Growth strategies for Startups

Lets dive into the alternatives an average Startup has when it is trying to grow its activity.

In the Page “From Startup to a Business“, we explained the steps you should guarantee when moving upwards from being a simple business idea to becoming a Market player.

• It is a very important section that you should read since it has very useful information we gathered during our professional careers assessing and analyzing several companies of any kind.

Being said that, the first question is: when should you think about growing your business?

This question has 2 aspects to cover:

1. Whether the business is ready to grow.
2. Whether you should make it grow.

You should never think about growing your business if it has been “open” for less than a year or it hasn’t demonstrated a solid profitability.

A business is ready to grow providing:

• It had experienced solid profits for a medium period of time, never less than a year.
• The competitive advantage that made it success, can bee guaranteed for the “growing” strategy.

This last statement is extremely important:

• Sometimes, what made you success can’t be maintained in after increasing your business activity.

We’ll give you an example so you understand it better:

Not exactly a startup, but for this example, it will be useful.

Walmart needs no presentation: it is the biggest retailer worldwide.

• With $482 billion Revenues and a $16 Billion Net Income, it seemed that nothing could stand on its way.

Some years ago, Walmart decided that it was time to expand its activity outside USA.

However, it didn’t success as expected not in Europe nor in Asia.

• How was that possible?

In order to understand it better, you must ask to yourself: What originally made Walmart success?

There are several factors to take into account, but mainly, we could highlight:

• They were very well positioned with North American grocery-suppliers.
• They perfectly knew North American average customers.
• Their logistics made possible for them to lower the costs so the competitors would have almost impossible to offer a reasonable alternative.

These Competitive Advantages that guaranteed its success, were difficult to maintain abroad:

• In Europe, the average customer behaves completely different than the North-American one.
• The suppliers in Europe already had their customers, clients and relations.
• Since the average customer purchased in a different way, all the logistics should be re-examined.

So they finally limited their intentions to expanding the business abroad USA: It was better to maintain the huge profitable business they already had, than start an adventure that may drag them down to the floor.

This example show how sometimes, no matter how big and profitable your company is, what made you success can’t be replicated in other markets or situations.

But why should you guarantee positive results for more than a year?

• Very simple: If you are not able to have profits with a simple business, you surely won’t be able to have them with a much more complex company that eventually could have to return money to investors with their correspondent interests.

Make sure that you are growing the right “plant”, do not feed a plant that could devour you whole.

This is among the most controversial topics we talk with the companies that ask us about whether or not they should expand their activity.

We don’t usually recommend expanding any business that is giving nice and substantial profits to the owners.

Why people should not expand their business? Because:

• People rarely have got the skills necessary.
• They don’t fully understand what made them success.
• They loose the focus on what is making them successful.
• Some people want to expand the business just for “ego” purposes; they want a big business rather than a profitable one.
• Lot of people that tried to grow a big business end up with debts that didn’t allow them to even return to their initial situation.

When do we really recommend expanding your startup?

• When you have a profitable company that is not giving you enough money.
  • If you couldn’t live with just the money you are currently making providing it is a full-time job for you.
  • In these situations you have “nothing to loose” since sooner or later you would have to do it or quit.
• When you have experience and knowledge about businesses or access to it.
  • Experienced partners or teammates.
• When you have a close relation with your future clients.
  • If some of your clients guaranteed you that they would purchase all the new products you developed.

You would never imagine how many companies we have assessed that committed the terrible mistake of expanding their activity when they were already profitable well-positioned businesses.

Never forget this: It is better having a small profitable flexible business rather than a big complex non-profitable-full-of-debts one.

By now, we’ve established when should you expand your business, and why you must be careful when doing it, but… What about the strategies to follow?

You finally have decided to expand and grow your startup or business, but have no idea where to start.

• Here, we’ll explain you the main alternatives you have.

Depending on the business you have and the clients you are targeting (very important) you would have 3 strategies for growing it:

1. Organic growth strategy.
2. Alliances, Mergers and Acquisitions – Inorganic Growth.
3. Strong alliance with a Powerful client strategy.

Lets explain them in detail:

Growing organically means expanding your business by boosting your current way of working.

It usually consists on:

• Acquiring new machinery for increasing your overall capacity.
• Buying a bigger product stock so the average price per product bought to the suppliers, decrease substantially.
• Moving into a bigger warehouse where you can handle better your on-line orders (in case you have an e-commerce business).
• etc.

In an ideal situation, you could finance these improvements with your own funds, but sometimes, if your cash generation is not strong enough, you should ask for a Loan.

* In “Raising funds for Business” page, within the “Business Plan” section, you’ll find the best explanation about how getting a Loan for your business.

Being said that… When choosing this option?

Organic Growth is a good option:

• In Markets with high entry-barriers or/and little competence;
  • So you have time for growing “on your own”.

• In Markets that grows fast;
  • Where there is no time for other kind of operations that would take much more time.

• In Huge Markets with enough place for everybody.

You’ll understand it better with an example:

Search Engines example

When Search Engines became one of the best and more important business in the world, Yahoo was the first reaching the top of the mountain.

But in few years AOL, Ask… and Google started to move fast for being the option number one.

Why didn’t they Merger or acquired their competitors?

• Because there was no time for doing so.

Each one of them had different search protocols, databases and policies.

• Just the negotiations for Yahoo to acquire Ask or AOL (this is a supposition example) would have taken years, lawyers, huge amount of money and work.

And even more: nothing guaranteed that even after merging, they would have become the customers’ best option.

There was no time for doing so at that moment and the risks were high.

Blogging Business example

On the other hand… what is happening nowadays in the Blogging or e-commerce sectors?

• By now, there is enough market for everybody.

You can start tomorrow a very well designed website talking about a certain topic, and if you do it in the right way, you’ll have thousands of page-views in one year.

There is enough market for everybody, so if you wanted to grow your blogging business by selling your own e-books or products, you could just ask for a small Loan and build it step by step organically.

These examples show how, the moment you choose for growing your business is also very determining.

Now, lets talk about Inorganic Growth:

This strategy, as its name indicates, is the opposite of the organic one.

It consists on increasing your activity by:

• 1. Buying a competitor.
• 2. Merging with other company.
• 3. Establish Market alliances.

It usually implies to modify your previous working dynamics, what you offer to your clients and even your company name:

• It is a difficult way of expanding your business since you don’t just depend on your instinct or skills, but on the final terms reached during the negotiations, the other-party market interpretation…

However, it is not the same buying competitors than establishing alliances with them.

This option is the one that we recommend the least when thinking about growing a business, since there are so many factors to keep in mind that the owner of a common business ends up agreeing to everything after getting tired of the process.

It may suits you whether:

• You are within a stagnant or declining market.
• You have a lot of both money and experience.
• You found a one-off market opportunity… but you also have experience and money.

In stagnant Markets, there is no space for you to grow organically so it makes sense thinking about an acquisition.

Nevertheless, we insist on highlighting the “money and experience” requirement because the most common mistakes when thinking about buying other company are:

• Thinking that it will be just a one single expenditure.
• Expecting that everything will work perfectly from the beginning.

Once a company is purchased, some of the best workers that were in the original team tend to leave, so you’ll have much more work than initially expected.

And, since these people are some of the best employees, you should count on spending money in hiring new people and taking the right investments in order to re-gain efficiency.

• That is why everybody expects a super-company after a famous acquisition is announced, but rarely these operations result as magnificent as expected.

Now, we’ll explain what a Merger really is, and why it is practically the same than an acquisition:

You only should consider merging with a competitor when:

• You need serious help in order improve your market position, despite losing the overall control of your company.
• Whether you want to become a smaller part of a more profitable business.

In a merging process, there is never an equality situation:

• One party will behave as the buyer, and other one as the “bought”.

So, only consider Merging if you want to be bought by a bigger or a better company.

• Otherwise, you’d be the buying party.

Moreover, as soon as one of the parties starts showing weaknesses, the theoretical “wonderful” relation starts to rot.

The biggest merger operation in history: $165 billion.

They highlighted how important this merger operation would be for both parties, how it would boost AOL and Time Warner equally…

After 9 years, the merger failed since AOL started losing its value and Time Warner though they could do it better without them.

So forget about merging in equal conditions, and having a “wonderful” relation with a competitor in a new company: either you are the buyer or the one that has been bought.

This last Inorganic Growing strategy is the best of all three of them.

Establishing Market alliances is having formal business relations with your competitors, taking decisions together regarding future actions and pursuing a common interest.

You should consider establishing market alliances when:

• You are specialized on a certain sector that has a very close relation with an activity your competitor is developing.
• Your customers and your competitor’s ones come from very different sources.

The most important thing to ensure is you have no common ground on what you develop together.

Of course, you could offer the exact same product to the same customers and developing a common strategy… but the most successful alliances come from common interests rather than common products.

You have to look for synergies, and it would be difficult if you have similar campaigns, similar products and similar customers.

Think about the famous alliance between Pepsi and Pizza-Hut.

Of course, there are several factors involved…. but essentially, Pepsi just develops drinks, and Pizza-Hut just offers pizzas.

You won’t see a Pepsi-pizza franchise, or a Pizza-Hut drink.

They stick to their main activity. That is it; no common ground.

After explaining the main Inorganic strategies we get to the third growth strategy: the Client alliance.

This one is difficult to develop, but when properly developed it may be the best of all:

It consists on having a contract with an important client that is committed to purchase all the products you’d develop after increasing your manufacturing capacity.

As you can appreciate, it means growing on solid basis, compared to other options we mentioned before.

This would be the best option for you in case:

• Your average customers are businesses rather than final customers.
• You have a healthy financial situation.
• You have interesting Clients with good results.

With this contract, you can ask for a Loan, but you would need to be in a good position in order to receive it: you should not have any financial problems.

Moreover, the financial institutions would check who is the client that committed to buy all your future products:

• If it is a small company in a terrible situation, they won’t give you the Loan.
• If it is a strong business with good numbers, they’ll assume that your client can ve trusted.

As we said before: it is difficult, but it worth trying it.

Although it is not exactly the same, Kickstarter uses this same philosophy.

If you launch a new campaign, you are financing your future product with the money you obtain from your clients.

Since they are not businesses but final customers, you can only finance your activity if they directly give it to you in advance.

• They skip the Loan step, the interests… but in essence, it is the same concept.

Notice that this last growing strategy is “similar” to Crowdfunding.

However we didn’t even mentioned it since… It rarely works properly.

For a NGO, a Hobby or certain kind of projects, Crowdfunding may be useful, but if you want to have a professional business, forget about it.

Growing a Business is something difficult that rarely ends up as initially expected, so you must be very sure about doing it, especially if you already have a profitable company or activity.

We only recommend expanding a business when:

• You have a profitable company that is not giving you enough money.
• You have experience and knowledge about businesses or access to it.
• You have a close relation with your future clients.

When growing your business, you have different options depending on the market you are in, and the average customers you have.

There are three main options for growing your business:

1. Organic growing strategy.

• Recommended in Markets:
  • With time and size enough for growing on your own.
  • With size but no time enough, so you would have no time to loose analyzing other alternatives.

2. Inorganic Growth.

• Buying a competitor.
  • You only should contemplate this option if you’ve got:
    • A very good economical situation.
    • Experience enough.
• Merging with other company.
  • Providing you are willing to become a smaller part within a more profitable company.
• Establishing alliances.
  • With competitor that share a common interest but whose activities and products are different than yours.

3. Strong alliance with a powerful client strategy.

• • Whether your Clients are Businesses.
  • The better the client the more options you’d have for getting a Loan that would allow you increasing your capacity.

The most important thing to remember is: don’t grow just for growing.

If you grow properly, you may end up with a bigger and more profitable business, but if you fail (what is pretty common) you could lose everything you already have… and even more.