Why is succession planning important for your startup?
Warsha Joshi and Evan Le Clus are startup mentors and the co-founders of Dare to Scale, an ecosystem for entrepreneurs scaling their business. The pair recently co-authored a book “Dare to Scale: How to Grow Your Business Gracefully” in which they outline the key elements required to scale a startup.
There are a couple of top reasons why businesses become sustainable and succeed beyond their first year through to their fifth year.
While there may be variance with each passing year, it is widely accepted that approximately 20 per cent of startups fail within the first year, 30 per cent by the end of the second year and a whopping 50 per cent by end of the fifth year.
Only about 30 per cent still stay strong to scale up by the end of 10 years.
First and foremost, we believe this is because of the lack of a robust strategy and the second, is inefficient cash flow management which in essence leads straight back to strategy. As we know, each of the Five Elements of a startup’s foundation are interrelated so let us talk about the source or the seed which holds the strength to build a sustainable business, the Strategy and Financing Element, more particularly at an essential pillar within that, succession planning.
During our time mentoring a large segment of startup founders, we have had the vantage point to observe that most founders’ journeys can look very different at an individual level, however the similarities in behaviours or patterns begin to emerge as larger groups are studied. Perhaps out of initial necessity or the core capability on which the business is founded, we notice the metric(s) most entrepreneurs measure is the product, product development, the ability to deliver that product and to turn a profit. And while by no means a generalisation, this application then seems to become the entire strategy once you have it working.
What you actually have here is a short term business model based on tangible outcomes and which misses the long term strategic thinking to build a business robust enough to succeed indefinitely. The fact is, any business built on solid strategic foundations can either be handed down to the following generations, readied to sell or to bring in a ‘CEO’ so you, the founder, can step back from the business to gain your freedom.
Succession planning to us is also more than just the transfer of leadership and planning for that eventuality. It really is about the company being ready, at a moment’s notice, to pass a thorough due diligence with flying colours to meet and continue running uninterrupted any change in leadership contemplated. And if a sale of the business is pursued, achieving the right sale price for the founder.
Why are we talking about succession planning today and how is it important?
This is simply because for both of us, this essential element of strategy, succession planning, materially affected and changed the equilibrium of our late teens. For Warsha, the lack of succession planning in the family-run business into which she was born led to the total loss of that business, causing a massive upheaval in her life at the age of 16. She was compelled to take up the reins of entrepreneurship in new businesses so the family could put food on the table.
For Evan, it changed indirectly. His family migrated from Zimbabwe to Australia for political and financial security reasons but it meant that his parents’ businesses were exited at much less than potential market value. This was particularly true for his mother’s business where it was sold for a pittance because long term succession planning was considered but not acted upon resulting in the business assets not being properly protected. Having lost the lion’s share of their capital base, the family had to start again.
Both our stories point to the need for deep thinking about a founder’s strategic road map, essential to ensure your business can meet just about any challenge thrown at it.
So let's bring it back to you, today's founder. The modern mantra is for you to run an agile startup, be tech savvy and adaptable, see an opportunity to improve your customers’ life with a valuable product and work towards the goal of being “free”.
And yet, despite all the support in the form of books, online help and thought leadership that you have at your fingertips, in so many cases, you feel more alone at the top than ever, routinely go through information overload, feeling overwhelmed and getting stuck wondering what to do next or how to prioritise. Your “ask” is often for support on what structure to put into place for the new or growing startup.
Reinvent to stay relevant
Working at the tactical level will see the startup through when times are good, but when the going gets tough, the ability of most startups to smoothly reinvent and stay relevant becomes an impossibly high mountain to climb.
Your market is an ever evolving element and when it needs something different from you, how quickly can you adapt your thinking and your business to successfully address this changing need?
‘Never be afraid to start over’’ is a profound mentoring lesson that we learned very early on from our parents and again in our later business careers. This lesson simply acknowledges ‘oh yes, you’ve reached this milestone...and yet, today, the world needs you to now deliver a different value proposition’. This is where your robust strategy and your process-driven succession planning built on a strong foundation plays a pivotal role.
These are some of the underlying reasons that led us to write the Dare To Scale book to help with this adaptation not only for our current audience but founders around the globe.
Bear in mind that you, the founder, have two key jobs: Look after your people and equally important, keep an eye on the company's strategy. Not just the tangible business model, but the bigger, bolder and somewhat intangible high-level strategy, thinking to be keen yet agile so you can flex and adapt your business with the key milestones in sight.
In all our years as scaling up mentors and coaches we have always advocated for strong leadership (guided by deep strategic thinking) and a firm grasp on managing your finances. Our faith is unshakably strong in today’s resourceful entrepreneur to successfully scale and build a sustainable startup that thrives into the future as a positive statistic.