In the world of startups, it often seems as though there are only two entities that really matter. At one end, you have early stage startups, who often don't have much in the way of revenue, but they have an exciting idea or inspirational founders, and they garner a lot of attention due to what they might become.
Then, you have the fabled unicorn, who while they may not have a great deal of revenue, much less profits, to speak about, have nonetheless managed to secure the $1bn valuation that marks them out as the next big thing.
The forgotten middle is the topic of a new report from Gallup and TrueSpace that explores how companies that are no longer startups manage to successfully grow their business to mid-market status.
Today In: Careers The report highlights how crucial this sector is, as while startups play a role in job creation, their high failure rate means that role is muted over the longer-term. Where the real values sits is in the businesses that have made it through the challenging early years and have grown to employ between 20 and 499 employees.
"Over 2 million small businesses in the U.S. have revenues between $2 million and $10 million and employ, on average, between 20 and 115 people," the report says. "Given the data regarding job creation, one might assume these firms are receiving significant attention from the investment community, the media and our economic development efforts. Unfortunately, the opposite is true."
Supporting growth The researchers analyzed around 2,500 businesses, each of whom was at least three years old, but had not yet reached mid-market status (defined as having over $10m in revenue), to better understand the distinct operating conditions that support growth to this level.
The report highlights how the growth of companies in this range suffers from a lack of support. Whether the media, the financial community or policy makers, attention is heavily weighted towards early-stage startups, and this lack of focus on more sustainable businesses not only harms the labor market for good quality jobs, but also the productivity of the wider economy.
"Less attention is paid to the challenges facing businesses that have moved past the startup phase but whose growth has stalled before reaching the midmarket range of $10 million to $1 billion in annual revenue," the researchers say. "Further, investors are more risk-averse when it comes to post-startup businesses, contributing to cash-flow problems among such companies that want to pursue long-term growth."
The report suggests that graduation from this post-startup stage requires the development of five key conditions, with these conditions the metric by which the businesses included in the research were assessed. These conditions are:
The analysis found that the first four of these conditions were significantly related to the best performance, both in terms of growth rate and company size. The alignment condition was most pertinent to growth, with the researchers suggesting this is because at this stage of the business, it's crucial to focus revenue generation efforts to make best use of finite resources.
"This focus requires developing both a competitive offer with a specific point of view and talent with experience valued by the target market," the researchers say. "The capability for growth then comes from repeating the offer to potential customers who are highly receptive to the company’s distinctive point of view."
This stage is also marked by the ability to find, select and develop talent, with this focus a key distinguishing feature of the highest performing companies. This is perhaps because this plays a fundamental role in helping the business to scale, which was found to be the second most important of the five categories identified by TrueSpace.
At this post-startup stage, efficiency is key, and it requires businesses to look beyond short-term operational concerns and begin to develop the capacity for continual improvement, which will underpin any strategy for consistent growth.
"In the early days of a startup, you can have conversations across the entire business within a single room, but as you grow that becomes increasingly impossible," Sridhar Iyengar, Europe MD of SaaS Business firm Zoho, says.
"At the same time, you're often pulled in multiple directions by customers, market conditions, and so on, so you have to have the right culture, structure, tools, and processes to scale up the organizational learning required."
It's a step that even the most successful companies often struggle with. In Facebook: The Inside Story, Steven Levy recounts how when Facebook poached Carolyn Everson from Microsoft to run their advertising sales, she was shocked how chaotic the processes were, even as the company was earning hundreds of millions of dollars from advertising.
Learning organizations It's perhaps taken for granted that startups are always learning, as their fundamental proposition is still being formed and adapts continuously to the lessons provided by developing the product and testing it in the marketplace. The report reminds us that this learning mentality has to endure into the post-startup stage, however, and doing this is a key factor that distinguishes the high-growth businesses from their peers.
As Harvard Business School's Michael Beer suggests in Fit to Compete, it's vital that startups retain the ability to have honest conversations and transparency of information as they scale and begin to expand the workforce from the core founding team.
"For any organization to be successful, it has to be able to listen, both to customers and external stakeholders, but also to all employees internally," Iyengar says. "It needs to have an open culture of listening that feeds into informed action."
Similarly, grit and resilience are oft-quoted capabilities required of any entrepreneur, but these qualities don't vanish once you enter the post-startup phase. Companies that exhibited high levels of engagement among their workforce, with correspondingly strong compensation packages in return, were able to elicit the kind of dedication from staff that is so important to growth.
This process of learning is fundamental to the growth of any business, but whereas traditionally learning is isolated within a company, the authors hope that their findings will help spread learning across this vital sector.
"The results discussed here offer initial evidence that the assessment can be a valid and valuable tool for business owners, policy-makers and investors to reliably assess companies’ potential for growth and offer specific guidance for achieving it," the authors conclude.
It seems unlikely that this report will support that on its own, not least as concrete recommendations are thin on the ground, but if it helps to draw attention to this crucial, and often under-served, community, then it will have served its purpose.
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