Start-ups that last are ones that are prepared to manage growth

March 12, 2016 12:16 am | Updated 12:16 am IST

Why do so many start-ups that seem to have it all — customers, cash, a promising outlook — run off the rails? Ask a venture capitalist, and you’ll probably hear that they have trouble “scaling.”

What does that mean, though? VCs typically describe it as a need to “professionalise the organisation” and “bring in grown-ups.” But those are simplistic fixes. Start-ups these days grow so rapidly that it’s difficult for them to correct course once they recognise missteps. They can improve their prospects by understanding the mechanics of effective scaling before they reach that moment of truth.

Drawing on extensive case studies of fast-growing companies and on 75 years of organisational research, Ranjay Gulati and Alicia DeSantola identified that there are four critical activities for successfully scaling a venture. Firms must hire functional experts to take the enterprise to the next level, add management structures to accommodate increased head count while maintaining informal ties across the organisation, build planning and forecasting capabilities, and spell out and reinforce the cultural values that will sustain the business. (Mr. Gulati is the Jaime and Josefina Chua Tiampo professor of business administration at Harvard Business School. and Ms. DeSantola is a Ph.D. student in the organisational behaviour programme at Harvard University.) Scaling doesn’t mean that ventures should disavow their start-up identities and embrace large-company dogma once they’re poised for growth. But those prepared to manage that growth stand a much better chance of making it in the long term.

Defining specialised roles

Founders typically do a bit of everything. Through informal channels they hire fellow generalists, who cobble together their roles and responsibilities partly by pursuing their own passions and partly by looking around and seeing what needs to be done. But as organisations expand, they face new levels of complexity that require them to define and assign tasks more formally.

To accomplish this, they typically seek specialisation in select functions, such as sales, human resources, marketing, research and development and manufacturing. This benefits them in two ways. First, the specialists use their knowledge to tackle their functions’ work more efficiently. Second, as they implement best practices within their domains, they catalyse future growth by creating slack. People who no longer have to worry about marketing, for example, are free to explore other activities.

Of course, all this can create tension between the “old guard” generalists and the domain experts. To keep people working together constructively, it’s important to anticipate and manage these growing pains. Let’s look at how one start-up, Birchbox, did so.

Birchbox experienced explosive growth, thanks to a business model crafted around consumers’ discoveries of new beauty products. Each month, subscribers received a box of samples customised according to their personal profiles. This model attracted a million subscribers in the first four years.

Consider the logistics of shipping a million boxes of unique samples each month — or the job of building sales relationships with enough partner organisations to continually fill those boxes with fresh, interesting products. To manage such complex work, Birchbox divided it into specialised functions and sought out domain experts to improve the effectiveness of each one.

As more outsiders have settled into functional divisions, early employees have provided cohesion through their broad understanding of how the components of the business model fit together. They also serve as a cultural channel back to the time when it took great resourcefulness to grab the attention of prospective partners and customers.

Adding management structure

When unveiling their start-ups, many founders eschew hierarchy. As firms scale, a growing number of people report to a handful of leaders. Founders may think this allows them to remain in command, because all decisions pass through them. But their organisations spin out of control as centralised authority becomes a bottleneck that hinders information flow, decision-making and execution.

CloudFlare, a San Francisco-based start-up founded in 2009, quickly became an important player in content delivery and security for small to medium-size websites. In the beginning, CloudFlare’s founders proudly proclaimed that they would build a completely flat organisation with no hierarchical titles or HR function.

Nevertheless, problems cropped up. In the three months ending in July 2012, five of the firm’s 35 employees quit, some citing the lack of a clear mid-level reporting structure and the non-existent HR practices. By 2015, the firm had hired additional managers along with a HR administrator and a talent recruiter. CEO Matthew Prince recognised that adding management structure was helping CloudFlare grow.

Clearly delineated roles and areas of authority enable people to make faster, smarter decisions locally. They streamline the process, rather than gum it up and promote individuals’ development. The more decisions people are empowered to make on the ground, the more they learn and the more accountable they become.

Improvisation is integral to young ventures; it’s how they make discoveries. However, as firms grow they need a framework of plans and goals to guide them.

India’s Micromax Informatics learned that the hard way. In 2010, Micromax seemed unstoppable. Having stormed the mobile handset market just a couple of years before, it was selling more than a million units a month.

But its relentless pursuit of growth had come at the expense of business hygiene. Micromax committed to major organisational changes. The founders agreed to bring in an outside CEO along with senior leaders from blue-chip firms such as Airtel and HTC.

As the new CEO (he has since left the firm), Mr.Deepak Mehrotra led the charge to implement strategic planning. He stressed the importance of regular goal-setting and pacing exercises companywide to build a long-term vision. Micromax also began to bridge planning gaps at the operational and tactical levels.

With these interventions, Micromax regained its footing in the mobile market. Its 2015 fiscal year revenue was almost $2 billion.

Sustaining the culture

Culture is typically a big part of what draws people to join start-ups — and what keeps them going. As employees battle the odds to turn a fledging business into a viable company, working late nights and weekends to make it happen, they’re motivated by camaraderie and a sense of belonging to something important.

But as more people come aboard, leaders may struggle to maintain a strong organisational culture. That’s a problem, because culture may be most important during periods of growth. How can entrepreneurs prevent these consequences? They can start by clearly articulating their cultural values in their mission and vision statements and in job descriptions. It also helps the organisation keep its values alive by hiring for cultural fit and rewarding desired behaviours through recognition and compensation.

Entrepreneurs may worry that the changes we propose will be the death of spontaneity, adaptability and speed — everything that got them up and running in the first place. It is not suggested that start-ups abandon what made them innovative. But it’s a lot easier to launch your rocket ship in search of new horizons when you don’t have to worry that someone forgot to fill the tank.

Between the extremes of ad hoc and prescriptive organising, there’s a useful middle ground. Leaders who can find it will have an edge on their rivals — and that really matters, given how few new ventures become established players. — New York Times News Service

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