As you grow your business, you will find that there are several points in your trajectory when revenue will naturally plateau. The toughest test comes at the $5M annual run rate mark, and it's at this critical juncture where your growth will stall because you have the wrong leadership team in place.
Most early stage firms are still led by a team of founders and first employees, operating more like a family than a true leadership team. Problem-solving discussions are fueled by emotion, and critical decisions lack an outside perspective.
The good news is that there are early indicators that tell you when your leadership team isn't scaling with the business. These signals are obvious once you're paying attention. It's like what happens when a warning light on your car's dashboard suddenly blinks on. You can ignore it, but sooner or later that small issue is going to cause major damage.
Here are three signs that you have the wrong leadership team required to break through the $5 million run rate plateau.
Sales efficiency starts to decline
Customer acquisition cost is an important measurement early indicator that your sales leader isn't keeping up.
When your sales leader begins to miss targets, and their solution is always to add more reps or generate more activity--an approach I like to call "brute force selling"--that's a sign that you might have the wrong sales leader in place. Brute force selling tactics include things like blindly adding sales headcount and coaching reps to send more emails and/or make more phone calls in an attempt to "make the the number."
These sales tactics are the tools of an inexperienced sales leader who is in over their head. Increased outbound activity can't solve problems like poor product-market fit or the wrong pricing model; these problems can only be addressed by thorough analysis and diligent execution, skills that are typically in short supply on a startup's original leadership team.
When your cost to acquire customers is increasing over two or more quarters, it's a symptom of larger strategic issues that can't be solved by simply making more outbound dials.
Internal systems are inadequate
The early warning indicator here is what I call "no source of truth." Your customer relationship management system doesn't talk to your email platform, so you can't track which campaigns produced results.
You store customer engagement data in one system, but your customer success team can't access it, leaving them to wing it on customer calls. Your sales reps are forced to manually enter their own leads, reducing their productivity and resulting in duplicative data.
Your billing system exists on a digital island, so only your finance team knows whether or not customers have paid their invoices. And so on.
Since no single system is the source of truth, every department in your company arrives at different answers to the same question. As a result, the number of meetings required to run the business explodes because nothing can get done without putting everyone in the same room to compare notes. There's only so much of that baggage your management team can carry around, and it prevents you from scaling the business beyond $5 million in run rate.
When nobody on your leadership team volunteers to own this problem, you probably have the wrong operations leader in place.
Good people start leaving
The road from zero to $5 million in revenue are the glory days, when an "us against the world" mentality permeates the culture of your company. Being a part of a startup that's crushing its early growth numbers is among the most exciting professional experiences to be had.
There comes a day when the easy sales have all been made, when the low-hanging fruit of early adopters have all been harvested. Things get more difficult: You begin losing deals to competitors, and legacy customers start to churn. Frustration at the leadership team level begins to show up for the first time because there are no simple answers, and trickles down into the broader organization.
When your best people resign, that's the third early warning indicator that you have the wrong leadership team in place. Good people don't leave jobs where they believe in the vision, so when it happens you can be certain that people inside the company are losing faith. Your most promising sales reps leave for greener pastures; a lead engineer leaves for that next startup. Each of these events are your company begging you to take action.
The transition from founding team to professional management is a make-or-break moment for most early stage ventures and their CEOs. These three early indicators will serve you well as you evaluate whether or not it's time to make changes to your leadership team so you avoid the $5 million run rate plateau.