Shifting Gears from Startup to Scaled Enterprise
April 12, 2007
Case categories include: Human Resources Leadership Operations
By Robert Sher
It was new to him—that feeling of helplessness. As an entrepreneur, Uwe Druckenmueller (pronounced “oovay”), founder and CEO of Cruiser Customizing, Inc. had always been able to personally jump in, work like crazy, and fix the problem. But not that time.
The growth of his company over the past five years since startup had mandated a new enterprise-wide MIS system, and the several-times-postponed cutover deadline had just passed again in November 2006, just as holiday orders began piling in. He had been raised on a cattle ranch in Germany, where “taking the bull by the horns” is a literal act, and that was his personal style. But even if he worked all night, he couldn’t make it happen.
Hitting the crossing point
This crossing point—from entrepreneurial management to professional management always happens if the startup thrives. For Uwe, it happened at $15 million in revenue. But the crossing point happens at different sizes for different business and different entrepreneurs. There’s no avoiding it, since startups have to be strongly led by a person who is hands-on, with only as many helpers as is needed. But if they do their job well, the business will grow. At some point, a business needs a team of leaders to make it run well. Every leader of a small, growing business must acknowledge this fact of life, and continually think about when and how aggressively to modify the management team to handle the growth properly.
The changeover shouldn’t happen instantly, like throwing a switch. Some of the startup team may be able to become professional managers. Others may not need to “professionalize” for another few years. But one staff position must lead the march inexorably forward, and that’s the CEO.
Super high-growth companies—often venture capital funded—often intentionally change CEOs at this point. They start by hiring known CEOs who flourish in the startup role to do the early heavy lifting, and all parties know that as the business gets to the next level, the early-stage CEO departs and a new CEO, skilled at running larger firms, steps in. But most privately held firms are owned by a CEO who wants to continue running their firm.
That was clearly the case for Uwe. With his training in software engineering and not business, he knew he had much to learn. He had joined the Alliance of Chief Executives two years earlier, to learn from his peers. He was an avid reader of business books, and had hired a consultant who was working with him on a consistent basis each month to help the company make the shift, all while managing 25% or more annual sales growth. He was and is committed to learning, changing, adjusting, and tackling the challenges of leading a bigger firm.
Uwe’s approach was perfect. He saw the need for change, and he led that change with his own behavior modifications and personal changes. Too often, CEOs react by doing more of the same, working feverishly, and increasing their involvement and control of every decision. Little do they realize that this is the path to stagnation and missed opportunities.
Bringing leaders on board
Hiring leaders to run a growing business is expensive. Their salaries could be 50% to 100% higher than the “helpers” that often work in startups. Typically in growing businesses, cash is tight, and bringing in big salaries can crush the bottom line and cash flow. It amounts to a bet that the company will grow into affording those salaries. Uwe says, “My biggest mistake was hiring people I thought I could afford, rather than hiring the ideal person or team to take my business forward. It usually turned out to be a waste of money and set me back months in my growth. I should have found a way to afford top caliber people.”
I’m not advising you to blow the budget. But what is true is that hiring great people will without doubt grow the business faster, are more fun to work with, and come up with ideas that the CEO would never have thought of. The best strategy is to hire a top talent in one functional area at a time, as you can afford them (or maybe a little before you can afford them). If growth has a hiccup, you can postpone the next hire. Worst case, if the business goes into reverse and shrinks a bit, you can always lay off those big salaries and make an orderly retreat.
The leaders I’m talking about hiring aren’t corporate VPs whose only experience has been with a $200 million budget. I suggest hiring leaders from somewhat larger businesses than yours but who are action-oriented, who still have “dirty hands” from prior positions where delegating wasn’t the primary work product. They’ll understand the systems that you are going to need, and will know how to implement them for you. Most importantly, they’ll know more than you about their area of specialty, and will pull their department forward and take the company along with it. It’s also important that you feel that they respect the magic that an entrepreneur brings to the table, and are excited about following your lead as the company moves to the next level.
I’m actually a big advocate of recruiting from within. In fast-growing companies, that means that most managers will have to grow their skills aggressively to keep up with the company’s growth. Sadly, few understand that it’s not the company’s job to “train” them: It’s their job after they’ve put in their 10 hours at the office. If you have one of these on board, you’ll know it. They’ll be reading books on management, teaching themselves new computer programs, or researching things on-line at home at 2 a.m. I’m all for creating an atmosphere that promotes career growth. But small, high-growth companies don’t have the bandwidth to do it all. If you see a heroic effort by a manager to keep their skills growing as fast as the company, it’s well worth it to be loyal in return. But if not, set them free to go into an environment that is less demanding than yours.
Cruiser Customizing made the software cutover two days after its final deadline. The new system began paying the expected dividends a few months later. The year 2006 closed with the first-ever loss due to the cutover and growing pains. It is common that during critical change years, the normal profitability falls victim to rebuilding both physical infrastructure and human infrastructure. How the changes are anticipated and managed can make a massive difference. The firm is on track for a profitable year in 2007 with 25% top line growth. Uwe and his team of leaders have the bull by the horns again. Figuratively.
• Businesses often require a team of leaders once they hit the crossing point.
• Hire the ideal people to bring the business forward, who are experts in their field of specialty.
• Recruit existing employees with the potential and motivation for leadership positions.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Company and Case Facts:
Company: Custom Cruising, Inc.
Person: Uwe Druckenmueller
Alliance Member since: 2005
Business Founded: 2001
Annual Sales Volume: $15 million in 2006
Head Count: 30
Service: Online retailer of motorcycle accessories
Typical Customer: Motorcycle enthusiast
Written: April, 2007
Address: Custom Cruising, Inc., 4671 Las Positas Road, Building C, Livermore, CA 94551-9631