Scaling up from scrappy startup to SME is a whole new game. Cash is oxygen and managers are critical.
“There is research that establishes no more than 4 percent of companies make it above the $1 million in revenue mark - and these statistics are from the West. In our part of the world it’s worse,” said Bijan Azad, director of the Samih Darwazah Centre of Innovation Management and Entrepreneurship.
Revenue, he said, was a vanity metric. Scale ups needed cash acceleration strategies.
Azad was hosting a panel at this year’s BDL Accelerate in Beirut on a subject that is fast becoming an issue in MENA: how to scale beyond your scrappy, startup roots into a bonafide small to medium sized enterprise (SME).
Cracking the big time requires fundamental changes in strategy. Funding to leap from one phase of growth to the next is nearly non-existent and there is little help for companies that have passed out of the ‘startup zone’ into a ‘mature company zone’.
The odds are against entrepreneurs.
Azad said in the West only 2 percent will become $5 million revenue companies, and 0.4 percent will become $10 million revenue companies. The figures could not be independently verified by Wamda.
Each of the five business people below faced specific challenges scaling from startup to SME. Many link directly back to cash - where to find it, keeping track of it, and how not to lose it.
Lina Tannir cofounded Lush Lebanon and is now a finance instructor at the American University of Beirut. She helps companies look at their cash conversion cycle (billing and payments) and how to shorten it.
Is a company billing on time? Are they collecting on time? These seem like business basics but they can be sidelined when the company is rolling out new technology or projects.
Tannir said only once founders had their internal cash generation strategies under control could they really start considering how other parts of the business could become more efficient.
Time is money
Inventis executive director Samer Dada invested in a startup in the US which was caught in the lost-and-forgotten receivables cycle.
The founders were stuck in a fundraising round. They wanted $1-5 million in bridge funding to cross their own ‘valley of death’, but it was taking so much time the founders weren’t paying full attention to the business.
Dada and his co-investors took a look through the books and found $1.5 million in receivables the founders simply hadn’t found the time to chase.
Although a fresh entrepreneur didn’t need a board, an SME did, he said. A two-person team could handle a smaller operation, but at the next level up, founders needed “smart people” to provide extra experience on business development through an outsider perspective.
Perfect on paper
Distractions are a good way to lose track of cash, and so are plans that go awry.
Nathealth CEO Ahmed Tijani said they’d built software for health insurance claims processing in 1997. By the late 2000s they wanted an upgrade. The design was beautiful on paper.
In practice, the software was so advanced, Jordan’s internet infrastructure couldn’t cope and basic issues such as connectivity brought the new system to a halt.
“This was creating a delay for us… in cash generation because you are looking at the production cycle, it was delayed, the delivery, it was delayed,” he said. “All of this accumulates to snowballing into a big problem.”
Stung by tech delays, Tijani then discovered profit margins were disappearing: the sales team, to compensate customers, were offering freebies.
When problems occurred it was essential to act fast and not ignore one problem in favor of fixing another, he said. They had to get the product working, and knew they couldn’t delay dealing with the sale process problems for when the tech was operational.
The odds are against you
Middle management has been much derided by television shows such as The Office. Yet while Tijani’s wasn’t a management problem per se, it was indicative of how much a founder of a scale-up business needs good managers who can be responsible for their financial targets, as well as aware of the broader company needs.
Foo is a Lebanese tech company, now based in the US, that could have created Whatsapp (they backed the wrong technology, building their app for Nokia just before the iPhone launched its global invasion).
Foo general manager Ghady Rayess said that as the company grew, he and cofounder Elie Nasr needed to find ways to oversee individual projects without having to manage every one themselves. To do this, they had to find qualified managers.
“When you’re two, you can do it all yourself. When you’re 40, you need the right people to delegate to,” Rayess said.
Once entrepreneurs move out of startupland and into the world of SMEs, they’re faced with a whole new raft of problems stemming from the very scale of the business. Recognizing that you’ve entered a whole new ballgame, will go some way to lowering the scaling odds against you.
Feature image via Euranetplus.