Scaling up a local startup to ensure its survival and success can be nearly impossible. According to Egypt Innovate, a think tank owned by the Ministry of Communication and Information Technology, “[The] grim reality [is that] eventually, 90% of startups bite the dust, and 51% of all businesses [that survived] die off within five years.” 

Verne Harnish, a serial entrepreneur, in his book “Scaling Up: How a Few Companies Make It … and Why the Rest Don’t,” explores the “paradox of growth” and challenges facing entrepreneurs.  

Growth fundamentals

Scaling up a startup begins with changing the mindset of senior leaders. “If they have the answers (or act like they do),” Harnish wrote, “it guarantees organizational silence, exacerbates blindness (the CEO is always the last to know anyway), and means the senior team ends up carrying the entire load of the company.” 

The right mindset is to “have the right questions, but turn to … employees, customers, advisors and the crowd to mine the answers,” Harnish stressed. “Every business is more valuable to the degree that it does not depend on its top leader.”

The other attitude change involves establishing routines or habits. “Goals without routines are wishes; routines without goals are aimless. The most successful business leaders have a clear vision and the discipline (routines) to make it a reality.”

Next, startup leaders tasked with turning a company into a fast-growing “gazelle” enterprise must think of “scaling up a business … like climbing a mountain.” It requires a plan “with a set of inviolable rules [and] intermediate waypoints [that] normally mark significant changes in terrain.”

Within the first year of starting a business, leaders must look no further than the next quarter. The book suggests after the one-year mark, startups should transition to annual planning, as the company has a stronger footing and its leaders have more experience dealing with unforeseen events.

The next step is to switch to three- to five-year targets, divided into annual goals, which are broken down into specific, actionable monthly and weekly steps, adjusting tactics as market conditions dictate. The ultimate goal, which Harnish calls the “Big Hairy Audacious Goal (BHAG),” should be achieved “in the next 10 to 25 years.”

Planning the post-one-year phase is tricky, as the book referenced “[Microsoft founder] Bill Gates’ note that ‘most people overestimate what they can do in one year and underestimate what they can do in 10 years.’”

Throughout this “scaling up” journey, startup leaders must “keep everyone focused on the summit and then decide the appropriate next step (quarterly priority) while respecting the rules that keep you from being swept off the mountain (values).” 

People factor

The book highlights “people” as the first “fundamental” factor to fuel a startup’s “gazelle” phase. “In leading people, take a page from parenting,” it said. “Establish a handful of rules, repeat yourself a lot, and act consistently with those rules. This is the role and power of core values.” 

“If … used effectively,” Harnish wrote, “these values guide all the relationship decisions and systems in the company.”

The next step is to ask the “key question: Do you have the right people doing the right things right inside the organization?” Other “people” questions include, “Would you keep all your existing clients? Are you happy with your investors [or] banks? Are your vendors supporting you properly? Are your advisors — accountants, lawyers, consultants, and coaches — the best for the size of the organization and future plans?”

“The toughest decisions to make are when the company has outgrown some of these relationships and you need to make changes,” he said. The book includes forms to assist with such transitions.  

Plan and execute 

The “key question” in the planning and execution phases is: “Can you state your firm’s strategy simply — and is it driving sustainable growth in revenue and gross margins?” 

Harnish stressed that startup leaders must “break apart a 50-year-old business term — strategic planning — and think about it in terms of two distinct activities: ‘strategic thinking’ and ‘execution planning.’ Each requires two very different teams and processes.” 

The “thinking” stage “requires a handful of senior leaders … meeting separate from the standard executive team meeting,” Harnish said. In those gatherings, “rather than getting mired in operational issues, the strategic thinking team is focused on discussing a few big strategic issues.”

One discussed topic should be the “vision summary.” The book includes a framework document to develop a vision summary for companies with fewer than 50 employees, as well as another for those with more employees. 

Harnish said the executive team should consider using SWT (strengths, weaknesses, trends) instead of the conventional SWOT (strengths, weaknesses, opportunities, threats) framework. 

The book also highlighted the “7 Strata of Strategy” to build a “robust, yet simply stated strategy,” starting with asking: “What word(s) do you own in the minds of your targeted customers (e.g. Google owns search)” or “What is your X-Factor … that completely wipes out any and all rivals profit.” 

Next is “execution planning, [which] requires a much larger team … setting specific annual and quarterly priorities, outcomes,” and key performance indicators. “Middle management and frontline employees are involved [as] they are closer to the day-to-day operational issues … and their participation in setting the plan creates better buy-in.” 

The “key question” at this stage is: “Are all processes running without drama and driving industry profitability?” Harnish said. “You have execution issues if … there is needless drama in the organization.” When something wrong happens, “everyone seems to be working more hours … fixing things that should have been done right the first time,” and “more importantly, the company is generating less than three times the industry average profitability.”

Having ineffective implementation is not necessarily fatal. “Companies can get by with sloppy execution if they have a killer strategy or highly dedicated people [who] will work 18-hour days, [seven] days per week to cover all the slop. Just recognize you’re wasting a lot of profitability and time.” 

To stay the course, the book recommended “taking a few minutes at the end [of every meeting to] summarize who said they are going to do what, when,” stressing, “This isn’t about micromanagement; this is about … being clear in both communication and accountability.”

If planning and execution are done correctly, Harnish said, they create a never-ending loop of think, plan, act, learn, repeat.

Bottom line

Ensuring “consistent sources of cash, ideally generated internally, to fuel growth” is elemental for a startup. “Growth sucks cash. This is the first law of entrepreneurial gravity,” Harnish said. “Nothing ages a CEO and [their] team faster than being short on cash. Successful companies hold three to 10 times more cash assets than average for their industries, and they do so from the time they start.”  

That allows the startup to scale from the “mice” phase, where stagnation is likely after initial momentum recedes; to “gazelles,” to achieving optimum size and stable growth in the “elephant” phase, where executives can only make things worse through wrong decisions.

Few startup leaders follow that cash-first approach, “paying more attention to revenue and profit than they do cash when it comes to structuring deals with suppliers, customers, employees (bonus plans) or investors [and] banks.” 

Harnish recommended always asking accounting for a “cash flow statement every day detailing the cash that came in during the last 24 hours, the cash that flowed out, and some ideas of how cash is looking over the next 30 to 90 days.”

Analyzing that data allows startup executives to determine “how long it takes, after you spend [cash] on rent, utilities, payroll, inventory, marketing, etc., for [cash] to make its way through your business model and back into your pocket,” Harnish said. 

Growth paradox

The phrase “Beware what you wish for, it may come true” is particularly relevant when scaling up startups. “Leading a growth company is one of the more exhilarating things you can do in the world,” Harnish said. “Eventually, sailing among the ‘big ships’ can be an incredibly fulfilling and rewarding opportunity.” 

In reality, “for many business leaders, scaling the business is a nightmare,” he warned. “Does every employee you hire, every customer you acquire, and every expansion you drive actually make you tired? Are you working longer hours, although you’d thought there should be some economies of scale as the business grew?”

Harnish said misalignment of expectations and reality is the “growth paradox: the belief that as you scale the company — and increase your dream team, prospects, and resources — things should get easier, but they don’t. Things get harder and more complicated.” 

That complexity stems from growing the business from an owner and an assistant, with two communication channels, to adding more employees, customers, locations, or products. “Expanding from three to four people grows the team only 33%, yet complexity may increase 400%, and [it] just keeps growing exponentially.”

Another source of complexity is that as startups grow, “fundamental barriers to scaling up ventures [surface].” The first is “the inability to grow enough leaders throughout the organization who have the capability to delegate and predict.”

The second is “the lack of systems and structures (physical and organizational) to handle the complexities in communication and decisions that come with growth.” Third is “the failure to scale up an effective marketing function to both attract new relationships (customers, talents, etc.) to the business and address the increased competitive pressures (and eroded margins) as you scale.”

Those challenges complicate navigation through “the ‘Valleys of Death’ — those points in the company’s growth where you’re bigger, but not quite big enough to have the next level of talent and systems needed,” Harnish explained. “These are the points where the business needs to leap from one whitecap to the next or risk falling into an abyss.” 

This article first appeared in August’s print edition of Business Monthly.