You share the fun and excitement of the start-up with your mates, but the game suddenly changes - with success comes responsibility. Stefan Stern talks to entrepreneurs who had to grow up fast.
When you start signing regular six-figure cheques to suppliers or service providers - the sort of sums you used to have to work more than a year to earn - it's a sure sign that your business has grown up. That nifty little idea you kept going from your spare bedroom, doing your own paperwork and accounts, has grown - to your delight and (perhaps) surprise.
It is time to get serious, hire more staff, put down roots that will help support long-term survival.
'There is a sense in which you have to turn yourselves into grown-ups,' says Steve Moore, the 38-year-old founder of SMC, provider of luxury audiovisual and security systems for commercial properties and private homes - including those of high-profile clients such as Mick Jagger. After 10 years in business, SMC has just achieved Investors in People status - in an impressive four months - and is now working towards ISO 9000, the internationally recognised standard for quality management systems. But not because Moore is a fan of certificates and formalised processes. 'We have preserved the original ethos of the firm,' he says, even though there are now 25 staff in the firm's south London office. 'We are a pretty flat organisation - anyone can make a suggestion, anyone can say what they like. We have tried quite hard to take on people who function well as people. Our wanker filter has proved pretty effective.'
Whereas a start-up business comprising only a handful of people can survive on an almost improvised basis, with increased headcount comes serious management responsibility. Says Moore: 'When it was just me I had to do everything. When there are only five of you there is a sense of communal guilt: everything seems to get done. But once there are 10 or 20, you need a structure. That's where something like ISO 9000 helps - it stops us screwing up.'
Moore's first-hand experience confirms what expert observers of the SME market have long known. Says Dr Colin Barrow of Cranfield School of Management: 'When small companies grow, the bits that go wrong are people and organisation. By and large, it's not the finance or the market that does them down. The challenge comes when the founder has to change from being an entrepreneur to a manager. The skills that help you start up are not what you need going forward. You have to start managing people you can't see all the time,' he says.
Professor David Storey at Warwick Business School agrees. 'Some of these hiring decisions are absolutely crucial. Will you recruit a professional finance director once you have sales of pounds 2 million or more, even though he or she will add nothing to your turnover and be expensive as well? Where will you find the right person? Will the chemistry be right?'
Someone who has clearly got his chemistry right is Will King, founder of KMI, the 'male grooming products' company - makers of King of Shaves oil and gel. After starting up the business at home, filling bottles in his kitchen and sticking home-printed labels onto them, his company pulled in the mighty figure of pounds 300 of sales in 1993. By last year, this had grown to pounds 10 million, and King confidently forecasts sales of pounds 14 million in 2003.
King knew it was time to take on more people when, as he puts it, 'I started dropping too many of the balls I was juggling'. By getting proper funding in place via the Government's loan guarantee scheme and then factoring out his invoices to secure cashflow, he laid proper foundations for managed expansion. A virtuous circle was created whereby sales and product development fed each other as new staff were taken on. Again, the founder believes the original spirit and identity of the firm have survived the transition from one-man-band to a team of 16.
'We are what I like to call a virtually integrated company,' King says.
New staff have come on board and fitted seamlessly into the team. Responsibilities are shared and decision-taking is fast.
Part of the virtual integration culture involves an open-book approach to salaries, which are set in agreement with staff and reviewed every six months. Moore at SMC operates a similar system, where salaries are set using internal comparisons with exist- ing staff: 'We just agree what a fair rate for the job should be.'
Hiring staff has freed King to think longer term about ambitious plans, in particular in the US. He is already manufacturing shaving products for the Speedo and Ted Baker brands, and hopes to eat away at Gillette's dominance in the shaving products sector. 'People think we're a lot bigger than we are,' he says. 'We have double the market share of Nivea in the UK, but we are a fraction of their size. This means we can be a lot more nimble and innovative.
'We're still young, edgy and entrepreneurial, but we are getting more professional all the time. You have got to maintain that vision - you have got to know where you are going, otherwise you'll never get there.'
Vision is what Lars Becker and his colleagues at Flytxt have specialised in. They launched their SMS (text message) business in April 2000 - possibly the worst moment for a new technology company to spring to life. 'The market was really tanking then,' says Becker, 29, a former investment analyst at Morgan Stanley.
Had you wanted to create an archetypal new-economy disaster story, Flytxt should have been perfect. Four young entrepreneurs, fresh from the booming world of late 1990s management consultancy and investment banking, decided that they wanted a piece of the new-economy action. Inspired by the frantic text-messaging he had witnessed while covering the Finnish telecoms market for his bank, Becker hit on SMS as a new and vibrant direct marketing route.
'People told us we were backing the wrong horse,' Becker says. 'Back then, all the talk was of WAP and 3G, and SMS was going to be yesterday's technology. Some investors told us to go away and come back with a different plan.'
However, venture capitalists at Mars Capital and IVC liked what they saw and helped the firm to launch.
Although their backgrounds suggest that high finance and management should have been second nature to the Flytxt team, 'that doesn't mean you know how to run a business,' concedes Becker. 'Some people think they have an idea for a business, but sometimes their only idea is that they want to run a business. It's not the same thing,' he says.
Six months after Flytxt's launch, the first client, Emap publications, was won. SMS campaigns for Cadbury, Eurosport, Comic Relief and, intriguingly, Gossard G-strings have followed. And Becker is clear that building a business that lasts will mean retaining these and other clients through professionalism and a thoroughness of approach.
'Business feels very, very different today compared to when we started out,' he says. 'It has got more professional; there are quarterly targets, monthly milestones. We have also done work on our values to identify what sort of business we are running, what sort of business we want to become.
There are now 35 of us. We hired slowly and carefully at first, and we still don't have a formal finance director. But it is crucial to hire people in advance of growth, because it is impossible to service clients later on if you haven't got the people to do it.'
Entrepreneurs know in their gut if their business is going to be a runner.
All the research into growing businesses shows that after six years you have either made it or you are never going to. Venture capitalists today are rarely investing in five- and six-year-old businesses that haven't made a significant breakthrough. By that time, you are either treading water and vulnerable to competition or are flying. But with growth and success come the other practical challenges outlined above - hiring wisely, managing more people while keeping an eye on the big picture and overall strategic goals.
SMC's Moore has a solution for entrepreneurs struggling with the idea of managing more staff. 'We trust our staff deep into their projects for clients,' he says. 'When you have hired well and give people that sort of trust, you have a lot less managing to do.' Something must be working - SMC is turning over a healthy pounds 3 million a year, and still has high-profile clients knocking at the door, even in a downturn.
Can success all be down to such a commonsense approach? Will King at KMI thinks so. 'I've spoken at entrepreneurship classes at London Business School for their MBA students, and I tell them that as long as you've got more coming in than going out you will be OK. They ask me if that's all there is to it, and I say, well, basically, yes.'
HOW TO GET SERIOUS BUT KEEP THE SPARK
- Hire carefully, and hold on to good staff. It is much harder to find good new staff than to keep them.
- Keep faith with your original vision. You know why you went into business. Don't lose sight of that - back your hunches.
- Trust your staff. You can't supervise them all. Delegate and focus on your chief responsibility, which is to make sure the fundamentals of the business are healthy.
- Invest in your staff. Don't be mean on staffing levels - you won't be able to grow quickly without building up the necessary manpower.
- Use a factoring company to smooth out cashflow and remove the headache of chasing late payments.
- Don't be frightened to bring some formality into the business. Quality benchmarks (ISO or IiP) may reassure customers and partners, and build in some necessary structure. They needn't dilute the original creative spirit that launched the business.