casey narrow.jpg

Why is growth so painful? How culture and learning make, or break, young companies

"We've added seven new customers this quarter, but our installation backlog is killing us and turnover is getting worse - not better ." This isn't a direct quote, but it is certainly a sentiment that I've heard from more than one entrepreneur over the 20 years I've been in the investment business. Why is growth so painful? A team labors months, maybe even years, to build a great product. Why, when the market begins to validate those efforts, do things get so hard? There could be many explanations for this, but perhaps the most practical is that flaws in the company's culture have frozen the learning process.

In almost any successful creative endeavor - writing a song, drafting a screenplay, conjuring a new recipe, or dreaming of a new business - the author/chef/entrepreneur begins with a hypothesis and follows behind that hypothesis with rigorous testing and refining to arrive at a song/screenplay/recipe/product that "works." In the context of a young company, those early days are often populated with a small group of people who share a common goal - to build an effective product that can be sold at a profitable price! Successful early-stage businesses learn quickly. In other words, they test and refine the product vision until they land on something that fits the market's need. They're "nimble" we say.

Inside the successful early-stage business, learning happens quickly and efficiently because there are fewer barriers to communication. Small teams, startup camaraderie, simpler paths to consensus - explain it however you like. The needs of the customer can be understood because the feedback loop between sales and product is robust and healthy. As long as the company can maintain a flow of "pure" feedback from market-facing people to product building people, the testing and refining process can continue unabated. In many cases, young, successful companies can maintain a reasonably "pure" flow of market feedback until they reach 20-30 FTE's.

But then... headcount begins to build. So many customers to satisfy, ever larger sales quotas to reach, product roadmap deadlines to hit. The direct flow of customer feedback becomes politically charged as the sales team struggles to land new deals and blames product flaws on their failure. The camaraderie of the early days begins to wane. The product and development teams naturally get frustrated because they're doing all they can to build a product that meets determined needs - the sales team just needs to do a better job selling! Trust erodes inside the organization and the free flow of information is disrupted by an ominous cloud of discord. Learning ceases and the company is no longer able to build products that satisfy customer needs the way it did years earlier.

In our view, the ultimate function of an innovative business is to LEARN what the market needs and build a product that solves those needs. Company culture is the foundation upon which learning takes place. Are we an organization that vets ideas and sets priorities in a transparent fashion? Do we work collaboratively across functions or do we complain about and undermine other internal teams? Do we train our teams to value input from the market and empower them to act on it? Do we hold team members accountable for their deliverables or do we sweep failure under the rug? Do we have a compensation philosophy that promotes collaboration or individual performance? Any number of cultural flaws can bring the learning process to a grinding halt. The result is familiar... the customer's voice is lost, bottlenecks appear in workflow, talented employees leave the company and, ultimately, new sales suffer as the product fails to adapt to customers' changing needs. Sorry promising young company, but you're no longer an innovator. In this case, scale actually behaves like the bright light of day - it spotlights cultural flaws that may have simply been minor frustrations in the past but now present major hurdles to growth.

At SSM, we believe that the key to long-term success is learning - translating market inputs into problem-solving products. To build an organization that scales, entrepreneurs would be wise to consider how their company's culture either aids or inhibits learning WELL AHEAD OF A REVENUE RAMP. Trying to heal cultural flaws in the midst of rapid growth is very, very difficult. Fostering a culture that promotes learning across the breadth of a larger team is a critical factor, in our view, to lasting success.

About SSM Partners. SSM has partnered with talented entrepreneurs for more than 25 years. The growth equity firm invests in rapidly growing companies that have proven and differentiated software, technology, or healthcare business models. Starting with a relationship built on trust, SSM offers its entrepreneur-partners a thorough understanding of the growth company lifecycle and a collaborative approach to building great businesses. Learn more at www.ssmpartners.com.