You’ve powered through the startup phase, you’ve established a level of product/service viability, you’ve reached a threshold level of profit, and generated positive cash flow. So what’s next? Should you expand and hire “next level” talent or focus on infrastructure and better processes for future scalability? Which of the many competing strategic and tactical elements of growth should be outsourced vs. done internally? Even if you found the seemingly perfect candidate, will they understand the complicated dynamics of your closely held company and be able to balance cultural preservation AND performance accountability?
Balancing Growth and Organizational Value
As a privately held business owner, you have a wide scope of responsibilities as you try to balance growth and the creation of organizational value. Growth and company value do not always align, as growth may bring a host of unintended consequences including, but not limited to, turnover, reduced cash flow, higher overhead, reduced quality, lack of diversification, and lower profits. Bottom line: you grow your revenues but do not realize any incremental profits.
The Cost of Growth on Company Valuation
Growth sounded like a necessity as you listened to the pundits, “You’re either green and growing or brown and dying.” So why has your growth degraded your valuation, increased your risk, and got you working harder and longer than ever? Isn’t it supposed to get easier? Unfortunately, the complexities of adding a new product line, new employee, new location, or new distribution channel aren’t a simple 1:1 ratio of increased complexity. In reality, it’s likely a 1:12 ratio of complexity as you coordinate and integrate the many interconnections between the one change and sales, marketing, logistics, accounting, finance, and operations.
The Role of Outside Help in Professionalizing Growth Plans
I’ve had the opportunity to work with dozens of visionary owners of private companies seeking growth. There is a similar pattern each time: Owners reach a level of fatigue due to a combination of trigger points (growth stagnation, margin erosion, turnover, degraded cash flow, etc.) and look for outside help to “professionalize” their growth plans. The owner hires a “C-level” exec, and the owner abdicates (not empowers) responsibility while they determine the highest probability way to stabilize cash flow and balance vision, alignment, and execution to return the company to incremental and sustainable profitability.
The Evolution of Owner-Executive Relationships
For the 20% of owners that actually find the right candidate (the overwhelming 80% do not), the first year in this W-2 relationship can be great. It’s fresh and new, with the owner more than willing to give significant autonomy to the new exec. Year one results in cost rationalization, talent alignment, key process overhaul, fiscal discipline, and cash flow stabilization resulting in direct bottom line impact. The owner and exec are happy…
Year Two: Achieving Incremental Growth and Stability
Year two brings a greater level of discipline throughout the organization in areas of planning, resource alignment, and execution. Sales channels and value propositions are tighter, and budgets are now being met to safeguard incremental profitability. Double-digit growth rates are typically hit. The exec gets a good annual bonus, and the owner gets accustomed to regular distributions outside of their salary. Everybody wins…
Year Three: Conflicting Agendas and Organizational Turmoil
The tail end of year three is where things quickly evolve. The exec doesn’t have equity but may have significantly driven the company’s value and scalability; however, the financial reward and long-term incentive are now elusive. The owner is now enjoying a level of personal liquidity, sees structures in place to grow, and has felt a little “caged” over the past few years due to all of the new processes. In essence, the owner re-engages with the mindset, “Let’s get back to explosive growth!” And the pattern begins again….
Introducing Venture Catalysts for Sustainable Growth
The owner and exec now have competing agendas on how best to grow the company in the best interests of the organization, employees, partners, and shareholders. There is rarely a Board of Directors, and the resulting “tug of war” typically leads to exec turnover, turmoil, and profit/cash flow erosion. The company either shrinks back to the size where the owner can comfortably manage again, sells for a deep discount, or goes out of business. The exec finds another opportunity…no one wins.
These patterns that many encounter through this elusive growth dynamic are consistent for many private businesses. To that end, we can explore alternative ways to engage the optimal mix of seasoned talent at the right time and cost. We turn to the Venture Catalyst. These are 20+ year experienced C-level execs who have a track record of success and understand the complicated dynamics of managing growth and value creation. They enjoy challenges and diversity of experiences without the politics and want the flexibility of different industries, markets, and company lifecycle phases. Venture Catalysts can be a viable means for businesses to cost-effectively leverage the right leadership at critical lifecycle phases with greater flexibility and less risk.
The Benefits of Engaging a Venture Catalyst
Fresh Perspective
Venture Catalysts bring a wide range of diversified skills, ideas, experiences, and leadership to an organization. A fresh and objective approach can accelerate innovation and reenergize a company.
Reduced Risk
Hiring the wrong C-level executive can be extraordinarily costly in both cultural and financial terms. Venture Catalysts reduce the normal ramp-up time and engage in flexible arrangements a month or more at a time. No forced commitments or W-2 liabilities.
High Return on Investment
Typically, engaging Venture Catalysts yields a return on investment that is at least 10X their fee within 6 months, with the relationship highly weighted on objective key performance outcomes.
Knowledge Transfer
Venture Catalysts serve as mentors to internal employees, ranging from technical knowledge transfer to change management to leadership development, strengthening the underlying fabric of your organization.
Flexible Arrangements
Arrangements can be project-based or on a fractional basis, designing commitments based on the desired speed of implementation and budget.
Balanced Growth
Venture Catalysts serve the company, employees, partners, and shareholders. First and foremost, they serve what is in the company’s best interest; however, they balance the needs of each party to achieve a common framework for defining success.
Moving Forward with Venture Catalysts
In times of growth and/or transition, experienced and objective Venture Catalysts can ensure your private company pierces through your current plateau while enhancing the overall value of the legacy you have created. It’s a win-win-win for the company, shareholder, and Venture Catalyst in managing growth in dynamic times.
Contact us at info@flvcp.com for more information on our process and how we can catalyze the growth of your private company.
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