NexJ Systems Inc. had made just two small sales of its new customer relationship management (CRM) software when a huge order put the company on a rocket ride.
“It was about as dramatic a turning point as I could imagine,” says William Tatham, chief executive officer of the Toronto-based software company. “We got what we believe was one of the largest CRM projects in the history of financial services. It was a bet-the-farm situation and we could not afford to have it screw up.”
NexJ was one of three competitors for the project. The client, U.S. brokerage Wachovia Corp., was ready to buy.
“We were thinking it would be just for 15 copies, the same as our first two customers had bought,” Mr. Tatham recalls. “But they said, ‘Why don’t you give us a quote for 20,000 users?’”
That eventually turned into an order for 35,000 as Wachovia acquired another company and then became part of Wells Fargo & Co. at the end of 2008. NexJ, with only about 50 employees, had to have everything up and running within months.
The reputation the company earned by succeeding in the deal has made NexJ one of Canada’s fastest growing companies for the past five years. Today it has more than $26-million in annual revenue from clients in finance, insurance and health care.
NexJ succeeded, but fledgling businesses should be cautious when considering deals that could lead to such warp-speed growth.
“If you are in the first two or three years of a business, and all of a sudden one order comes in that will take up 25 to 50 per cent of your effort, it’s a risky roll of the dice,” says John-Kurt Pliniussen, associate professor of marketing and innovation at Queen’s University School of Business.
“You’re going to have to devote a great deal of your time and add considerable resources to service that order. And if that client drops you after you’ve built up your capacity, you’ll have a big void to fill,” says Dr. Pliniussen, who conducts research on business failures.
“I have seen many small businesses that fail because they have leveraged themselves too much in order to take on a big deal,” he says.
If you fail, your reputation can be tarnished and it can be difficult to find potential clients.
But playing it safe can mean missing golden opportunities, counters Thomas Hellmann, professor of entrepreneurial finance at the University of British Columbia’s Sauder School of Business.
“I’m in the entrepreneurial camp that says if you don’t seize opportunities and unique challenges, someone else will. You are never really ready. Either companies are willing to be responsive or they’re destined to remain, or at least appear, mediocre.”
That said, “you should control your growth when you can,” particularly if you are just starting out, Dr. Hellmann says. “The owner or owners will have to weigh how well the business is doing now, and how willing they are to give up personal control for the sake of a more successful company.”
Fortunately, Mr. Tatham and his management team at NexJ were able to succeed because they had been in the growth business before. Mr. Tatham founded the former Janna Systems Inc. in 1990. When he sold it 10 years later, he used the proceeds to become a venture capitalist during a contractually required non-compete period.
Other key members of the Janna team who had gone to competitors rejoined him to launch NexJ in 2006. These experienced managers would ultimately help the company grow to 327 employees from about 50.
Errol Singer, NexJ’s chief financial officer, described the growing pains: “Every time we moved into a new space, we realized we still had to keep the space we had before, but that still wasn’t enough. Every time we made a deal with the landlord, we were in negotiation for even larger spaces.”
The company added human resources managers and developed an in-house team of recruiters to augment efforts by outside recruiters. They were also bringing on 40 to 50 co-op students – mostly from the University of Waterloo – each term and that became a pipeline for new hires.
Financing and cash flow were stretched. “If you have only one big client and you’re hiring people, you have fixed monthly costs. Meanwhile, software licences are only paid for once a year,” Mr. Singer says.
To finance the growth, the company did a private round of institutional financing in 2010 and went public with a share offering on the Toronto Stock Exchange in May, 2011.
Through it all, Mr. Tatham says he had the luxury of feeling confident. “Having the experience we did made it much easier to go ahead and know we could scale up and succeed.”
Here are three areas where small businesses can make potentially fatal stumbles in the race to expand, according to Thomas Hellmann, professor of entrepreneurial finance at the University of British Columbia’s Sauder School of Business:
Control: If you are an owner used to calling all the shots, it can be unpalatable to bring in other managers needed to keep on top of a fast-growing firm. “Finding the right people takes a lot of effort and it requires letting go of control, because you’ll have a management team that may have more expertise than you about sales, supply and finance,” Dr. Hellman says.
Continuity: You’re going to have to hire a lot of people in a short time. “If everybody is new and their supervisors are new, the big risk is a lack of complexity and continuity in the organization.” That puts a lot of pressure on the experienced people who will need to transfer their knowledge to new people.
Costs: Production and payrolls have to be financed if income lags behind expenses. Venture capital comes with conditions and adds complexity and pressure to achieve financial goals by what could be arbitrary deadlines.