Andrew Waitman calls it “the million-dollar paradox.”
There’s a point in a young company’s growth where the management responsibilities reach the limit of the person or partners who founded it. In Canada, achieving significant growth also can mean expanding into larger markets, such as the United States or Europe, which requires experience and skills the entrepreneur isn’t likely to have.
At some point you need to hire one or more managers who collectively can cost you about $1-million in compensation, says Mr. Waitman, chief executive officer of the database administration company Pythian Inc. “If you can’t afford them, a small business may stay stalled in a mom-and-pop size business,” he said.
Pythian reached that turning point in 2007, and the co-founders were at odds over what to do next.
In its first 10 years, the Ottawa-based company had a respectable annual growth rate of 20 per cent. But results had plateaued. Founder Paul Vallée, who had expanded the firm into India and Australia, saw the potential to triple growth with an aggressive global expansion, while his business partner, Steve Pickard, hesitated.
Mr. Vallée ended up buying out his partner.
Mr. Waitman entered the picture in 2007 as an equity investor. He had been managing partner of Celtic House Venture Partners and had joined Pythian as adviser and executive chairman in 2008, becoming CEO in 2009.
Mr. Waitman and Mr. Vallée were in agreement on the need to expand. The company grew to $25-million in annual revenue and about 215 employees, up from $8-million and 60 employees in 2008. The company operates today in 22 countries.
“We want to double to $50-million in two years and $100-million in 2016,” Mr. Waitman says.
It’s a common scenario. Founders tend to be conservative in the early days, says Allan Riding, a professor of management at the University of Ottawa who does research on entrepreneurship and public policy. “With all the problems of getting established, the idea of expanding rapidly nationally or internationally is a non-starter.”
Even after becoming successful, many entrepreneurs resist opportunities for faster growth because they have reached a limit on responsibilities they can handle. That should be a cue to bring in a management team to take on the daily operations, Prof. Riding says, which may not be viable without an infusion of capital from an angel or venture capital group.
“That’s where the paradox develops. Venture investors expect fast returns of at least 30 to 40 per cent growth. That means pressure to bring in managers experienced in growth and new people who can develop new markets,” he explains.
The price of hiring experienced executives depends on the industry, but $1-million is not an unreasonable estimate of the commitment needed for a company with international aspirations, he says. “Despite Canada’s still-slow job recovery, there’s a lot of competition for experienced executives in key roles, particularly in tech and the goods-producing sectors.”
However, because venture investors will also take a share of the company in exchange for their capital infusion, “many entrepreneurs will resist that investment because they don’t want to share the business and they fear that they’ll lose control of what was their baby,” says Don Rumball, the Toronto author of several government studies of the stages of growth of small business.
“Venture capital really only goes in when they can see growth fast enough that they can take their money out in an initial public offering, usually within five years,” he says.
In the United States, venture capitalists more often back the entrepreneur or make sure he or she finds one or more partners who fill the managerial gaps, Mr. Rumball has found. By contrast, “in Canada, venture capitalists tend to be much less oriented toward staying with the entrepreneur. They’ll often try and replace them.”
But entrepreneurs shouldn’t necessarily resist a capital infusion.
“It’s a risk for an entrepreneur, but it’s also an opportunity,” says Becky Reuber, professor of strategic management at the University of Toronto’s Rotman School of Management. “The fact that outside capital is interested in investing is a good sign for the company’s potential. It’s also an endorsement for potential clients because smart people are backing the company and its product.
“Of course, you’re going to lose some control because people are putting money in the company and they want to have a say in how things go,” Prof. Reuber says. “But while you have to think carefully about that, what you really have to decide is: Do you want to own all of a small pizza or an ultimately much bigger slice of a huge pizza?”
The upside of an investment is you’ll get experienced people who want to take the company further. “They will have contacts that the founders probably don’t have in the business community and access to markets and potential partners that the founders may not have been able to get,” she says.
In any case, entrepreneurs should never ignore opportunities to grow and cultivate new business. “Particularly in high-tech sectors, where there will always be new competitors coming along.”
A company’s stages of growth
One-person band: Zero to nine employees; all decisions made by the founder(s).
Early success: 10 to 19 employees; an extra manager is hired and a reporting structure develops.
Operationalizing: 20 to 29 employees; time to nail market niches, which requires extra managers and delegation of some responsibilities.
The people crunch: 30 to 49 employees; entrepreneurs take back some tasks they previously had delegated and reassess existing talent and products.
Professionalizing: 50 to 99 employees; time to bring in experienced managers and embark on a dramatic expansion of the business.
The corporation: 100-plus employees; founders become leaders rather than managers.
Source: The Six Stages of Growth by Don Rumball for the Ontario Ministry of Economic Development and Trade.