The pace of progress
I have heard a lot of stories about rapid growth in businesses. One of the most rapid growth stories I am aware of is my own. In the 1980s I ran The Radon Project, which grew from 8 to 250 employees in less than 6 months. It's hard to imagine more rapid growth than this, and managing it was intense, involved an enormous number of hours and close attention, and was painful to undertake and accomplish.
If I knew then what I know now, would I have done it differently? Sure. A few mistakes would not have been made. Some deeper analysis would have led to better margins and a better long-term outcome. But what I was missing then is what I try to provide to others now. I could have used a mentor who had been through something similar before. I might have made fewer mistakes, but I certainly would have had different advice and likely a substantially different outcome.
I am not complaining about it. But the experience taught me something about growth that I almost certainly would never have learned otherwise. There is something about the pace of operations, called "tempo" in the military, that stretches the cognitive limits of the individuals and groups they work within.
Is faster always better?
It is hard to live with business coming in too slow. Cash flow sucks, you cannot get momentum really going, you never get into the flow of operations, the team starts and stops, and so forth.
But going too fast is also problematic. You can never keep up, and in the rush to do so, you make mistakes. The urgent outweighs the important until the important ends up not getting done, and at that point, things start to fall apart. You are forced to give up business or do it poorly and give up reputation. Your cash flow may become so bad it puts you out of business. Your resources are strained to the limit, and you are unable to build up the future because of the pressure of the present.
It's all about pipeline. And scale makes a huge difference. The sequence for most successful startups goes something like this:
One team, not enough work (no pipeline), cash flow negative: Relatively immature, inadequate processes in place, time and money spent trying things and learning from them, brittle to outages.
One team, enough work (short pipeline), cash flow break even: Not bleeding cash, but not improving. Process may slowly improve to repeatability, highly susceptible to supply chain issues or individual illness, injury.
One team, too much work (long pipeline, overtime), cash flow positive: Repeatable process, not well documented, individual effort is key, brittle to changes, no time to make progress, pipeline will soon kill new business.
Two teams, not enough work (medium pipeline), cash flow negative: A second team is required, which means there is 1.3 times the work that can be done by one team, split between two teams, for about 2/3 utilization each, except pipeline is not going down very quickly because team 2 is being trained for some time.
Two teams, enough work (medium pipeline), cash flow break even: Pipeline gets to a low enough level for sustainability without loss of sales, teams operating at 80% utilization each, cash flow break even, but process not very efficient.
Two teams, too much work (long pipeline, overtime), cash flow positive: More work comes in, teams get to 100% utilization, makes for positive cash flow but unable to improve processes and mature without added time and effort. Teams get to 120% utilization each (240% of one team), pipeline grows toward limit of new sales, and strong repeatability. Redundancy allows less brittleness.
Three teams, enough work (medium pipeline, no overtime), cash flow positive: The 240% utilization is split 3 ways, for 80% utilization for each of 3 teams, each is cash flow positive, there is time for process improvement, leading to scaling to higher volume without increased labor, reasonably resilient to failures, pipeline under control and can be compensated for by more or less team effort, maturity improves.
At this point, growth involves 3 or more teams getting to 100% utilization, adding a team which is still profitable, a systematic training and management approach high efficiency, economies of scale, and so forth. Cash flow very positive, and making up for all the dips along the way. While it may seem that this doesn't apply to many situations (e.g., computerized businesses), it very often does. Look at 24x7 support, for example, which requires 5 teams for full coverage.
Cash flow analysis and scaling
All of this is done in the example with a minimum of numbers. Just the total load on the team or teams. But the problem for the business person trying to execute on this is predicting cash flow and demands over time, which translates into how much investment is needed, which translates into fund raising. If you have $500K in the bank, is that enough? If payments come late and bills come early, how much effect will that have? If costs go up and sale price goes down, how bad is it?
It turns out, these results may be very different with even relatively minor differences in these factors, even for a business that is eventually very profitable. In one case, a profitable company starting to expand did a simulation analysis. They found that, depending only on payment terms, they could need anywhere from $20K to $500K over the next 9 months.
By changing from net 30 to net 60 payment terms, as they grow, their cash demands just keep going up. If they stopped all work for 30 days, collecting bills would all of a sudden produce enough cash to grow even faster. But then they would again face a cash crunch in a few months for the same reason. They can give a 10% discount for early payment (30 instead of 60), and while the profit will be lower per unit volume, they will be able to grow far faster, and within a year have far more profit. Of course all of this depends on their ability to sell more.
As long as they can sell more and more at the same cost per sale, seemingly minor shifts in payment terms, or getting a line of credit, loan, or investment, produce enormous changes in maximum growth rate, profit over time, and ultimately, turn out removing the need for that capital.
I don't want to claim too much here. The spreadsheets used for growth models in many startups don't realistically model the minutia of cash flow, and as a result, they may drastically underestimate the need for cash or limit growth rates. Simulations are far more revealing, and our simulation tools have proven invaluable at bringing insight into relatively minor changes in operations or terms. But at the end of the day, the CEO and CFO have to understand these issues and work together to solve them.
How fast is fast enough? As fast as possible but no faster! But if you are not careful, you will end up dead in the water.
Copyright(c) Fred Cohen, 2017 - All Rights Reserved