Founders are excited about getting their startup moving along at a frenetic pace. They have thought long and hard about their idea, found the perfect partners and staff and now are looking for fast and furious growth. But is fast growth the right approach?
There are many considerations a startup needs to address before making major moves as far as distribution or production.
- Understanding the demographics
- The operational efficiency level they can maintain
- A strategic plan for controlled growth
- Don’t take every opportunity
- You have one chance at expansion
It’s easy to see why a founder would be determined to quickly move into the marketplace, create a brand and be successful. The reality is that some companies need different growth strategies than others. It’s not a dilemma but there is a decision to be made whether the business goes full speed ahead, scales up the business methodically or even is constrained in the market.
Running full speed at all opportunities in the market causes problems. I’ve seen many companies use the spitball option; throw everything at the wall and see what sticks. You lose your focus and things start to go sideways. With a lack of focus your team becomes demoralized for lack of leadership. Your business is spread too thin and nothing is done efficiently or effectively.
Mark Cuban from the Shark Tank, a 30% investor in Beatbox Beverages had to help the founders find their way after what could have been a disastrous move into multiple markets looked ideal to them. The three founders tried to say yes to everyone and while their boxed wine product was innovative and well received there was no way the three founders could manage the entire US.
The founders wanted to snatch up every opportunity that they could but it was operationally inefficient. Their problem reached critical mass when WalMart (WMT) offered them shelf space in 1000 US stores. Operationally this could have been a nightmare. Big box stores like WalMart like the 180-day billing cycle so they use your money while you go broke waiting to get paid. I think any business would have jumped at the WalMart offer without thinking of the ramifications.
Cuban taught them about the risk that comes with expanding too quickly. He told them “not to drown in opportunity.”
Startups have one shot at expansion and it better be well planned because if you don’t perform in the big boys market you’re out for the count. In Beatbox’s case they needed to capture markets close to their hub and grow by scaling the business. They needed to get some experienced people on board instead of trying to do everything themselves.
Beatbox needed to create a strategic plan for growth including a plan for new products and new markets that worked. This was a shift in emphasis for them because they had worked for businesses in the past that focused on rapid and opportunistic growth. They needed to focus on low hanging fruit while building the plan for the big picture.
Cuban is a shrewd investor and he realized they would be soon in over their head if they stayed with their current direction. He suggested their plan should be geared towards constrained distribution and production. Constrained distribution is usually a negative function of product getting stuck in a bottleneck. In this case it was suggested that the company seriously consider creating their own self-imposed bottleneck while the company infrastructure caught up to demand.
I can’t even begin to imagine what problems would happen to a company’s infrastructure if sales tripled in one month without the right systems in place to manage everything from production to accounts receivable. If you read my last article I explained how too much in sales can be as damaging as too little in sales for a new business.
After the Shark Tank episode aired distribution offers came in from 35 states and 20 countries.
Beatbox had already gotten rid of the biggest risks. The founders had already managed to secure the biggest manufacturer in Texas and found markets. They had proved that the product had an audience and that they knew how to arrange profitable deals on their own.
The Beatbox team also felt that because their product was getting critical acclaim they should add more flavors to the market. Cuban suggested they take it slow in that area as well. More products required more marketing budget and, as is the case for liquor sales, every state was highly regulated for the sales of their wine that further added to their distribution challenge.
While Beatbox illustrates wild growth and the need to reel it in at times I like the tried and true approach of scaling a business to match production, delivery and the sales cycle so that no one area can falter when demand exceeds the norm. Unlike the founders at Beatbox most of us don’t have a mentor/investor like Mark Cuban to offer feedback and support.
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Originally published at www.equities.com.