This blog was contributed to VentureApp by Gwen Farrell, CBPA, and Tony Silvestro, CBPA and district manager for Insperity, a trusted advisor to America’s best businesses for more than 30 years that provides an array of human resources and business solutions designed to help improve business performance.
In the realm of entrepreneurship, no group of professionals is better equipped to assess growth potential than venture capitalists. These experts are positioned to evaluate whether or not a new business is addressing an unmet or under-served need with a viable solution, and can maintain a competitive advantage in the face of inevitable new competition. For such companies, venture capital presents the opportunity for expansion without the costs and regulatory complexities of going public.
But sometimes a young company with otherwise promising credentials for venture capital funding undermines its chances by making serious mistakes as it enters its initial growth stage, thus diminishing its potential appeal to venture capitalists.
Consider the following: According to U.S. Department of Labor statistics, while a little more than 50 percent of all businesses founded in a given year are still in existence five years later, the percentage of survivors drops to about one-third of the original figure at the 10-year mark. Having survived the very dangerous start-up phase, why do many companies flame out after establishing a foothold in the marketplace?
The answer, experts generally agree, is that a company’s first growth phase is often as fraught with peril as its start-up years. Pitfalls that should be top of mind include:
Hiring Without Due Diligence
A fast-growing company typically needs to increase staff quickly. Overburdened entrepreneurs, eager to expand a management structure to properly accommodate growth, often are vulnerable to the mistake of taking shortcuts in proper hiring practices. But doing so may set the stage for a host of problems in the near future. Interview serious job candidates several times and be sure to include more than one member of senior management. Check references thoroughly and verify the candidate’s experience and education.
Assembling a Management Team that Thinks Only as You Do
Yes, successful entrepreneurs generally are strong-willed individuals who, naturally, want key staff members totally on board with their decisions. But an over-emphasis on consensus has its dangers. It is not a good idea to eliminate all checks and balances by discouraging counter-thinking and dissent. A senior aide who can thoughtfully challenge his or her boss’s ideas can be an invaluable asset to a young enterprise.
Ignoring the Importance of Cash Reserves
Growth is essential for existence. But cash reserves can be equally essential. Without them, a business in a growth phase may find itself without the resources to survive unforeseen adverse circumstances, such as a temporary market downturn, operational difficulties or the failure to meet the growth target. A company can survive these occurrences, as long as it has the financial resources to stay in business. Before embarking on an ambitious growth plan, it is vital to carefully plan for and evaluate its cash reserves.
Over-Enthusiasm for an Acquisition
Growth through an acquisition can be very tempting, and with many Baby Boomers reaching retirement age these days, a large number of private companies are for sale. But care must be taken to avoid common mistakes when making a first acquisition. For starters, an entrepreneur should avoid becoming so preoccupied with chasing the deal that aspects of the existing business are ignored. Also, the need for proper due diligence on the company being acquired cannot be over-stated, nor should negative findings be ignored because the acquiring entrepreneur intensely wants to close the deal. Do not make the error of assuming too much debt or of making an upfront cash payment that is too large. And finally, be sure to plan sufficiently for the integration of the acquired company’s operations and employees, giving careful consideration to whether or not the two company cultures make a good mix.
Using Independent Contractors
Business owners sometimes staff some functions with workers who are classified as independent contractors rather than employees, thus saving on payroll taxes and employee benefits. But there are complex rules defining which workers can legally be classified as independent contractors, and federal and state agencies have been aggressively penalizing businesses that misclassify employees. The financial penalties for doing so can be ruinous and threaten a small company’s existence.
Taking More Space than Necessary
When leasing additional space to accommodate growth, careful planning is required to avoid overestimating how much space will be needed within the term of the lease. Moreover, avoid lavish and expensive build-outs for which the tenant will be fully or partially responsible. Of equal importance is an understanding of the complexities of a commercial lease, including escalation clauses that can add significantly to facility expenses after the first year. The amount a firm budgets for rent can fall far short of the actual cost.
Promising young businesses that have conquered the start-up phase and established a preliminary market presence may find themselves to be good candidates for venture capital assistance and an exciting leap to a new level. But care should be taken to sidestep costly mistakes that might weaken the characteristics that attract venture capital attention.
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