Once a company reaches 50-100 employees, growth creates an interesting and seemingly unfair challenge. Having the opportunity to grow is the result of – and reward for – great success. Only successful founders build organizations that attract investors. Only companies with substantial capital have the opportunity to quickly double in size and revenue.
But after a large capital infusion, the next level is not a baby step. It is a giant leap – one that often requires a significant transformation – with a new or evolved vision, strategy, leadership, talent level, structure, and culture. Private equity backed growth is one of the most consistent examples of “what got you here won’t get you there.”
Rapid growth impacts every aspect of the organization – and essentially requires building and transitioning into a new organization while still running the one that was successful enough to create the growth opportunity. Herein lies the twist: Because an organization must evolve and transition, if it fails to make the leap to the next level, it can’t just go back to the way things were. The old organization doesn’t exist anymore. As a result, failed growth can leave an organization worse off than it was before it tried to grow. It can render a successful company crippled. It can result in a complete investment loss.
Failed growth can leave an organization worse off than it was before it tried to grow.
A private equity firm asked us to conduct a growth profile assessment of a portfolio company that was struggling several years after the initial investment. The company used the capital to add expensive new equipment and to build out a large executive team. There was little to no strategy behind the additions to the team, and the new executives were not a good fit with either the vision, culture, or existing leadership. In less than a year, every one of the expensive new executives had left or been let go, and the new equipment was sitting idle.
The costs of these errors were enormous: (1) the company spent over $500,000 in salaries and severance for the executives; (2) numerous other great employees left the company in frustration; (3) morale and productivity declined for the employees who stayed; (4) the relationship between the Board and the CEO became adversarial; and (5) the private equity investors were being called daily to manage leadership conflicts. It was a 360 degree cluster, which was so far advanced that it eventually resulted in the company losing its market position and the investors taking a large write off. Because they didn’t have strong leadership, a well thought out people strategy and a solid cultural foundation to support the growth, they ended up significantly worse off than they had been before they tried to grow rapidly.
There are a few truths that apply to all organizations and that are particularly poignant during rapid growth:
- People drive results.
- Organizations can’t outperform their talent.
- Companies cannot outscale their leaders’ ability and effectiveness.
It is critical to have a strong foundation to support rapid growth – especially growth inspired by private equity investments.
If you’re an investor or CEO in a private-equity backed company and any of the challenges above resonate, reach out, and we would be happy to share our insights and experience.