Cash-flow crunches. Staffing snafus. Plain old burnout. For new entrepreneurs, the common challenges of the startup phase can be overwhelming — so much so that most firms go out of business before their 10th birthday. This year’s PROFIT HOT 50 leaders encountered them all — managing not only to survive, but thrive. Here are five key lessons in rapid growth that the HOT 50 learned the hard way.
Get enough capital. Then get some more
Jason Shron figured he would need to borrow $75,000 from a silent partner to launch the model-train manufacturing company of his dreams in November 2004. But like so many entrepreneurs, the CEO of Rapido Trains Inc. (No. 4 on this year’s HOT 50) underestimated the time needed to generate sufficient cash flow. When his detailed model trains arrived almost a year late from a manufacturer in China, he was forced to go back to his partner for an additional $200,000 to cover the costs. By that point, the partner had run into a financing crunch of his own, so he called in the loan. Shron didn’t want to lose the partner — he was experienced and knew the industry — so Shron had to find a way to pay up.
Shron took out a factor loan, whereby a specialized financial-services firm purchases accounts receivable at variable interest rates — 25%, in Shron’s case. By factoring, he was able to hand his partner a cheque for $250,000 within 30 days. The loan saved the firm and Shron’s partnership.
Douglas Grosfield faced his own capital crunch when his Kitchener, Ont.-based IT-support firm grew rapidly during its first two years in operation. Xylotek Solutions Inc. (No. 40) landed a mega-order for hardware worth nearly $500,000, but didn’t have enough cash to cover product and overhead costs. Grosfield and his partners had overlooked that crucial law of credit: you have to get it before you need it. Being swamped with orders was a luxury, “but we had no idea how we would swing it all,” says Grosfield. After weeks involving trips to banks and suppliers asking for time and money, the firm secured financing to cover the cost of the orders.
In retrospect, Shron advises other entrepreneurs to presume they’ll need extra funds in the startup phase. “You have to expect things will go wrong, and build time and money in for that.”
Systemize HR sooner, not later
By the time Sean Costello founded IronGate Server Management and Consulting (No. 31), he’d already witnessed the havoc that an ineffective HR structure can wreak on a young company. Three years prior, Costello had sold his first computer-consulting company to another firm and, as part of the deal, agreed to stay on to help oversee the transition. Costello says he made the mistake of assigning employee responsibilities too casually. “I would invite people to bridge this short-term need to fill that gap, to help out over here as well,” he remembers. One unintended result: once-focused, disciplined employees grew distracted and disenchanted with their work.
When his next firm, Ottawa-based IronGate, started experiencing rapid growth, Costello was determined to avoid the same pitfall. From the beginning, he drafted job descriptions for all his hires, updating them during quarterly employee performance reviews. He also analyzed which new opportunities were coming and the associated jobs they’d need to fill, and carefully probed candidates about their experience and career aspirations during job interviews.
Within IronGate’s first year, for instance, Costello interviewed a potential account manager who had designs on one day becoming a controller. “We didn’t need a controller at that point,” Costello explains, “but we’d identified that we’d need one within the year.” So IronGate hired the account manager and paid for the training that would allow him to assume controller duties — which he did 12 months after joining the firm. Bonus? The controller still works on key client accounts during swells in IronGate’s business.
Mind your metrics
Shortly after launching Optamedia Inc. (No. 37), agency principal Chris Bolivar landed the first of what would be many major advertising contracts from energy-sector clients. But within a few months, Bolivar was surprised to learn that net income for his Edmonton-based advertising agency was off target by as much as 10%.
“I’d look at projects and wonder why they were taking so long,” he says. Neither Bolivar nor his staff were keeping track of time spent on client work, which meant the firm was chronically eating into profits by underestimating how long it took to complete projects.
At the root of Bolivar’s problem was a common entrepreneurial misstep: working in the business rather than on it. “I lost focus of the financial realities of the business because I was too busy doing work.” Bolivar corrected the problem by introducing a time-accounting program that employees must fill out in order to get paid. Each month, he runs reports on accounts, tracking hours worked in relation to project milestones and overall budget. The strategy worked; net income almost doubled, and productivity is up — employees now spend 70% of their time on paying work, compared with 50% before. What’s more, because Bolivar records time on a project-by-project basis, he says he’s estimating new jobs far more accurately and responding faster when work is taking too long.
Plan more, work less
Cynthia and David Enns have long loved a fine Bordeaux. But when they made plans to launch their own winery, they quickly learned to appreciate the money that goes into every bottle. So to help fund the launch of Penticton. B.C.-based Laughing Stock Vineyards Ltd. (No. 36), the husband-and-wife team continued to operate their financial-services firm.
The ability to work long hours is a startup prerequisite, but doing double duty caused both of the Ennses companies to suffer. The couple of 12 years struggled to stay organized, often working on the winery late into the evening before waking up again for a 5 a.m. call with a financial-services client in Eastern Canada. “I can remember running out to the vineyard where David was pruning to tell him he had a conference call waiting,” says Cynthia Enns.
Once the winery started to pay its own way, the Ennses made procedural changes to the business that allow them to put some distance between themselves and work. They automated as many administrative processes as possible and hired and trained staff to run the business in their absence. Most importantly, they preserved Laughing Stock’s boutique status, capping production at around 5,000 cases of its premium wines per year — which today allows them to spend the odd weekday afternoon relaxing on their boat. “Could we be bigger?” Cynthia Enns questions. “Yes. But you have to think about what you’re giving up in order to grow.”