Starting a successful business is often considered the hardest thing entrepreneurs do – but growing an existing venture may be even more difficult. Many companies get stuck on a plateau that inhibits their ability to grow: a scale stopper. Call this barrier the “Devil’s Triangle”: the place where a company seems weighted down by the bounds of its original start-up business model, a lack of experience by its founder(s), and an accelerating, expense-fueled burn rate through working capital and investor patience. “Once a venture reaches a critical size, its complexity greatly increases,” write the authors of How to Identify the Best Customers for Your Business, published in the Winter 2013 issue of the MIT Sloan Management Review.
At this point, it’s time to identify your core customers and build a scalable platform for growth around them. That’s the message from Frank V. Cespedes, the MBA Class of 1973 Senior Lecturer of Business Administration at Harvard Business School; James P. Dougherty, cofounder of the health-care IT start-up Madaket; and Ben S. Skinner III, head of the Atlanta-based consultancy LCS Partners.
The article discusses the importance of understanding your ideal customers; the implications for selling, cost management, growth strategy, and organizational relationships; and a process for putting it all together.
We asked Cespedes to expand on how firms can break free from the grip of what he refers to as the Devil’s Triangle.
Question: Describe the Devil’s Triangle and how it can hinder a firm’s ability to grow.
Frank Cespedes (FC): We use this as a metaphor for framing the following facts about entrepreneurs: Fewer than half of US start-ups in the twenty-first century have survived beyond three years. As everyone knows, it’s not easy to start a venture that gains traction with paying customers. But it’s even harder to grow beyond certain levels of sales: Of the nearly 44,000 firms founded in 2000 and listed in the Capital IQ database, fewer than 6 percent achieved more than $10 million in revenues by 2010, and fewer than 2 percent grew to more than $50 million. The percentages are worse for US and international companies founded in years since 2000. The increase in angel groups, advent of crowd funding, proliferation of accelerators, and continuation of VC investments have made it increasingly possible to start a business, and in some sectors entrepreneurs were able to attract funds without a real monetization strategy. I agree with venture capitalist David Lee, who said, “It has never been easier to start a company and never harder to build one,” and with Dan Isenberg, who notes that equating entrepreneurship with a start-up is not wrong, but is an incomplete picture of business formation. Significant value creation cannot occur without growth, so the failure to scale has social as well as investor and managerial costs. It affects job creation and innovation throughout society.Once a venture reaches a critical size, its complexity greatly increases. The original business model must deal with new market and organizational realities, and behaviors that established the business are often inadequate for scaling. SG&A (selling, general, and administrative) costs then rise faster than revenues, and resource-constrained ventures are forced to raise a dilutive round of capital, operate in small niches, or go out of business. Our research and advice focus on dimensions within an entrepreneur’s circle of influence: how to identify a venture’s core customers and the implications for selling, cost management, growth strategy, and required organizational relationships.
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