Growing Your Small VAR Business: 5 Ways To Get To $10 Million

Starting a company isn't easy. But talk to entrepreneurs, including those who have built solution provider businesses, and most will tell you the real challenge comes when a company is trying to grow beyond its first $2 million or $3 million.

Entrepreneurs, as well as analysts and academics who think about this stuff, say a number of hurdles can hinder a company's growth -- or even lead to its demise -- before it can reach $10 million or $20 million in sales. Loss of focus on what made a startup successful, failure to implement core business processes, poor marketing efforts, and the inability of the enterprise's founder to delegate authority can doom a startup to small-company purgatory.

"Only 4 percent of startups get above $1 million," Verne Harnish, a consultant and author of "Mastering The Rockefeller Habits: What You Must Do To Increase The Value Of Your Fast-Growth Firm," said in an interview. And only four-tenths of 1 percent succeed in growing beyond $10 million in annual sales.

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Certainly, outside forces such as a recession or a sudden market shift can throw a monkey wrench into any startup's growth plans. But often the impediment to growth is the founder/entrepreneur himself who fails to recognize when it's time to begin hiring people to manage some business operations so he can focus on core priorities such as product development or planning the company's long-range strategy. "The entrepreneur can't get out of the way. They are used to being in the center of everything and they can't let go. So the CEO becomes the bottleneck to the whole thing," said Mark Helow, founder and managing partner of 10X CEO, an organization that develops training programs and other resources for business leaders.

Through interviews with experts such as Helow and solution providers who provide firsthand insight into building a business, CRN pinpointed five common mistakes that can stifle a company's growth.

NEXT: Lack Of Consistent Business Processes

1. LACK OF CONSISTENT BUSINESS PROCESSES

In a presentation at UBM Tech's Best of Breed conference in October, Helow described four phases of growth for young companies, starting with the "prototype" stage where the entrepreneur's idea is tested in the marketplace. Assuming the value proposition and business model are winners, a company can quickly reach its first $2 million or $3 million in sales.

But then comes the "business validation" stage where the objective for a growing company is to develop consistent, repeatable business processes such as sales management and product delivery. While a startup can handle sales opportunities, customer complaints and other situations on a one-off basis, that's no longer possible as sales grow from a few million dollars to $20 million or more and the number of employees expands from around a dozen or 20 to 100 or more.

"That's frequently where [entrepreneurs] get stuck," Helow said in a recent interview, estimating that only 2 percent of entrepreneurs get beyond this hurdle. They may be brilliant in recognizing a market need or developing a ground-breaking product. But they're often incapable of developing business processes that a growing company needs for it to become self-sustaining without the founder being involved in every decision.

"Consistency in your [business] processes is paramount. That light turned on early for me in our development. You have to have a consistent delivery model," said Andy Papadopoulos, managing partner at Navantis, a Toronto-based solution provider founded in 1999.

"It's the rhythm of the business that needs to be established, doing something repeatedly and consistently: What has to happen day to day, week to week, month to month," agreed Dave Sobel, who founded the Fairfax, Va.-based solution provider Evolve Technologies and ran it for 10 years before selling the business early last year.

NEXT: Not Letting Go

2. NOT LETTING GO

Besides failing to develop consist business processes, another reason entrepreneurs so frequently stall out after reaching their first few million is that many fail to recognize that it's time to hire highly talented people to oversee those processes. Once those managers (such as a sales vice president or financial controller) are in place, the company founder has to take on the role of "management coach" and step back from day-to-day management.

"The way you get from $2 million to $10 million is to let go. If you don't let go you'll never get to the next level," said Papadopoulos. Navantis, with nearly $40 million in annual sales, is now well into what Helow calls the third or "growth" stage of companies (between $20 million and $100 million and 100 to 500 employees) when the business grows without the founder/CEO's involvement in day-to-day operations.

As Navantis grew, for example, the solution provider hired a sales executive and people to manage the company's financial and accounting processes, and manage its staff schedules and service delivery.

Brothers Alex and Edward Solomon also realized the importance of delegating responsibilities after founding New York-based solution provider Net@Work in 1997 in the middle of the Y2K and dot-com IT spending booms. With the two splitting management duties, the company was quickly able to get grow to about $5 million in sales -- further than most -- by 1999.

"Even then it was too much to do it all ourselves," Alex said. One warning sign: They began hearing from employees and clients that their multitasking was taking a toll on communications and responsiveness. Early on, in 2000, they hired a marketing executive, a professional services director and a finance controller to help grow the business.

Today the company is approaching $30 million in sales and the Solomons are focused on strategic initiatives such as acquisitions and the Net@Work Partner Alliance Program. A little more than a year ago the company promoted its professional services director to be "chief people officer" responsible not just for employees, but for the company's entrepreneurial culture. "That's something that's critical to our well-being," Edward said, noting the importance of nurturing talent within the company to help maintain growth.

Papadopoulos suggests entrepreneurs make a list of what they are good at -- and passionate about -- and hire people to do those things they're not good at. "You have to take a really good look at yourself. The biggest mistake you can make is to think you know everything. No one is good at everything."

If an entrepreneur is finding it difficult to let go of some tasks, Helow suggests hiring a chief operating officer to run the business, allowing the entrepreneur/CEO "to go off and create the future."

NEXT: Not Hiring The Right People

3. NOT HIRING THE RIGHT PEOPLE

IPM, another New York-based IT consulting firm, is expected to do between $25 million and $30 million in sales this year and is squarely in Helow's third-stage "growth" phase. President and CEO Myron Bari relies heavily on managers he's appointed to oversee the company's various practices. "I've got a lot of people who are a lot smarter than me," he jokes.

"Hiring the people and building the culture during that [growth] transition is absolutely critical," said Evolve Technologies founder Sobel, who is now partner community director for Level Platforms, a developer of remote monitoring and management applications.

Recognizing, hiring and retaining talented individuals isn't a skill that comes naturally to entrepreneurs, especially those in the channel, who tend to be better with technology than with people, Sobel said.

"I think that was one of my biggest struggles, picking the best people," Sobel said. His company suffered a setback in 2007 when he hired a service manager that he said looked good on paper. "And God, he was bad," he said. Not only can such mistakes be expensive from a monetary standpoint, they can set a company back if they damage customer relations.

While Sobel said the candidate oversold his qualifications, he said the experience also taught him the need to set expectations and put in place the metrics to evaluate managers and employees. "It's a different skill set from running a five-person shop to running a 20- or 30-person business." Establishing good internal communications and lines of reporting are also key, he said, pointing to insights gleaned from Harnish's "Mastering the Rockefeller Habits" and other books.

The departure of a key service manager from Evolve Technologies was a major factor in Sobel's decision to sell the company. He recognized the company was at a critical juncture ($1.4 million in annual sales, 15 employees) and that getting it back on a growth track would require a lengthy search to replace the manager and rebuild.

Irvine, Calif.-based Vision33 has grown to $15 million in annual sales both organically and through acquisitions and that's increased the need for top talent. Bringing in that talent is a priority for the company: Rather than rely on outside agencies, the company has a dedicated talent recruiting team in-house, said Vice President Alex Rooney.

As young businesses get larger, business owners shouldn't overlook the importance of growing talent from within, what Helow called the "farm team" approach. That can be less costly than hiring expensive talent from outside. It's more proactive than reactive -- promoting from within rather than scrambling to fill management vacancies. And future managers can be groomed in line with a company's culture, he said.

NEXT: Weak Marketing Practices And Losing Focus

4. WEAK MARKETING PRACTICES

Marketing is another facet of the business that entrepreneurs frequently let slide, said Harnish. Among solution providers, that's often due to the entrepreneur's technical background. Becoming bogged down in day-to-day administrative chores at the expense of market-facing activities is a frequent pitfall.

Once a solution provider surpasses the $2 million threshold, managers should carve out time for weekly meetings to discuss big-picture marketing questions, such as whether the company has the right product and services for its market, if it's charging too much or too little for the product or services, whether it has the right distribution strategy, and if it's doing enough promotion, Harnish said.

At IPM, top managers regularly hold off-site meetings to assess where the company is and, more importantly, talk about "what do we do right, what do we do wrong, and what do we want to be when we grow up," Bari said.

Solution providers on a growth trajectory also can benefit from observing their customers. "It's amazing how much you learn about running your own business by watching your customers grow," Papadopoulos said. "You grow as your customers grow."

5. LOSING FOCUS

With talented managers and consistent business processes in place, a CEO should be focusing on the company's business model, its talent environment, and core processes such as product development and creating customer value, 10X CEO Helow said.

And yet he finds many CEOs spending as much as 70 percent to 80 percent of their time on things that don't really matter. CEOs at growing companies should ask themselves if they were forced to reduce their work hours by half, how much effectiveness would they really lose?

At Novantis, Papadopoulos said he has no problem filling 40 to 60 hours every week with work. "It's incredibly easy to get caught up in 'things that need to get done,' " he said. He's developed the practice of thinking -- often on the drive home -- about how he spent those hours and whether they sync up with his list of core tasks. If they don't match, "then it's time to hire and delegate."

"It's separating what's important from what's urgent," said Sobel. How to tell the difference? "It just takes the conscious choice to learn. It's a lot of self-awareness that has to be built and learning from mistakes," he said.

Helow suggests that entrepreneurs who feel their company may not be living up to its growth potential should ask themselves three questions: What did I do this month that improved my business model? What did I do that improved my core processes? And what did I do to improve my talent environment?

And he has a warning for those who follow his advice: "When you start asking yourself these questions for the first time, the answers are going to be painful."

PUBLISHED APRIL 3, 2013