Survive the Small-to-Big Transition

By Elizabeth Wilson

Your startup has enjoyed steady profits and your phones are ringing off the hook. But while your business is making more money, it’s costing more and more to run it, and you don’t know why; instead of relishing those constantly ringing phones, you dread them.

You could be in no man’s land, a description used by Doug Tatum, author of No Man’s Land (What to Do When Your Company is TOO BIG to Be Small but TOO SMALL to Be Big). Tatum’s financial leadership business, Tatum LLC, sends CIOs, CFOs or technology consultants to businesses to help them grow out of this awkward “tweener” stage.

With nine out of 10 startups failing within the first three years, no man’s land is a “real piece of territory” many businesses will face, Tatum says.

Essentially, it’s a transition a company goes through when it’s too big to be small and too small to be big, Tatum says.

It begins around 20-plus employees and reaches a crescendo as it approaches 100 employees.

“Entrepreneurs recognize it because they feel like they’re losing control, and the old levers that they used to pull to move the business forward don’t work anymore,” Tatum says.

4 Pitfalls of No Man’s Land
Tatum’s book explains four common pitfalls associated with no man’s land and how to resolve them: market misalignment, outgrowing your management, outgrowing your model, and outgrowing your money. If he could boil down all these tips–market, management, model and money–into a single phrase, Tatum says it would be: “The company has to become good at what the entrepreneur is good at.”

With respect to adjusting your business model, “Some businesses don’t have a unique value proposition that’s scalable, and so they never would be successful [if they grew] larger because the business is based on the talent of the entrepreneur, and that talent can’t be transferred to a business.”

That’s a key reason so many startups fail, Tatum says. Approximately 40 million businesses start up per year; an estimated 350,000 break out of the pack and begin growing, and about 35,000 to 45,000 make it. These businesses also provide the bulk of the net job growth in the U.S.

Another key reason a business may fail while it’s in no man’s land is because of capital gaps, where a business isn’t big enough to attract the capital it needs, Tatum says.

While money is available for startups, growing businesses go through a stage when they need between $250,000 and $5 million, a niche that capital markets don’t serve, Tatum says.

“Once the business has proven itself over time and gets large enough, banks and private equity investors will offer the business capital. The entrepreneur has to concentrate on the profitability of the business and has to spend time on managing its customer receivables carefully and its relationships with its suppliers. There is no shortcut, and the honest answer is not to spend a bunch of time looking for investors when the reality of the matter is that the capital needed to get a company through no man’s land has to come from the business itself.”

Tatum recommends hiring an accountant and providing him or her with decent accounting software with a goal of producing weekly operating reports that let the entrepreneur know where the business stands before the monthly financials are in.

Read the full featured story at entrepreneur.com

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