Customers also have a funny way of expecting more -- way more -- from a supplier as that firm grows larger. Harry Taxin, the CEO of MegaPath (No. 127), says that clients anticipate the same dependability from his $68 million business as they'd get from the huge corporations he increasingly finds himself competing against. MegaPath provides the computer network expertise that connects the nation's 5,000 Radio Shack locations, allowing the chain to track sales and inventory. "The size of our company doesn't matter to them -- they want 100% quality no matter what," Taxin says. "The network has to be up, and if we screw that up, we're wiped out."
Meanwhile, as MegaPath's sales force trolls for bigger clients, they often find themselves outgunned. "We have eight salespeople in the field," Taxin says, while competitor AT&T has "eight salespeople on the West Side of New York." He'd like to hire more salespeople, but it usually takes months before they earn their keep, straining cash flow.
Growing companies must also contend with strict notions of how a company's size should change the way it does business. When the payroll at military contractor Odyssey Systems Consulting (No. 388) hit 50 employees, the company passed the threshold at which the government requires its vendors "to ramp up HR," says CEO Michael Sweat. Later, when the firm passed $10 million in revenue, a new set of accounting regulations kicked in. Then there's the issue that many of the contracts Odyssey wins are designated for businesses with less than $23 million in sales. If the company, which now posts $14 million in sales annually, grows beyond that point, Sweat will "go from competing against small businesses to competing against the McDonnells and the Lockheeds," he says. That's a place where, for now, he doesn't want to be.
Anticipating these growing pains is half the battle, Tatum says. Even before they pop up, begin to make adjustments. Since getting that one customer complaint, for instance, Burgess has put customer service back at the top of his to-do list. He now spends much of his time traveling to his firm's distant offices to see clients. Of course, Burgess Construction still needs someone to oversee day-to-day operations and to manage the staff. That's why its CEO embarked on the third crucial step company founders go through in No Man's Land: Burgess has begun hiring to replace himself.
3. At some point, a founder has to share power.
Tatum says this is usually the trickiest of the four hurdles facing companies in No Man's Land. First, it requires a founder to begin delegating to a new generation of senior managers. Second, it's expensive: Experienced CEOs, CFOs, and COOs -- the three jobs that are often the most necessary hires -- command big salaries, big chunks of equity, or both. Often this feels like a circular dilemma: A small business can't get bigger without these key managers, but the business isn't yet big enough to afford them.
Inc. 500 owners routinely complain that getting seasoned executives to join small companies is a real challenge. Rod Hill, co-founder of Integrated Management Services in Jackson, Miss. (No. 432), says folks in his part of the country prefer working for big, well-known companies. "They may not see much of a future in a young, emerging organization," he says. "They're looking for something that's perceived to be more stable." Hill has also faced challenges getting veteran managers to relocate to Mississippi. However, his firm has used local connections to recruit two seasoned vice presidents, and he and co-founder John D. Calhoun are looking to add to their top management team soon.
Even when filling management posts that don't command six-figure salaries, entrepreneurs can face tough economics. Tatum recalls talking with the owner of a chain of sandwich shops. Every night, the owner collected the cash from each of his three stores. And during the day, if a store manager called in sick, the owner would fill in behind the counter himself. He worked hard. The chain was profitable. Things were going well enough that he expanded to eight stores.
That's when trouble started. With eight stores the company needed a bookkeeper to track and manage cash, an HR system to track employees, and an extra manager to fill in when regular store managers took time off. Those expenses drove the operation into the red. Analyzing the costs, Tatum figured the chain might return to profitability when it had 11 stores, which would generate enough revenue to cover the extra management costs. Trouble was, by the time the owner was losing money with eight stores, he lacked the capital to expand to 11. Either he'd have to backtrack by closing stores or find a way to finance his expansion. "He was stuck," Tatum says.
The key to meeting this challenge, paradoxically, is that "you need to overhire your management," Tatum says. In contrast to the sub shop owner, an entrepreneur who's adding to his management team needs to make sure he plans to grow big enough to support the new costs. Making the offer still requires courage because you're hiring employees even though current sales may not justify them. "The critical issue is 'How do I attract and build the infrastructure ahead of the revenue?" Tatum says, "because if I don't, I won't be able to get there."
4. Money is hard to come by.
While most company founders use their personal net worth to get their business going, there comes a point when capital tied to the CEO's credit history becomes insufficient. Banks often consider these firms too risky for loans. "It's hard to credit score something in No Man's Land beyond the net worth of the individual," Tatum explains. And both banks and venture capitalists often shut out the owners of a business looking for, say, a half million dollars to fund expansion because, Tatum says, "their own cost structure can't have them out there doing small deals." It's simply inefficient.
Tatum sees this betwixt-and-between problem as evidence of a "capital gap," or a structural flaw in the way lending institutions treat small business. To solve it, he's worked with Congress to propose legislation -- H.R. 3062, known as the Bridge Act -- that would offer small, fast-growing businesses a way to defer income taxes during their early years to help fund growth. It's a nice idea, but so far it lacks political legs. So in the meantime, Tatum and other experts say the real way to improve the odds of getting financing is to focus on the first three pieces of his No Man's Land puzzle: fixing the business model, realigning with your marketing, and hiring management. Clearing that last hurdle, by hiring experienced executives, can be particularly pivotal.
