When Not To Grow Your Business
by Steve Musick, CEO of Destiny Capital
In the startup universe, growth is the Holy Grail. It’s what drives us to innovate, take creative risks, and challenge the status quo. The pursuit of growth is no longer just a strategy; it seems necessary to most founders.
Our lust for growth, however, comes at a cost. In the U.S., research indicates that between 50 and 90 percent of all entrepreneurial endeavors fail within the first few years. Too many entrepreneurs prioritize growth over sustainability, and the result is usually disastrous.
It doesn’t have to be this way. It’s completely plausible to focus on both growth and survival at the same time. In fact, the most successful entrepreneurs are the ones who know when not to pursue growth and expansion.
Here are some guidelines for maximizing growth and sustainability without sacrificing your business in the process:
1. Understand Productive Growth.
Productive growth provides increasing residual benefits using the same fixed and variable resources. An example of residual benefits would be service revenue from product sales. If a technology company sells data management systems to the healthcare industry, its residual benefits come from the ongoing service revenue from their software sales.
When the residual benefits decrease, we’re no longer talking about growth; the business is in a state of static equilibrium, which is not a bad place to be. When your company is in equilibrium, you have the space to figure out what’s working, as well as what’s not, and determine how to make the best use of your resources.
However, if a company in static equilibrium believes it’s actually in a growth environment, things can fall apart quickly.
It’s critical to the stability of your company that you understand the relationship between your resources and benefits. When you have a clear picture of what is happening in your business, you’ll be better able to recognize opportunities for growth when they emerge. You’ll also be less likely to pursue growth strategies that won’t work.
2. Create and Test a Model First.
Years ago, I was helping an entrepreneur make a decision about his manufacturing business. The market was just beginning to demand custom manufacturing. For the entrepreneur, this was an exciting opportunity for potential growth. But instead of rushing in blindly, he decided to test the waters first by employing a small-scale strategic model.
The entrepreneur transformed a small section of his existing factory to handle custom projects. Within a year, this had become the fastest-growing section of his business. Only when he had proof that this was a sustainable model did he purchase more manufacturing equipment to handle the excess demand. Since then, he has expanded the custom manufacturing operation; it now takes up half of his factory.
This measured approach to growth offers you tremendous insight. Once you design, launch, and run a strategic small-scale model, ask yourself the following questions:
- Did we have enough trained staff to do the work?
- Did we have sufficient equipment to start and grow the unit?
- Would outsiders (bankers and investors) help with financing the transition of the business?
- Does the economic model generate sufficient cash flow to pay all the costs and still provide a sufficient profit margin to warrant taking the risks?
- Did we create price points that enabled us to engage as much of the market as possible?
Equipping yourself with these answers will make the decision to pursue growth — or not — that much clearer.
3. Do a Blood Test.
So an opportunity for growth has emerged, and you’ve run a small-scale model with promising results. There’s still a big question you need to answer: is your company healthy enough to take this risk?
To do a blood test, ask your managers to assess the health (performance) of your company. Once the managers have done the assessment, share their findings with the rest of the team. What do your employees think? Is the company healthy and getting healthier, or is there a sickness spreading? Transmit the results across every level and ask for feedback. If you have validation across the board that your business is healthy, you’re good to go. If there’s an inconsistency is your findings, hold off on taking any risks until you’ve done a full and formal investigation.
Only a healthy company can handle rapid growth; a sick one is likely to collapse under the pressure.
Growth takes patience. It takes restraint and control. It means you shouldn’t chase after every flashy opportunity. Make long-term sustainability as important as growth, and you’ll achieve both.
Steve Musick is the CEO of Destiny Capital, a financial advising firm he founded in 1977. In addition to wealth management, Steve is an author, speaker and lecturer on the subject of Entrepreneurial Leadership. He recently launched Empowerium as an entrepreneurial platform to fuel business growth.
This is an article contributed to Young Upstarts and published or republished here with permission. All rights of this work belong to the authors named in the article above.