How to Avoid Throttling Your Start-up’s Growth and the Burnout That Comes Next
(Forbes, July 22, 2017, by Robert Sher) New businesses that tap into large and severely under-met needs are destined to grow rapidly. But if the founders starve the company of capital, their conservativism eventually will kill growth. Even more important, it will burn out the founders. That is unfortunate for people who start businesses to have a better work/life balance. It is also avoidable.
The story of Koshland Pharm illustrates this well. Peter Koshland launched a compounding pharmacy in 2009 in the depths of the great recession. Given the dire economic times, he received what he thought was sound advice: expect very slow growth. So Koshland created a conservative business plan. But with a strong reputation in his market (the San Francisco Bay Area) and a great need for his products, his firm reached its second-year revenue target just eight months after opening. In fact, Koshland Pharm grew at triple-digit rates for several years, winning him SF Business Times “Fast 100” awards two years running. What’s more, the business was profitable.
But in 2014, after five years of scrambling to keep up, Peter was burned out. The vision of having the flexibility to help patients optimally while enjoying freedom and independence was fading; work had become his taskmaster. Prescription turnaround times had spiked to eight days (ideal is next-day). Peter’s wife, Krista Shaffer, today VP of business development, recalls watching Peter go to work exhausted since he was the only pharmacist in the company. (In any pharmacy, a licensed pharmacist must be present). Peter Koshland took no vacations. His work-lifework balance terribly imbalanced.
Too lean is a “thing”
Many startups take lean to the extreme, trying to run at 100% of capacity to minimize costs. They believe this will cause cash to start piling up, signaling to them that it’s safe to start investing in the business. But healthy, growing businesses naturally use up cash as they grow, so that signal never comes until the business stops growing or the owners wear out.
Peter Koshland says, “It seemed sensible to run lean, with everyone busy. But if anyone called in sick or quit, it was stressful and difficult to keep up. Even so, the cash didn’t pile up.”The key to stability and long-term sustainability for growing, profitable businesses is increasing throughput. Management must focus on the bottleneck, then invest in building better measures of capacity and better processes to increase throughput. Once accomplished, find the next bottleneck and repeat the process. Soon the business is large enough to afford a team who makes it less reliant on the founder.
Knowing that he lacked business experience & education, Peter Koshland joined the Alliance of Chief Executives, a Bay Area CEO peer group. He retained several advisors — one from his industry and another focusing on management and operations.
How to find the starting point
Start by understanding the business’s finances. Shooting for growth can leave you broke if you’re not careful. On the other hand, too often founders are fearful of spending, but that fear isn’t based on careful analysis. Make sure your bookkeeping is done reasonably well, then model your cash flows. Get help if you need to — it should take only four to eight hours to project cash flow. Given strong demand for your product or service, you can afford to spend more (and take a bit more financial risk) when you focus that spend in the right place.
Next, identify what is holding you back: your bottleneck. For example, it could be responding to web inquiries. It could be affording enough materials to fill orders. Focus your energies on building capacity in that area. In growing businesses, most of the time we find that process is lacking, and when examined, it becomes clear that they are working inefficiently, investing in the wrong places, new employees are trained poorly and hiring is way too late (or too slowly).
Koshland’s bottleneck wasn’t sales—it was operations. In the very tight San Francisco labor market, qualified technicians and pharmacists were hard to find and harder to keep. So, they created a better hiring process and staffed up until they had one “extra” technician. They began more careful measuring of on-time shipments, stepped up training processes to shorten the learning curve. Financial modeling showed that with faster shipping times came faster billing, and increased volume meant better turns on inventory. Their cash situation would get better with scale. The bank agreed, and increased their line of credit. With the guidance of a business coach, they introduced many processes which made their operations significantly more resilient to surprises.
Koshland says, “We recently lost nearly one third of our operations team over a two month period — each departure for a different reason. In the past, that would have devastated us. But as the first one left, we fired up our hiring machine and our onboarding and training process worked well. On our worst day, we were shipping prescriptions in three days, but were able to hold to one or two days overall.”
Can’t Afford It?
Don’t be so sure you can’t afford it! Many founder’s instinct is to tighten the purse strings. But growth doesn’t usually come from cutting. Are you profitable and is there plenty of demand in your market? If yes, you can find a way to invest more in your business if you want it to grow stronger and more sustainable. If no, then cutting costs may be a better option.
With operations under control and two more pharmacists on staff, Krista and Peter Koshland are able to take vacations and enjoy other freedoms of ownership. At the beginning of 2017, they shifted their focus to assuring that they achieved their 10-15% targeted annual growth rate (the next likely bottleneck). They hired their first business development employee, reporting to Krista Shaffer. She says, “We are growing at the top end of our desired growth rate (16%), and best of all, even when Peter and I are on vacation, our company is developing new business without us.”
Strong demand is always fleeting. For nearly all businesses, periods of abundant opportunity end, whether it be from economic downturns, strong competitors bringing innovation, changed business models or new regulatory changes. Don’t waste your chance to grow. Invest in increasing throughput.
Follow me @RobertSher and check out my new book, Mighty Midsized Companies; How Leaders Overcome 7 Silent Growth Killers.