors. A software business with $25 million in sales that gets acquired for $75-$100 million shouldn’t cost $50 million to build. Today’s entrepreneur needs to show investors a capital efficient approach to getting to cash-flow-break-even and ultimately to an attractive exit. Otherwise, capital availability will be the major barrier to growth.
10. Customer Satisfaction If customers are not satisfied, there will no repeat purchases, no referrals to other prospects, and no feedback to guide product improvements. Furthermore, one unhappy customer can be more costly than acquiring ten new customers. The factors that determine customer satisfaction can be product, purchase process, customer support, and other company interactions. The key is an early warning and response system. Social media can help.
Follow Dave on Twitter: @WDavidPower