Rapid growth causes a series of Inc. 500 companies to experience dramatic upheaval.
Postmortem
Most small businesses get killed by sweeping shifts in technology or by global competition. For fast-growing companies, the real enemy is within
Just three years ago linda kesler started each day staring down the same stark choice. "I woke up every morning flipping a coin," recalls the founder of Create-a-Check Inc. (#290). "Either I'd go into bankruptcy or I'd see this thing through."
Kesler had founded the business--which makes check-printing and electronic-payment software--a little more than three years earlier, and she wasn't the type to cave in easily. She had, as she puts it, "had a few challenges" over the years, which is understandable given her status as "a non-Mormon, a smoker, and a drinker in Salt Lake City." She was also one of the city's pioneering female entrepreneurs, having started her first venture in 1974. "Early on," she recalls, "I went out to meet a potential client, who asked me why I wasn't at home taking care of the children."
By 1995, much to her chagrin, it looked as if she'd get more time at home. It wasn't so much the prospect of failure that stunned Kesler. Rather, the circumstances were what took her by surprise. Create-a-Check, after all, wasn't being overrun by some massive shift in the marketplace. The company hadn't been stomped by a swift competitor, walloped by a nifty new technology, or even destabilized by relentless regulatory shifts. Nothing in the outside world had preordained Create-a-Check's demise. If the company went under--and, given the hundreds of thousands of dollars it owed its vendors, closing shop appeared to be the sanest strategy--Kesler would have only one person to blame: herself.
Not that she wouldn't find plenty of camaraderie among other founders of fast-growing companies whose creations had gone kaput. Talk to those who have presided over the demise, or near death, of their fast-growing entities, and they'll almost never list external factors as the critical culprits. Despite whatever strains speedy growth appears to place on them, Inc. 500 companies are sturdier than typical small businesses. Much sturdier, in fact. According to a study of the class of 1985, the survival rate of Inc. 500 companies is about twice as high as that of traditional small businesses. (See " The Startling Truth About Growth Companies," State of Small Business special issue, 1996.) Often, Inc. 500 companies can withstand the enemies that snuff out their more ordinary counterparts. By contrast, they die of unnatural causes. "Ninety-five percent of the failures are due to internal problems," observes Dave Ferrari, president of Argus Management Corp., in South Natick, Mass., which specializes in turnarounds. "I can't tell you how many companies I've been to that have the fast-growing-company plaque on the wall and are about to go under. They don't have the systems and the people in place. Accounting is lagging. Purchasing is not done in the most efficient manner. Inventory gets out of control. All of a sudden, all these mistakes compound, and the least little burp kills them."
The collapse is swift--or seems to be, anyway, in part because CEOs are so busy scanning the horizon for threats that they overlook the nearby symptoms of internal bleeding. "They unravel fast," says turnaround consultant David Auchterlonie, CEO of the Scotland Group, in Los Angeles. "What you're seeing are the results of bad decisions pervading the organization."
Besides, founders of fast-growing companies aren't inclined to build much of a cushion for themselves: fast growth yields goals for even faster growth, with profits reinvested accordingly. Witness how many of this year's Inc. 500--148, to be exact--ranked on last year's list. "I always thought you had to take the company to the next level," says Hadi "Mike" Mahmoodi, founder of NIE International (#404), a three-time Inc. 500 winner, which recently endured its own upheaval.
But as Mahmoodi, Kesler, and others attest, CEOs of fast-growing companies can save their businesses from their own worst enemies--namely, themselves--by making some assumptions about the burdens that fast growth will likely impose upon them. Whether your own fast-growing company ranks among this year's Inc. 500 or not, it's a worthy priority to make yourself aware of these trouble spots, lest they turn into trapdoors.
You'll grow exhausted from managing fast growth
What took her years to build, Linda Kesler almost bankrupted in less than six months. "It takes very little time without paying attention to destroy a company," she reflects.
It started in the fall of 1994. Exhausted from running three businesses and newly remarried, she instinctively installed the only logical person--actually, the only person, period--to serve as president of Create-a-Check. Marketing director Alan Redd was promoted to president, enabling Kesler to take a break. "I wanted to live longer than my father's 54 years," says Kesler (now 52), who claims that her father, an entrepreneur, worked himself to death.
The transition took place quickly, as it had to. Although Kesler and Redd were supposed to talk weekly, they rarely did. "I was a newlywed and was tired," she confesses. Redd failed to meet sales budgets, Kesler claims, and expenses grew as sales stagnated. For example, she says, he hired several telemarketers to generate leads, an approach she opposed. He also brought on salespeople, who had to wait while the telemarketers struggled to identify prospects. "The telemarketing effort didn't work out as well as it could have," concedes Redd. Against Kesler's wishes, he spent at least $1,000 over the course of 60 days to prepare for a venture-capital fair that didn't raise a dime. "I knew she wasn't as happy about it as she could have been, but it was very good exposure for the company," insists Redd.
Beyond their specific disagreements, the fact remains that Kesler got herself into that situation by making a maximum-impact decision with minimal forethought. "It happened too fast," says longtime board member Mitch Feinglas. "One day Linda put him in charge. She shouldn't have given up control to Alan. He wasn't prepared to take it."
By the time Kesler returned, in February 1995, vendor lawsuits were pending. In one case, the company's failure to show up in court meant that it was forced to pay a $10,000 bill from a public-relations firm--plus $5,000 in court and lawyers' fees. In total, she says, Create-a-Check owed about $450,000 to its vendors. Redd claims any debts were incurred before he got there and says he had no authority to deal with accounts payable. "Individuals make all the difference in the world," he adds. "It's important to know if they're going to be able to let go of the control enough to let an organization be successful."
