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The Big 3: Operational Scaling in Your SaaS or Tech-Enabled Service Business

In a prior post on the the Big 3 challenges common to nearly every growth-stage tech-enabled services (TES) businesses, we explored the importance of building and developing your team.

In this post, we’ll focus on a second growth imperative, operational scaling. Bending the growth curve to double, triple or quadruple revenues presents a new set of operational challenges for your business. Some are more obvious than others and, in fact, the “below the radar” hurdles left unchecked can pose the most troublesome and lingering impediments to your scale-up plans.

A Common SaaS/TES Scenario

Let’s start with a typical scenario; your TES operation is humming along at over 20% growth and you’ve just broken through a much anticipated revenue barrier, maybe its $5, $10 or $15 million. We’d all agree that, in most cases, the current organization, business processes and systems at $10 million won’t necessarily work as well (or at all) at $20, $30 or $50 million. We can some shed light on what to do about it and when by asking ourselves a few fundamental questions:

How should you think about developing a proactive yet measured approach to scaling the business?

How does your business strategy reflect the operational reality? Is it tailored to your operational competencies, assets, and processes?

Do you understand the link between your growth strategy and execution quality?

What are the most important and most challenging factors to mitigate scaling risks?

Your company’s ability to bend the growth curve is rooted in a healthy understanding of the current operational realities and the state of your change-capable organization. Can you add team members, new processes and systems while preserving everything that is special about your current, nimble unit? Any unforeseen issues with an evolving organizational and operational dynamic could divert your energies, the company’s focus and waste precious growth capital dealing with the necessary course corrections.  And while the focus in clearly on top line growth, you may have to prepare your team from the bottom-up.

Scale Functionally and Lead

Introducing new roles and team members into the organization is an obvious growth step. To scale your operation, the “mean, lean, wear lots of hats” machine must evolve to more functional roles with dedicated specialists (like customer support, product management, customer success, business development, line executives, etc.). No problem. What’s not so obvious is how the current team deals with these changes, particularly if they don’t have a lot of prior experience. If team members are used to taking direction from the top (the CEO or the founders, for example), they may have questions or concerns about their new manager, their role and the revised roles of everyone around them. When it comes to building a growth-oriented team, don’t assume everyone understands what you’re doing and why. Just because you’ve laid out a logical and viable scale-up plan, architected the new organization, hired all the right people and committed to new processes and systems doesn’t mean they know how to adapt and work together effectively. It may sound mundane but take the time to clearly define the new roles, responsibilities, process owners and who is ultimately accountable for the results. Then, assume the role of educator, conscience and sentinel every step of the way.

Develop a Value Creation Playbook

Scaling a a SaaS or TES business is hard work. Period. You’ll want to find a value creation playbook to be your situational guide. It should include a set of success factors, tools, methodologies and best practices necessary to scale a tech-enabled services business and complement what you already do so well.

And although most of it’s not rocket science – this phase of company building requires there be a clear link between the strategy, the plan, the value creation milestones and how every team member fits in. There are a few more subtle scale-up hurdles that can have a material impact (up or down) on the results. They include:

  • Communicating broadly, consistently and frequently to every team and team member at every level. This is far easier to say than do and is one of the “secret elixirs” to mitigating the scale-up risks.
  • Assessing the need for critical, long lead-time hires. Start recruiting early – it always takes longer than you think. Build a bench of talent for parts of the organization where you’ll need to scale the team. This helps you to make high quality hires – just in time.
  • Institutionalizing “tribal knowledge” – by documenting and sharing the essential stuff in the heads of the founding team that new hires need to do their job at the highest level and to avoid reinventing the proverbial wheel.
  • Determining early which systems and processes won’t scale – refactor them pre-emptively.
  • Courageously tweaking the organizational dynamics whenever necessary to find the business’ optimal cadence. As you scale-up, you’ll see a shift from mostly high performance individual contributions to team-based deliverables. It is one thing to execute as a high performance silo. It is quite another to consistently add horsepower, create new teams and redefine processes in order to meet your accelerated growth, EBITDA and productivity goals.
  • Knowing what to do today and what to put off until tomorrow, next month or next year. Most entrepreneurs and investors talk about and get the importance of “focus”. What separates the successful businesses at this growth phase is knowing what to focus on.

Inattention to any of these details can lead to indecisiveness, team paralysis, or lackluster performance and even put a drag on morale and esprit de corps – which, of course, is exactly the opposite of what you’re trying to achieve with an accelerated growth and investment plan.

Don’t React. Plan.

As we discussed last time, the secret isn’t just figuring out what the hurdles are but also how to take up the gauntlet to address these critical success factors – like operational scaling – in the most expedient, capital efficient and sustainable way. In doing so you’ll also help ensure that every invested and/or re-invested dollar in the business will generate the highest returns.

Next time, we’ll be discussing the 3rd and arguably the most ubiquitous growth challenge, demand generation where positioning strategy, buyer insights, behavior-based nurturing and meaningful conversion metrics form the foundation of an optimal content marketing and demand gen strategy. In the meantime, you can learn more about The Big 3 , the difference between building Unicorns and Workhorses in our Don’t Die Trying post, and If You’re ready for Growth Equity.

The Big 3: Team Building Best Practices


Bending the growth curve presents a new set of challenges for your expanding business. We recently touched on The Big 3 imperatives common to almost every growth-stage tech-enabled services (TES) business:

  • Team: Building and developing your team from top to bottom
  • Operational Scaling: Growing the operation and refactoring systems and processes to accommodate scale
  • Demand Generation: Opening up the aperture on the top of the the sales and marketing funnel – efficiently

Today, we’ll dive into the best practices, tools and methods associated with imperative #1: Team Building.  Getting to the right answers starts with asking the right questions:

Do we collectively possess the experience and expertise to be successful in this next phase?

 

If not, how do we architect, hire and nurture a high performance team to meet our goals?

 

Are all of our team members, especially our best and brightest, in the most effective roles?

 

How do we preserve the company’s culture as the business grows both inside and out?

As an owner-operator, you’ve successfully bootstrapped a business built upon a healthy respect for capital. The challenge ahead is how to expand your “bend the curve” team while preserving the company’s special attributes that got you here.

Team members that don’t scale, even one bad hire or unforeseen issues with team dynamics will divert your energies and the company’s focus from the task at hand. Furthermore, having to deal with the necessary course corrections will almost certainly waste precious growth capital.

Team Building Best Practices

There are best practices that cover every aspect of team-building from hiring to esprit de corps to leadership development. While there are many paths, choosing the approach and supporting tools that fit your particular situation is the special sauce. We’ve found that the most successful companies:

  • Common Language: Develop a common vocabulary and promoting consistent team communications. It’s been said that 95% of the issues you’ll face are rooted in communications.
  • Strategic Alignment: Are strategically aligned from top to bottom around “success”. You might be surprised how often teams aren’t unified on the long-term goals. Getting this right will streamline your hiring process, lead to better execution quality and feed a maniacal focus on achieving that “success”.
  • Focus on Performance Not Size: Build small, high performance teams. Company building begins and ends with elite teams. They are the foundation for sustainable, long-term success. Understanding the key attributes of high performing teams, starting with trust, and applying an effective operating model will produce the desired results. It will also promote and nurture leadership competencies throughout the organization.
  • Hiring: Hire well. A recruiting imperative for every growth-stage TES business is the ability to get candidates to reveal their strengths and weaker points from every job and to highlight their successes, failures, key decisions, and key relationships throughout their career. Mastering this approach can avoid misfires with strategic hires and identify potential high performers for front-line through manager roles that fit your team’s chemistry and company’s culture.
  • Psychology of Leadership: Great leaders really “get” their team members. Progressive leaders also focus on understanding their team’s conative faculties – the actions that result from their natural instincts which enable them to be the most productive. A simple assessment and collaborative tool can be used to improve organizational dynamics and hiring.
  • Prioritize: Prioritize continuous improvement. An important steps is transitioning from “the team you have” to “the team you want” through a continuous cycle of planned activities including:
    • 360-degree feedback
    • Creative on-the-job development of functional and communications skills
    • Action-learning team projects
    • Senior to junior level mentoring

The secret to all of this isn’t just figuring out what hurdles lie ahead but rather what “growth elixir” works best for your business. Then, follow through in the most expedient, capital efficient and sustainable way possible. In doing so you’ll also help ensure that every invested dollar in growth will generate the highest returns.

Next time, we’ll be discussing the 2nd imperative, Operational Scaling and how to proactively overcome the systems and process scaling challenges associated with doubling, tripling or even quadrupling your revenue. You can learn more about our views regarding The Big 3 Scaling Imperatives and the difference between building Unicorns and Workhorses at Don’t Die Trying.

The Big 3: Company-Scaling Imperatives in SaaS and TES

If you’re the owner-operator of a SaaS or tech-enabled services (TES) business that’s growing at over 20% and approaching profitability…..savor the ride because you’re flying in rarefied air. It’s not every day an entrepreneur “bootstraps” their way from the risk and uncertainty of the “fuzzy front-end” to demonstrating a strong value prop and product-market fit on little to no institutional capital.

So what does the road ahead look like? You may feel that your best and maybe most challenging work within the business is still to come. Bending the growth curve presents a new set of problems for you and your team to tackle. How do we become the category leader in our market niche? How do we double, triple or quadruple our revenue over the next several years? How do we grow our profitability at the same time? How do we preserve the company’s culture as the business expands both inside and out?

The good news is that all of these questions represent “high-class problems” and you are certainly not alone. Almost every TES business at this stage in every segment of the market faces the same growth challenges; you can think of them as “The Big 3”.

So what are “The Big 3”?

  • Team: Building and developing your team from top to bottom. Read more of our thoughts on Team Building Best Practices.
  • Operational Scaling: Growing the operation as you approach un-chartered territory. Read more of our thoughts on Operational Scaling in SaaS and TES.
  • Demand Generation: Finding and expanding the number high quality customer prospects at the top of the sales funnel – efficiently. Read out thoughts on Demand Generation.

There’s no rocket science here. You’ve probably been dealing with the first two since you launched the business and chances are you’re losing sleep thinking about next year’s demand gen. The secret sauce isn’t in figuring out what the hurdles are but rather how to take up the gauntlet for these critical success factors in the most expedient, capital efficient and sustainable way. In doing so you’ll also help ensure that every invested and/or re-invested dollar in the business will generate the highest returns.

Companies that successfully address these company-building imperatives head-on will be well on their way to achieving the long term value creation milestones for their business.

Explore all of our thoughts on best practices, tools and methods for each of The Big 3.

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Introducing Workhorse Capital

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Today, we launch Workhorse Capital. We start modestly, with humility, but with big aspirations.

We subscribe to Jim Collins’ Hedgehog Concept, based on Isaiah Berlin’s parable of the Hedgehog and the Fox. The story of the Hedgehog and the Fox comes from a quote fragment attributed to the Greek poet Archilochus:

The fox knows many things, but the hedgehog knows one big thing.

Long-story short… the fox is cunning, sly, creative, and out to get the hedgehog. The hedgehog is, by contrast, mundane, plodding, un-inspiring and looks like easy prey. However, every time the fox attacks the hedgehog, the hedgehog responds consistently and effectively by turning into an impenetrable ball of quills. The fox is turned away every time. No matter the tactic used by the fox, the hedgehog “wins”.

Hedgehogs aren’t the most electrifying of animals. They certainly don’t have the broad repertoire of physical and cunning attributes possessed by foxes. However, hedgehogs do turn into an impenetrable ball of quills really, really well. The success of the hedgehog stems from the fact that the hedgehog is built with purpose.

Our Purpose

Like the modest hedgehog, Workhorse Capital is purpose-built to do one-thing and to do it really well. In our case, Workhorse Capital is purpose-built to support the next generation of great technology-enabled service market leaders with growth equity capital.

We observe that every one of the successful entrepreneurs with whom we’ve had the honor of working shares a unifying but frequently overlooked trait: They pursued their work with an infectious and unyielding sense of purpose. A sense of purpose doesn’t guarantee success, but, in our estimation, success cannot be achieved without it.

Our purpose is to use capital as a catalyst to help the entrepreneurs we finance achieve their purpose. In the process, we aim for a lofty goal; to build a world class growth equity firm.

Our Hedgehog Concept

The Hedgehog Concept suggests that the truly great companies are those that have a deep understanding of the intersection of three concentric circles represented by three questions:

HedgehogWhat Are You Passionate About?

We’re passionate about supporting tech-enabled services entrepreneurs in achieving the purpose they have set their business to. We do not believe that companies are hollow vessels. We believe they are the instrument through which entrepreneurs achieve their dreams. We only invest in companies where we believe in the entrepreneur’s purpose as passionately as the entrepreneur believes.

What Can You Be Best in World At?

We believe we can be best in world supporting the creation of economic value from growth stage technology-enabled services businesses. We’re committed to working with businesses that are between $5 and $20 million in revenue with equity checks between $3 and $15 million. We have observe that most every growth equity firm starts by becoming successful in this segment, but is eventually lured away by the opportunity to increase assets under management by raising larger and larger funds. Ultimately, the overwhelming pull of gathering assets causes growth equity fund managers to vacate the very segment in which they enjoyed their initial success. In the process, they lose touch with what made them successful.

We are uncompromising in our intention to be best in the world working in our defined stage and segment; forever. We do not aspire to go “up-market” and raise a $500 million fund, ever. We would not recognize ourselves if we did.

What is Your Economic Engine?

Companies in which we invest create value by converting invested capital into capital efficient revenue growth. As a result, our economic engine, which we refer to as the Revenue Yield Ratio, relates revenue growth to entry valuation and invested capital.

Revenue\ Yield\ Ratio\ = \frac{Dollars\ of\ Annual\ Revenue\ Growth}{Entry\ Pre-Money\ Valuation\ +\ Dollars\ of\ Invested\ Equity\ Capital}

We target a Revenue Yield Ratio in excess of 1x; so that every dollar of pre-money valuation and equity capital invested translates into at least one dollar of increase in annual recurring revenue over the life of the investment. If we don’t believe an investment prospect can increase revenue by 1x the sum of the pre-money valuation and the equity capital we expect to invest, we won’t make the investment.

Because the businesses in which we invest typically exit on a multiple of revenue, the value creation impact of the Revenue Yield Ratio is magnified by the exit revenue multiple.

Our economic engine reflects our belief that value creation is the result of a balance between three inter-related factors: revenue growth, entry-valuation and capital efficiency.

Our BHAG

We begin the journey knowing only our point of departure (a humble beginning) and our destination; the aspiration to build a world class growth equity firm. In Collins-speak, this is our BHAG (Big Hairy Audacious Goal). What the journey has in store between departure and destination we shall see.

We hope you share our sense of purpose, our passion for technology-enabled service businesses, and our awe and appreciation for entrepreneurs. Whether you are an entrepreneur, an advisor or capital provider to tech-enabled services businesses, we hope that our work and purpose inspires you to walk more than a few steps of the journey along side us.