Before I give my workshop on financial models at the FIU Entrepreneurship Center each time, I review the presentation and try to improve it based on attendee feedback, classroom discussions from my course in entrepreneurship and client work. Invariably during this process I discover some major concept that I "need" to completely re-work. The concept I am re-working this time is "what is growth". One of the key objectives of every business should be to grow, but it appears that a surprisingly large number of entrepreneurs do not really understand the concept of growth.
In the last month I have worked with three entrepreneurs to review their business plans. One company is re-starting the capital raising process and the other two are self-financed startups. After working with each client for from a few hours to two days, the entrepreneurs volunteered the following comment:
- "My business can be much larger than I thought"
- "I realize now that I have been thinking about my business as too small a venture and that may be why I can't raise fresh capital"
- "Now I understand what you mean by growth"
Puzzled by these comments I asked a friend who is an experienced CFO why entrepreneurs do not understand the concept of growth. He responded that people are confused by the difference between sales and growth. When I posed the question to another experienced executive, she said that business owners do not really understand what a business strategy is and therefore never do the hard thinking about how to grow a business. I think there is a lot of truth in both answers. A focus on sales is critical for an early stage company (or any stage) but growth requires thinking about more than sales. Few businesses have a real strategy and consequently never really think about how to grow the business. I think there are two other reasons for the lack of understanding of the concept of growth.
1. Many entrepreneurs have a preconceived, but unfounded view of how big their business can be and never question that assumption. If you think you can only open ten locations of your business you may never realize that 1000 could be successful. I believe that growth has to be staged and that hockey stick revenue forecasts are inherently unrealistic, but why would you limit your initial growth expectations before the business starts?
2. People do not understand the growth drivers in their business. As I outlined in a previous post on startup business plans, I think there are five basic growth drivers:
- New Accounts
- New Locations
- New Subscribers
- New Distribution Outlets
- Sales Force Expansion
If your business model is not built on one of these drivers, you have not yet reached a full understanding of how your company will achieve growth. The key concept here is one driver. If your understanding has not reached this point of clarity you still have not defined the key growth driver in the business. It once took me two days to determine the one key driver in a business. I was wrestling with whether locations or outside sales force was the key to successful execution. When I realized that the locations should just be considered support infrastructure I knew that the outside sales force was the key growth driver.
One technique to help you find the key driver may be to try this. Outline your detailed revenue assumptions. Look at the very first assumption. I am assuming that you are building your revenue assumptions logically, step by step and that some type of "unit" is the first assumption and not price. Ask yourself what is the basis for that assumption about units. If that assumption is based on another factor you probably have not yet found the key growth driver. For example, I once asked an entrepreneur with an application processing business where the applications (first revenue assumption in his model) came from. He said that he rented space in another business that attracted the customers who filed the applications. After asking my question the entrepreneur realized that applications were not the key growth driver but instead it was locations. Building out the network of locations was the key to growth. Operating locations each month became the first revenue assumption in his financial model.
Now I need to think about how to use this blog post in the workshop on October 26 to better explain growth drivers. Maybe I'll use slides with stick figures of little men. On the first slide there will be one man with one bag of gold. On the second slide the man will have two bags of gold (sales). On the third slide there will be ten stick men each with two bags of gold (growth). Alternative graphical presentations are welcome. Pictures of stick men are also welcome. Google Images is clearly lacking in the stick man category.