💾 Archived View for gmi.noulin.net › mobileNews › 5840.gmi captured on 2023-01-29 at 05:04:54. Gemini links have been rewritten to link to archived content
⬅️ Previous capture (2021-12-03)
-=-=-=-=-=-=-
2016-02-25 11:03:41
Ranjay GulatiAlicia DeSantola
From the March 2016 Issue
Why do so many start-ups that seem to have it all customers, cash, a promising
outlook run off the rails? Ask a venture capitalist, and you ll probably hear
that they have trouble scaling.
What does that mean, though? VCs typically describe it as a need to
professionalize the organization and bring in grown-ups. But those are
simplistic fixes poor substitutes for the substantive changes that need to
occur. Start-ups these days grow so rapidly that it s difficult for them to
correct course once they recognize missteps. They can improve their prospects
by understanding the mechanics of effective scaling before they reach that
moment of truth.
Venture capitalist Ben Horowitz compares scaling to a black art. He and
others have proposed useful ideas for demystifying it, but start-ups still lack
a cogent framework for transitioning to mature firms. That s what this article
provides. Drawing on our extensive case studies of fast-growing companies and
on 75 years of organizational research, we have identified four critical
activities for successfully scaling a venture. Firms must hire functional
experts to take the enterprise to the next level, add management structures to
accommodate increased head count while maintaining informal ties across the
organization, build planning and forecasting capabilities, and spell out and
reinforce the cultural values that will sustain the business.
It s easy to misconstrue these activities as replication as merely increasing
the capacity and efficiency of what you re already doing. But they re also
about handling greater market and organizational complexity as you seek
different avenues for growth. That can mean developing new products or
services, entering new markets, or engaging in other forms of innovation.
Many entrepreneurs will resist these activities. They often develop strategies
opportunistically, lacking a frame of reference because they are starting from
scratch, and they take a similar ad hoc approach to building their
organizations. Founders tend to view formal structures and processes elements
common to all four activities as bureaucratic threats to their entrepreneurial
souls. They also worry about losing speed, control, and team intimacy. When
they eschew order and discipline, however, they pay a steep price: chaotic
operations and unpredictable performance.
Scaling doesn t mean that ventures should disavow their start-up identities and
embrace large-company dogma once they re poised for growth. But those prepared
to manage that growth and to learn new ways of operating and behaving stand a
much better chance of making it in the long term.
Defining Specialized Roles
Founders typically do a bit of everything basically, whatever it takes to get
the business off the ground. Through informal channels they hire fellow
generalists, who cobble together their roles and responsibilities partly by
pursuing their own passions and partly by looking around and seeing what needs
to be done. This idiosyncratic all hands on deck approach can work fine in
the beginning, when adrenaline is high and the company is small. But as
organizations expand, they face new levels of complexity that require them to
define and assign tasks more formally.
To accomplish this, they typically seek specialization in select functions,
such as sales, human resources, marketing, R&D, and manufacturing. This
benefits them in two ways. First, the specialists use their knowledge to tackle
their functions work more efficiently. Second, as they introduce and implement
best practices within their domains, they catalyze future growth by creating
slack in the rest of the firm. People who no longer have to worry about
marketing, for example, are free to explore other activities.
Of course, all this can create tension between the old guard generalists and
the domain experts. Demands for functional expertise often outstrip early
employees abilities to keep up through organic learning. As a consequence,
functional leadership titles increasingly go to outsiders, and the legacy folks
may grow resentful. Early employees may also chafe against the narrowing
confines of their changing roles. Not every generalist can or even wants to
become a specialist. Often people get frustrated and leave, taking their
valuable relationships and their tacit understanding of the firm s mission and
culture with them.
To keep people working together constructively, it s important to anticipate
and manage these growing pains. Let s look at how one start-up, Birchbox, did
so.
Birchbox experienced explosive growth within just a few years of its founding,
thanks to a business model crafted around consumers discoveries of new beauty
products. Each month subscribers received a box of samples customized according
to their personal profiles. They could simply pay their fees and enjoy the
samples; they could also go to the Birchbox website and buy larger quantities
of the products they liked most. A dedicated team generated a steady stream of
digital articles and video tutorials about beauty trends to further engage
customers. This model attracted a million subscribers in the first four years,
inspiring dozens of copycat start-ups to pitch their businesses as the
Birchbox for X.
To keep up with demand, Birchbox grew from eight employees in 2010 to more than
300 in April 2014, when it secured $60 million in series B funding. In the
process, employees roles and responsibilities shifted. Nicole Fealey, the
director of people operations and performance, recalls the excitement of being
a jack-of-all-trades during the first 18 months. That s what I love about
start-ups, she says. You never get bored. But she realizes that she and
other early employees lacked the knowledge and experience to handle everything
on their own as the company grew and that they would have burned out if they d
tried.
Consider the logistics of shipping a million boxes of unique samples each month
or the job of building sales relationships with enough partner organizations
to continually fill those boxes with fresh, interesting products. To manage
such complex work, Birchbox divided it into specialized functions and sought
out domain experts to improve the effectiveness of each one. The new hires
included a CTO with a computer science PhD from Carnegie Mellon and a vice
president of brand campaigns who had been a principal at Booz & Company.
When I walked in and looked objectively at certain monthly processes, I saw
that they had been established in a hacked-together way, says Kate Price, who
served as VP of brand campaigns for about three years before becoming VP of
Canada. My consultant mind immediately went to thinking that we should fix all
those things, but I learned pretty quickly to respect the people who at the age
of 24 had built a process that was part of the engine keeping the company
running. Cofounder Katia Beauchamp agrees about the importance of appreciating
the old guard a group the cofounders see as essential to Birchbox s special
sauce. She says, I think we do a really good job of showing people how
valuable their skill sets are and celebrating the fact that we wouldn t be here
without their collective capabilities. That attitude has kept early employees
feeling valued and engaged.
Even so, they have sometimes struggled to find their place in the growing
organization. It s scary for sure, Beauchamp acknowledges. I don t think it
s easy for me to this day; I don t think it s easy for anybody. Some people
had to hire their own bosses to supervise activities they themselves had
nurtured since the beginning, rewriting their own job descriptions accordingly.
Matt Field, a former early employee who headed international operations during
the big growth phase, saw that as an opportunity for personal development. I
knew I did not have the background or knowledge to take Birchbox to the level
of aspiration we had, he says. I hired someone who could teach me and empower
me to get better at my job.
Cultivating a learning mindset among employees was key, as was reminding them
of the challenges ahead and the ways in which experienced talent could help.
Those things got Field and others focused on the greater good of the firm
instead of worrying about their relevance and status in the new order.
Beauchamp says that she and cofounder Hayley Barna worked really hard to get
people to believe that you can hire people better than you. Involving members
of the old guard in the hiring process assured them they would still have a
voice. The founders also talked with them about how the domain experts could
mentor them and help them develop their niches in the growing firm.
As more outsiders have joined and settled into functional divisions, early
employees have provided cohesion through their broad understanding of how the
components of the business model fit together. They also serve as a cultural
channel back to the time when Birchbox had no brand cachet a time when it took
great resourcefulness to grab the attention of prospective partners and
customers.
People joke that they could never have gotten their jobs now, Beauchamp
remarks. The old guard didn t come in with as much industry experience, but
they are superskilled at Birchbox at our vision and practices.
We worked really hard to get people to believe that you can hire people better
than you.
Katia Beauchamp, cofounder, Birchbox
Does specialization bring risks? Absolutely. Once functions have independent
leaders, employees might hunker down in their silos and stop identifying with
the organization as a whole. Tribal instincts can prevent cross-functional idea
sharing and innovation, so firms must ensure that informal interactions
continue across teams and divisions. When companies are in a high-growth phase,
they often forgo relationship-building activities in favor of more-immediate
work demands. But over time that can lead to stasis and unoriginality. Firms
are better served in the long run by fostering cross-pollination while they
organize to support the work that needs to be done. The answer is not to avoid
building silos but to find ways of bridging them.
Adding Management Structure
When launching their start-ups, many founders eschew hierarchy because of their
egalitarian ideals. But as their firms scale, a growing number of people report
to a handful of leaders. Founders may think this allows them to remain in
command, because all decisions pass through them. But ironically, their
organizations spin out of control as centralized authority becomes a bottleneck
that hinders information flow, decision making, and execution. A couple of
people at the top can t effectively supervise everyone s increasingly
specialized day-to-day work; in such a system, accountability for
organizational goals gets lost. And employees find it hard to remain focused
and engaged when they don t have managerial guidance and processes. They may
become frustrated as they struggle for access to decision makers who are
juggling many other projects and people.
That happened early on at CloudFlare, a San Francisco based start-up that was
founded in 2009 and quickly became an important player in content delivery and
security for small to medium-size websites. By July 2012 it was serving nearly
500,000 websites, with more than 2 billion daily page views (then about 1% of
total internet page views). At that time it recounted some of its growing pains
to Harvard Business School s Tom Eisenmann and Alex Godden, who published a
teaching case about it.
In the beginning CloudFlare s founders proudly and vocally proclaimed that they
would build a completely flat organization, with no hierarchical titles or HR
function. Like many start-up leaders, CEO Matthew Prince wanted to promote
flexibility and individual achievement and believed they would be stifled by
bureaucratic control. In creating a title-free organization, he also hoped to
avoid future organizational chart conflicts, since the people initially heading
up the small venture probably wouldn t be suited to lead a team of 250, and
senior roles would inevitably change. Either the original person gets demoted,
in which case he or she will likely leave, or the new person doesn t get
brought in, Prince said. Neither is a great outcome.
Nevertheless, problems cropped up. In the three months ending in July 2012,
five of the firm s 35 employees quit, some citing the lack of a clear midlevel
reporting structure and the nonexistent HR practices. They described situations
in which they had no one to turn to (short of pestering the founders) if they
thought certain practices, such as activities related to software or coding
standards, needed to change. Without official policies, they found it difficult
to navigate conversations about taking vacation and sick days, balancing work
and family expectations, and expensing items. The employee backlash was similar
to what Zappos experienced in 2015, when it announced that it was eliminating
all titles and managers, and 14% of its workforce 210 people consequently took
buyouts and quit.
It s been fascinating to watch people from the engineering team look at the
sales team and say, Hey, they actually look happy and productive. Maybe
managers aren t such a bad thing.
Matthew Prince, CEO, CloudFlare
Even though CloudFlare lost fewer people than Zappos, the percentage was about
the same. Soon after the departures, Prince acknowledged that the firm needed
more structure. We are under no illusion that these management practices will
work forever, he told Eisenmann and Godden. You can already see some gaps.
People want feedback; they want direction. When we double our current staff, we
will need more hierarchy and managers and processes. A product manager had
recently joined the organization, but Prince, who still disliked the word
manager, called him a product engineer. He preferred to think of his
employees as being assisted.
By 2015 the firm had hired additional managers, along with an HR administrator
and a talent recruiter. Prince wanted the organizational chart to remain
flexible enough to attract senior hires without discouraging solo contributors,
but he recognized that adding management structure was helping CloudFlare grow.
When building up some areas, such as enterprise sales, he added hierarchical
layers. He recently commented, It s been fascinating to watch people from the
engineering team look at the sales team and say, Hey, they actually look happy
and productive. Maybe managers aren t such a bad thing.
Of course, organizations can take structure too far. Having excess layers in
the decision-making chain can slow things down by restricting the flow of
information (top-down or bottom-up). It can also demotivate employees by
signaling that they re not trusted to handle their own work. But as we saw at
CloudFlare, people find too little guidance demotivating as well.
Firms that complement formal structures with informal mentoring and feedback
can keep motivation intact. That s because those things foster a learning
mindset, helping employees grow right along with the organization. Clearly
delineated roles and areas of authority also enable people to make faster,
smarter decisions locally. They streamline the process, rather than gum it up,
and promote individuals development. The more decisions people are empowered
to make on the ground, the more they learn and the more accountable they
become.
Planning and Forecasting with Discipline
Improvisation is integral to young ventures; it s how they make discoveries.
However, as firms grow they need a framework of plans and goals to guide them.
That way they can keep trying new things and reacting to dynamic markets, but
with an eye toward larger objectives and sustaining the business. Otherwise
improvisation essentially amounts to aimless riffing.
Many start-ups, including India s Micromax Informatics, have learned that the
hard way. In 2010 Micromax seemed unstoppable. Having stormed the mobile
handset market just a couple of years before, it was selling more than a
million units a month. Its four cofounders had ambitions to make the company a
global leader, and the numbers seemed to put it on that path: That year revenue
more than quadrupled, and net profits more than quintupled. In September
Micromax raised $45 million in private equity from Sequoia Capital and other
investors, and in October it announced plans to go public.
But in July 2011 the company withdrew its IPO. Its relentless pursuit of growth
had come at the expense of business hygiene, and it had lost momentum as a
result. Mohit Bhatnagar, a managing director in Sequoia s New Delhi office,
says, From the outside it looked like a company that had grown exponentially,
with great customer adoption of its products. However, on the inside it was
chaotic.
At a board meeting later that year, Micromax committed to major organizational
changes. To their credit, the founders agreed to bring in an outside CEO, along
with senior leaders from blue-chip firms such as Airtel and HTC. When those
leaders arrived, they were struck by the utter lack of planning. For instance,
Micromax had done little to standardize market and employee information, let
alone use it to inform sales, operations, or talent management decisions.
As the new CEO at the time (he has since left the firm), Deepak Mehrotra led
the charge to implement strategic planning. With the founders support, he
stressed the importance of regular goal-setting and pacing exercises
companywide to build a long-term vision. He says, At my first meeting with my
direct reports, in January 2012, I made them write their epitaphs: Imagine
that two years hence, all 16 of you are returning from celebrating a great
year, and your plane crashes. What would you want as your obituary? That was
his way of getting managers to think more concretely about the company s future
and set clearer performance targets things the founders had avoided in their
excitement to pursue new opportunities and their reluctance to admit when
things weren t panning out. For example, the founders had initiated aggressive
expansions to Brazil and Dubai, undeterred by their limited knowledge of
customer preferences in those markets. Once systematic planning got under way,
the company shut down those operations.
Micromax also began to bridge planning gaps at the operational and tactical
levels. In many functions, managers lacked real-time data. Sales was a prime
example: Once handsets shipped to distribution channel partners, the firm had
long waits before finding out which models had sold, so placing advance orders
with suppliers involved a lot of guesswork. That led to underavailability of
fast-moving products and excessive returns of others. It also made it hard to
know how much inventory to retain. As a result, the company experienced cash
flow challenges and had a limited ability to launch new products until it
reached credit and inventory settlements with suppliers.
Cofounder Sumeet Kumar designed a solution: a tool that tracked each phone from
shipment by the manufacturer to activation by the user. I now know at exactly
what stage in the supply chain a device is, he explains. I know, in the top
20 cities in the country and street by street, the models I have sold.
Micromax completed the tool s rollout in November 2012. Sales and inventory
planning have since become much more precise, enabling the firm to learn within
30 days whether a product is going to be a rock star or a failure. This has
reduced problems with stock-outs, returns, and cash flow.
Before Micromax applied this sort of discipline, it had an ad hoc style of
pouncing on opportunities as they arose, using a combination of tacit knowledge
and off-the-cuff fixes. Leaders rationalized this approach on the grounds that
decisions had to be made quickly because rivals were close on the company s
heels, looking to copy existing products. In the frenzy to tackle pressing
challenges, the tasks of documenting solutions and analyzing how they might
have been reached more efficiently often fell by the wayside. People had little
interest in establishing routines to deal with repeat issues. When they came up
with effective solutions, they rarely shared them companywide; each unit had to
discover its own best way of doing things. And when key people left, their
knowledge walked out the door with them.
I now know at exactly what stage in the supply chain a device is. I know, in
the top 20 cities in the country and street by street, the models I have sold.
Sumeet Kumar, cofounder, Micromax
As Micromax s leaders discovered, even in a fast-paced, high-growth
environment, it s important to set aside time to plan and to identify and share
best practices. It s easy to assume that such activities are incompatible with
agility and managerial discretion. To be sure, overly rigid planning processes
can provoke battles over limited resources, which may hamstring innovation. But
it s possible to have freedom within a framework. Setting clear goals and
guidelines, systematically gathering and sharing information to shed light on
performance and enable better forecasting, and creating processes instead of
relying on key individuals to craft one-off solutions all these promote
efficient, smart decisions, especially when the world around you is in flux.
With these interventions, Micromax regained its footing in the mobile market.
Its 2015 fiscal year revenue was almost $2 billion.
Sustaining the Culture
Culture is typically a big part of what draws people to join start-ups and what
keeps them going. As employees battle the odds to turn a fledging business into
a viable company, working late nights and weekends to make it happen, they re
motivated by camaraderie and a sense of belonging to something important.
Founders recognize how powerful this is and rely on nostalgic, almost mythic,
stories about the organization s first days to get everyone to embrace the
culture. That can work while a venture is small and all the employees can
personally relate to those stories but as more people come aboard, leaders may
struggle to maintain a strong organizational culture. That s a problem, because
culture may be most important during periods of growth. As a venture starts to
formalize its functions and reporting chains, identifying with the larger
organization helps employees work across boundaries and engage in the
spontaneous collaboration and exchange of ideas the company needs to innovate.
Although founders of fast-growing firms say they worry about losing their
organizational culture, few take steps to codify and reinforce it. Their
attention quickly shifts to things that feel more urgent, such as operations
and marketing. As a result, employees motivation and engagement slip and
people leave, hoping to recapture the magic somewhere else.
How can entrepreneurs prevent these consequences? They can start by clearly
articulating their cultural values in their mission and vision statements and
in job descriptions. That makes it easier to recognize cultural drift before it
goes too far. It also helps the organization keep its values alive by hiring
for cultural fit and rewarding desired behaviors through recognition and
compensation.
Most of the personalities here talk a little faster. I tend to hire people who
inherently have a bit of discontent.
Ryan Howard, cofounder, Practice Fusion
Let s look at how this played out at Practice Fusion, a San Francisco firm that
makes a cloud-based platform for electronic health care records. By late 2013
it had hired nearly 200 employees within 12 months, more than doubling in size.
Throughout that period, cofounder Ryan Howard made it a priority to preserve
the organizational culture.
One of the firm s tenets, Be scrappy, harked back to the days when the
cofounders, spurned by VC investors, worked out of coffee shops and used
insurance money from a motorcycle accident to cover payroll. So it s not
surprising that early on, the leaders relied heavily on folklore tales about
their marathon workweeks and bootstrap solutions to convey this core value. But
as the business became larger and more complex, that created distance between
leaders and employees. The founders charisma and stories were no longer enough
to bind everyone together.
Anticipating this problem, Howard articulated the firm s values more formally,
posting them online and in the building. You ll now find them painted on the
office walls not just scrappiness (his personal favorite) but also integrity,
customer focus, teamwork, fun, community giving, and doing extraordinary
things. These values have become criteria for hiring and performance
evaluation. For example, leaders expect employees to be resourceful,
self-motivated problem solvers. Most of the personalities here talk a little
faster, Howard says. I tend to hire people who inherently have a bit of
discontent.
The firm also instituted weekly town-hall-style meetings, where the founders
encourage employees to ask tough questions about what matters most at Practice
Fusion, the problems it faces, how key decisions were made, and so on. This not
only ensures a regular line of communication with employees but also makes
everyone insiders, privy to the leaders thinking about critical issues.
The staff also comes together once a month for phenomenal Friday, where
divisions take turns sharing updates and challenges. Sitting together and
swapping stories helps weave the different groups into a unified community an
effort that requires regular care and feeding, especially in a company that
extols scrappy self-starters.
As just about any rapidly growing start-up will attest, scaling up is
challenging. Market crashes, unreliable supply and distribution partners,
fierce rivals, and plenty of other external forces can buffet firms. But that
doesn t mean companies need to be chaotic on the inside. Effective internal
organization frees them up to keep pursuing new opportunities and brings
long-term survival within reach.
Entrepreneurs may worry that the changes we propose will be the death of
spontaneity, adaptability, and speed everything that got them up and running in
the first place. Indeed, these are valuable qualities. Many large companies
realize that too; that s why they often try to behave more like new ventures.
We re not suggesting that start-ups abandon what made them special and
innovative. But it s a lot easier to launch your rocket ship in search of new
horizons when you don t have to worry that someone forgot to fill the tank.
Between the extremes of ad hoc and prescriptive organizing, there s a useful
middle ground. Leaders who can find it will have an edge on their rivals and
that really matters, given how few new ventures become established players.
A version of this article appeared in the March 2016 issue (pp.54 61) of
Harvard Business Review.
Ranjay Gulati is the Jaime and Josefina Chua Tiampo Professor of Business
Administration at Harvard Business School.
Alicia DeSantola is a PhD student in the Organizational Behavior program at
Harvard University.