Doug Tatum is the business world’s premier diagnostician of growing pains. The title of his book--No Man’s Land: What to Do When Your Company Is Too Big to Be Small but Too Small to Be Big--defines the ungainly stage of company development he considers at least as perilous as launch, though for different reasons.
Businesses stumble into adolescence at about 20 employees and stride out at about 100, according to Tatum’s rough rule of thumb. He estimates that 600,000 U.S. companies are currently in the throes of puberty--and many of them are also Inc. 5000 companies. Tatum spoke to Inc. senior editor Leigh Buchanan about the importance of the early middle market.
There’s considerable frenzy around startups and billion-dollar-plus companies. What’s so exciting about businesses in this adolescent stage, what you call No Man’s Land?
I am increasingly convinced that the United States is experiencing a structural--not cyclical--shift in the economy that has enormous implications. We are seeing a dramatic shrinkage in the total number of companies in the upper middle market and the corporate sector and a long-term net reduction in employment by those larger companies. The bright spot for the economy seems to remain those emerging middle-market companies.
The entrepreneurs navigating through No Man’s Land are truly the economy's heroes. If they are successful at getting their companies to scale, then the middle-market private equity community is waiting, flush with cash to add them to their existing investments or to fund their growth at historically high valuations.
Do we pay less attention to this period because we are so focused on high-tech startups? And those companies typically don’t experience it in the same way.
There is not a typical No Man’s Land in a West Coast venture capital-backed startup. They overhire management from the very beginning. They skip through what the vast majority of companies go through when they start something and they right away have to create revenue and they have to create customers. The Obama administration’s narrative is high-tech startups. High-tech startups don’t move the needle like the regular companies. You take some poor carpet wholesaler with 10 or 15 employees who actually is expanding and has figured out a way to outcompete the rest of his industry--it’s not a very sexy business. But when you take 600,000 companies like that out there, they move the needle.
Why is No Man’s Land harder than start up?
If a startup is doing gymnastics three feet off the ground, No Man’s Land is doing the same thing 20 feet off the ground. You make one bad decision and the consequences can be horrible because of the capital gap. When you are small, you are operating out of your checking account. You can adjust up and down at the speed of light, within a day. You can delay things. But when you get to a certain size and you have basically built your infrastructure and obligated yourself financially before the revenue gets there, it can be catastrophic if the revenue doesn’t get there.
If it’s a prototypical West Coast startup, it's a different ballgame. You’ve gone from your seed round to your A round. Your valuation has gone from $10 million to $30 million. You’ve got plenty of management and a lot more money to do things with. You can be a lot more aggressive. You can hire more programmers. But that is not the way 99 percent of businesses operate.
You suggest that companies can reach a pretty significant size without really understanding what they do. How can that be?
What the entrepreneur may not understand is the value proposition, which is what made the company successful in the first place. I always use the example of the guy in my audience who told me the wheels were coming off his business. I said, “What is it you do?” He said, “I’m a used aircraft parts distributor.” I said, “No, what are you good at?” He said, “I’m really good at buying right.” I said, “What do you mean by buying right?” He said, “I’m out in front of the customers that are the end users of the parts. I am also visiting on a daily basis or talking with the refurbishers. I know what the end users are building into their jobs and I know what they will pay for it. So I figure out what they will pay for it, and then I buy it at a discount and immediately flip it over.” I said, “In other words, you are a trader. Your value proposition is that you are intimately familiar with what your customers need on a real-time basis.” He said, “Yes.” I said, “If you can’t get your business as a whole to do that, then you are stuck at $70 million.”
At first, the business is the activities of the entrepreneur. It is third grade soccer. The entrepreneur is out there making the promises. The company is delivering a lot of the value. It is surrounded by people that enable it to do that. And it works. But getting the company good at what you’re good at is the only way to scale. That’s when you’re dealing with something completely different.
How important is having a strong culture to surviving No Man’s Land?
Everybody talks about culture. CEOs who are successful say it’s because their company has a strong culture. Our culture is the greatest. Why did this thing fail? Well, the culture was just abysmal. Nobody ever defines culture that I can find.
The culture is the recognized--whether they are written or not--priorities of the inner circle, and who is in the inner circle? It could be that every decision is made by the CEO. Everybody knows it. And everybody in the inner circle supports the CEO’s decision. And that is the culture. If the CEO makes really good decisions all the time, then you are going to have a pretty prosperous business. The bigger the business gets, the more difficult it is for one person to make all the decisions fast and accurately enough. Therefore you have to share that decision making process.
Your book has been out since 2006, and you still attract crowds when you speak. Is the existence of No Man’s Land news to a lot of people?
People who are starting out don’t know what’s coming or how wild it’s going to get. And there’s also comfort in seeing and learning from others in the same situation. I’ve never been to an AA meeting, but I have friends that have. They go in there and say, “I am not the only alcoholic.” With No Man’s Land, entrepreneurs say, “I see this is a transition. But other people have been through it, and I recognize these patterns. It’s not just me. I’m not some stupid, idiot entrepreneur who doesn’t know any better.”