Failure is self-correcting; it is success that can kill you!
by John M. Connolly
July 11, 2017
I am pleased to announce that in addition to my responsibilities as senior advisor at Bain Capital Ventures, board member of multiple companies and venture investor, I have become a board member of Vention Growth Partners, a group of experienced board members and advisors focused on helping CEOs, senior leadership teams and boards accelerate growth and value. Vention Growth Partners was co-founded by Randall Hancock and George Pohle, two talented executives with whom I have collaborated to build and grow companies over the last two decades.
As part of my collaboration with Vention Growth Partners, we are launching Perspectives of a Growth-Focused CEO and Investor to share my experiences from 30+ years as a serial CEO, board member, entrepreneur and investor. Please share your feedback, including ideas for additional topics you’d like us to address or discuss.
One of the most important lessons I’ve learned is that while failure is self-correcting, it is success that can kill you. Let me explain.
New ventures need to gain market traction with compelling offerings quickly to build and learn from their customers, drive revenues, and gain credibility with investors. This initial success enables them to secure the additional funding required to continue growing. Like any game that you can win or lose, if you fail to create sufficient demand quickly for your offerings, your new company fails and the game is over. Your only choice with this outcome is to move on, my friend — you were not ready to play such an important game.
But what if you succeed? Companies that have achieved annual revenue of $25-50 million typically run into tremendous turbulence and indecisiveness as they try to grow beyond this stage. While market demand and business model may have been proven, companies frequently haven’t developed the breadth and depth of capabilities required to accelerate growth to the next level. The startup marketplace is littered with unfortunate examples.
So what exactly happens? Why do so many companies struggle to get beyond this level of growth?
Many growth companies sell themselves into trouble, acquiring new customers faster than they build the capabilities to serve them. In many instances, it’s easy to drive sales, but it’s hard to deliver sustainable growth and value if your organization is not prepared for it. At some point companies discover they’ve outgrown their existing capabilities, and may not have the right CEO, leadership team, go-to-market model, product management, technology infrastructure, operational processes, human resources or financial reporting in place to achieve their next stage of growth. In fact, weakness in one or more of these areas is the most significant reason for failure.
As a result, the early signs of failure start to seep into the company — customers defect as satisfaction plummets due to inconsistent service, salespeople become cautious about making promises that cannot be delivered, overworked employees start looking for new opportunities, and revenue growth comes to a sudden halt. I know from firsthand experience how painful it is for all stakeholders when they haven’t thought enough about how their company’s capabilities need to evolve with growth. It’s just too easy to become intoxicated with initial success and forget what is going to be required to achieve tomorrow’s goals.
For example, I was once recruited to become the CEO of an established business services firm whose growth had plateaued at $40 million in annual revenues. The company had been spun out of a large information company and acquired by a well-known U.S. private equity firm. While the new PE investors saw tremendous upside opportunity, they realized that the previous parent had not invested sufficiently in the business to enable its next stage of growth. Equally important, the then CEO didn’t know what to do. In fact, the sales team’s effectiveness in driving new business had outstripped the company’s ability to deliver value consistently to its customers, creating operational issues across the company.
Upon arriving at the company, I discovered a leadership team made up of middle managers who had been put into senior positions. While the team had deep industry knowledge and relationships, none of them had been part of a growth company before, and thus lacked growth mindsets and experiences. They tended to think tactically rather than strategically, aimed for incremental rather than aggressive growth, and simply didn’t know how to scale the company beyond its current size.
As a result, the company faced many of the typical hurdles challenging companies seeking to break out from the $25-50 million revenue range. Its technology delivery platform, which had evolved piecemeal over time, was not built for the global scalability that growth required. Lack of dedicated client services resulted in increasingly unhappy customers. There were no clear product roadmaps, as offerings were developed by IT without any formal product management function. An undervalued human resources function was unable to fill open positions. Led by a controller rather than CFO, finance took a retrospective rather than prospective view, providing timely updates on financial performance but not the predictive financial models needed to support critical decisions. Moreover, informal planning had resulted in vastly differing opinions about the company’s path forward, preventing company-wide alignment and execution around a cohesive strategy to achieve their next stage of growth.
The board brought me in as its new CEO to address the many growth challenges the company faced. Working closely with the board and existing leadership team, we made the difficult changes required to get the organization to the next level. These included:
Failure was not an option for those of us who came together as a team to restart the company’s growth. But achieving this success took enormous focus, thoughtfulness and collaboration to make difficult decisions and execute effectively against our targets and priorities. Understanding what it was going to take, and getting the commitment of the board, leadership team and entire organization, was really hard but eventually made the difference between success and failure.
Because of these concerted efforts, the company’s growth and value began to accelerate once again. Improved capabilities raised client satisfaction considerably, resulting in higher retention rates. Gaps identified by the strategy development process resulted in three targeted acquisitions in a single year, enabling the company to solidify its global leadership position. And a reenergized sales and marketing team helped drive top-line growth to 40% annually, achieving $110 million in revenue in just three years. The company’s accelerated performance enabled the sale to a strategic buyer for more than 20 times EBITDA and 5.5 times revenues.
Growing a company from zero to $25 million requires skills and mindset built off scrappiness and commercial aggressiveness. To be sure, you still need to be scrappy to get to $100 million, but you also need a formal approach to driving commercial success. So, the next time you are focused on how not to fail, you may also want to make sure that your success doesn’t kill you.
About Us. John M. Connolly is a serial CEO, entrepreneur and investor who currently serves as non-executive chairman or board member on multiple growth companies. John was managing director and head of the operating group at Bain Capital Ventures for over six years, and is presently senior advisor. John is also a board member of Vention Growth Partners, a group of experienced board members and advisors focused on helping CEOs, senior leadership teams and boards accelerate growth and value.