Enthusiasm. Confidence. Passion. Belief. All of these are important to the success of any new venture. They can also be the biggest pitfalls for the new venture. The momentum and the drive to do everything at once can lead an entrepreneurial team to expand before the foundations of the business are fully built or solidified.

Why the urge to grow?

In addition to the above factors, several other influences come into play with new ventures. These other influences may stem from ego or from the conditioning of the marketplace: “bigger is better”, “the race goes to the swift”, “the early bird gets the worm.”

For quite some time investors have been driving the markets – both public and private – to generate significant near-term results, to post positive earnings every quarter, to improve annual performance, to continue to provide a means of exit with significant capital gains. This drive to grow in size and results can lead new ventures to move too quickly toward adding infrastructure, additional locations, and so on.

Readiness “caution flags” for growth

Although established organizations can expand rapidly and still make mistakes (at least in the short term), new ventures have less margin for error. When new and early stage businesses expand, they place significant strain on the existing operations. These strains include: training of new employees and management, cash flow, capital investment, and coordination across sites.

If the core business’ operations, policies, procedures, and management culture are not defined and firmly established, then the additional demands placed on the organization can erode the profitability and success of the even the initial facility. The ability to replicate the success of the first facility (assuming it has achieved profitability at the time expansion is started) depends upon the strength of the founders, the core management team, and the ability to “transplant” some of the initial team into place on a temporary or permanent basis at the new locations.

Any businessperson or organization experienced in expanding operations at an existing site can attest to the impact that expansion can have on existing business capacity. The existing capacity is often reduced by multiple disruptions: the need to hire, train, and deploy additional people; the demands on resources of time, people, capital investment, and cash flow when adding onto or acquiring new facilities, systems, equipment, and tools; the cash demands of meeting the upfront expenses while the new capacity comes on–line and begins to generate revenues and profits.

If the initial facility isn’t fully operational and profitable, adding even one more location may overtax your internal resources to the point that “success” may cost you the business. Becoming too big too soon is one possible issue for your new venture.

Geographic “caution flags” for growth

Another facet of expansion which can cause issues is expanding too far too fast. This means spreading operations over too large a geographic area or into geographic or other markets the business is not equipped to cover. Often because of travel time, differences in culture, limitations on qualified labor, and other geographic differences, the business cannot replicate its original facilities operations and achieve the same degree of success. Differences in regulations for environmental, labor, and other operational aspects of a business model may significantly lengthen the time to get up and running, require significant additional investment to meet requirements, or impose seemingly arbitrary requirements on the business which aren’t debatable or optional.

It is critical to understand the foundation for solid, systematic growth: sound business analysis and practices which are fundable and sustainable through operational, financial, and investment revenues.

Timing is another significant factor in the expansion equation. A business full of potential which expands based only upon expectations or a perception of “how things are done” is a business that will at best suffer through “growing pains” at worst put the entire business at risk for failure. Expansion will come successfully only when the business is ready and capable of sustaining the expansion.

Self-tests for growth

Before you make the decision to expand operations or add an additional location (or two or three or…), take the time to consider the following:

  • Have you proven your business model?
  • Are you profitable?
  • Are you cash positive in your existing operations?
  • What demand will expansion place on cash flows?
  • What demand will there be for capital investment?
  • Are your business practices, policies, and processes documented?
  • Do you have sufficient funds (cash and capital) to invest in marketing new locations and existing operations, new products as well as existing requirements?
  • Is there a qualified labor pool and can you compete to obtain and retain the necessary workforce – in your current operations and the new operations?
  • Do you have qualified management talent capable of either running the established operation the expanded operations?
  • How sensitive is your success to meeting forecast goals?
    • What happens if openings are delayed?
    • What happens if facilities or other equipment issues require higher than expected investments?
    • What happens if you can’t obtain or retain a qualified workforce?
    • What happens if there are glitches in marketing and advertising for the new locations?

Even Fortune 500 companies are vulnerable to overexpansion and overconfidence in past business models. The markets and economic environments are constantly changing. What has worked before may not work in the future. Interest rates and capital availability are subject to significant fluctuations. Unexpected, unrelated external events can impact the best laid plans.

Proceeding with care is an especially sound strategy for new ventures. New ventures and early stage businesses are still evolving and learning. When additional demands are placed on these structures, it can be a bit like a stringing a hammock between a mighty oak and a sapling – one side can handle the weight, the other bends or breaks. Are you growing too big, too soon, too far, or too fast?

© Copyright 2006 Lea A. Strickland, F.O.C.U.S. Resource, Inc.

 

 

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