Hubspot had an interesting article on the importance of recirculating old blog content. Turns out most visitors to blogs are reading old posts such as these SF classics on Excel modeling. A post from August 2007 I think is still valid almost eight years later.
"Natural phenomena tend to be explained by a normal curve. People can be explained by the normal curve in many ways--for example height and weight distributions, number of children, etc. Therefore, businesses, run by people, should demonstrate certain behavior consistent with normal curves. Stated another way, the limitations of people should manifest themselves with a certain regularity in the way they run their businesses.
These limitations in people determine the various stages of development for a company. If the owner adapts and changes the way the business is managed, the company can move on to the next stage of development. For example, many companies get stuck at about $30 million in annual sales. This level happens to be where the limitations of one person management take hold (for an average owner). If the owner learns to delegate, the company can go to the next level ($100 million in sales). If the owner insists on making every decision, the company frequently plateaus.
If we look at early stage companies, there is a certain consensus on the stages of development, which are described below:
- Proof of concept--revenue less than $1 million
- Commercialization--revenue from $1-3 million
- Scaling--revenue from $3-10 million
Many VCs use these revenue levels as one way to measure the progress of company performance. Part of the reason is that at each level management needs to be developing or demonstrating a new set of management skills. Failure to develop the necessary skills strongly suggests that a company may not reach its potential. Many a technologist has developed a product and achieved limited sales but lacked the necessary skills to demonstrate a real market for a product (failure at stage 2). Many entrepreneurs are born survivors and can hustle up enough business to reach $3 million in annual revenue, but they lack the skills to build a sales force or put together a distribution system to support a sales force (failure at stage 3).
At each stage in the development of a company different management skills are required. My experience is that many entrepreneurs fail or plateau their companies because they do not actively consider what skill sets and disciplines they need to succeed in the next stage. The larger your company the longer you have to prepare for the next stage, but in a startup failure to prepare can be fatal. I am not suggesting necessarily that you hire a sales manager when monthly revenues are $40,000, but one needs to actively manage a company to be ready for the next stage.
The good news is that the stages and the management skills are pretty well defined up to at least $1 billion. In a future post I'll talk about the stages after $30 million."
Some very detailed work in the last two years with small businesses confirms that $1 million and $3 million are still high hurdles for most startups.