Platt Perspective on Business and Technology

Planning for and building the right business model 101 – 12: exit strategies, entrance strategies and significant business transitions 2

Posted in startups, strategy and planning by Timothy Platt on September 13, 2015

This is my twelfth posting to a series that addresses the issues of planning for and developing the right business model, and both for initial small business needs and for scalability and capacity to evolve from there (see Business Strategy and Operations – 3, postings 499 and loosely following for Parts 1-11.) I also include this series in my Startups and Early Stage Businesses directory. And with that in mind, I focus here in this series on exit and entrance strategies for businesses seeking to more effectively transition out of their startup and early business stages – and primarily on entrance strategies for moving beyond their early business stages and into an early profitable growth stage, as a now recently established but already successful enterprise.

I cited and repeated four specific business development scenarios that are relevant to that in Part 11 of this series:

1. Maintaining your business yourself as a privately held, wholly owned entity,
2. Maintaining your business yourself as a privately held entity but with a restricted set of shareholders in the form of angel and/or venture capital investors backing you,
3. Going public as an initial public offering (IPO), and
4. Selling your business for incorporation into another, probably larger business through merger and acquisition processes,

(nota bene: which I initially offered in an earlier series as a part of Building a Startup for What You Want It to Become 5: exit strategies and goal directed strategy and planning.)

And then I began to develop and discuss the first of those scenarios in expanded detail and in the context of this series, in Part 11. To finish setting up this posting for its discussion to come, I add that I ended Part 11 by stating that I would complete my discussion, at least for purposes of this series, of Scenario 1 here, and then continue from that to at least start addressing Scenario 2 as well. And then after completing my discussion of Scenario 2, I stated that I would address Scenarios 3 and 4. I begin all of this with my default setting Scenario 1, and with a set of factors and considerations that I have seen emerge as important there, and at this transition point if not earlier.

• Startups and early stage businesses generally place a premium on developing and maintaining as lean and simple a system as possible, with minimal headcount and with essentially everyone in the organization communicating directly with everyone else there. This means that everyone there can generally come to agreement as to what to do now and as an immediate next step as they go along, and with the founder/owner there to resolve any disagreements when and as needed.
• Then the business begins to take shape and it begins to develop, produce, market and sell its products and/or services to an identified and targeted market. And it faces need to expand its headcount, as there is now too much to do and too much of that to do at any given time for the original people there to be able to manage all of this on their own.
• I assume here that this business is one that by its specific nature, would be expected to grow as it becomes established, and not for example remain a single person, lone entrepreneur enterprise. And I assume that as an early stage business, this young enterprise has brought in one or a few entrepreneurial employee participants for their particular skills and experience, who are likely in effect, taking responsibility for what would with time grow into entire departments and functional areas (e.g. Finance, or Information Technology.) But the overall number of people actively involved here in these first two development stages is very small and certainly up to the transition point where this new business becomes profitable, and where pressure on it switches from that of finding a viable path forward, to growing so as to pursue it.
• When everyone can and does directly communicate with each other to clarify and address questions and issues, strategy can remain essentially entirely big-picture, and formal operational processes simple and direct. As the headcount begins to grow, and at least something of a more formal managerial system becomes necessary, operational systems become more elaborate as more and more decisions and processes become standardized, and simply followed, and according to an evolving but established plan. And while the core business strategy might remain big-picture, the overall strategic process and its established planning and decision making implementations have to expand out too, in order to keep all of those newly developed operational systems aligned and supportive of the overall business and its business model.
• Yes, I am assuming at least something of a business plan, and something of a preconceived overall business model that this fits into and supports. But I am also assuming an ongoing flow of learning curve opportunities and of contingency planning need. And I am assuming that change and the emergence of both unexpected challenge and of unexpected opportunity will arise too.

The emergence of a new at least initially successful young business as a now profit generating enterprise, marks the end of one set of challenges. But it marks the beginning of a new set of them, and certainly for first time entrepreneurs, and for entrepreneurs who do not have access to the advice and experience of others who have already gone through this type of transition and learned their lessons from that.

I briefly touched on one of the issues that can arise here, in one of my earliest postings to this blog: Maintaining a Vision While Loosening Our Grip. I initially wrote that posting with a specific still-startup phase business in mind that I was then working with, and with a goal of addressing problems that arose there in filling out a team of founders for their necessary first-step experience and skills. The problems of opening up the decision making process to allow for active creative participation from team members who are not founders, becomes even more pressing and challenging as this new business begins to grow out of its early business stage and into becoming a larger, now profitable venture.

As a general rule, look for interpersonal and communications problems at the root of challenges that arise when emerging from early stage and into this next growth and expansion stage. It is these collisions that drive development and elaboration of systems of operational processes and established precedents.

• Businesses develop established processes, in effect as if applying band aides, in order to address and prevent recurrence of problems that have emerged from ad hoc earlier attempts,
• And as those ad hoc efforts prove to create new problems in and of themselves, from their inconsistencies and from their collateral consequences.

And the challenge here is to develop processes and systems that can work long-term and that can be scalable, and supportive of still further business development and growth.

And with this admittedly abstract narrative in place, I conclude my Scenario 1 discussion, at least for now, and turn to consider Scenario 2 from the top of this posting. And I will take that at least somewhat out of the abstract by discussing involvement of outside investors (e.g. angel and venture capital) in the more specific context of the explicitly innovative new business venture, in my next series installment. In anticipation of that, I will delve into how outside investors can and do seek to manage executive team membership, as for example in selecting a Chief Financial Officer for a young business, who can help address their risk management concerns. And I will also consider how these investors can influence and shape realized business plans and business models, as for example when addressing target markets for a more disruptively innovative new product idea. And as a core consideration for all of this, I will look into how these investors’ goals and priorities can align with, but also differ from those of a new business’ founders who they work with as supporting investors.

Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 3 and also at Page 1 and Page 2 of that directory. And you can find this and related material at my Startups and Early Stage Businesses directory too.

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