Evaluating Growth Indicators
FastTrac, Kauffman Foundation
As you evaluate your growth potential, you will take a close look at two key indicators of your business’s ability to undertake growth—its financial strength and stage of growth. Businesses that are still struggling to maintain profitability or are in the early growth phase will benefit from different growth strategies than businesses that have achieved financial stability and are more mature. Determining these factors up front will help you make realistic plans for your business’s future.
Shifting Gears to Grow
John Friess and his brother, Mark, launched wired.MD in 2000. Their initial product was streaMed Patient Education Solution, a series of streaming videos describing diagnoses, procedures, and treatment plans for airing in doctors’ waiting and examining rooms. Their mission: to empower healthcare professionals to improve patients’ healthcare experience and reduce costs by making patient education more engaging, effective, and efficient to deliver. Their vision: to educate the masses.
They started their business by selling streaMed to doctors’ practices. Their first sign that they needed a different means to grow their business was a financial one. When they began to get a handle on their marketing budget, they determined it was too costly. They found that not only were doctors a hard sell, but also that the trade shows to target them were expensive. It was costing them $110 to $125 for each qualified lead.
Then, while pitching a medical group at a women’s health center, they were directed down the hall to a health resource center. It featured an Internet-connected computer that patients could use for accessing information. Eureka! With just some slight engineering tweaks, their product would be perfect for such an environment. With the interest exhibited in the health resource center, they realized that a more effective and scalable strategy was selling a video patient education software product that patients could access directly over the Internet—in health resource centers, libraries, or even on home computers.
So they shifted gears—halting all marketing efforts aimed at doctors’ practices directly to reach the new health resource center audience. With a new marketing focus, they adjusted both the product and the message. In changing gears, however, they understood that some things don’t change. Brand identities, color schemes and corporate culture begin to belong to the entity and come to be identified with it. They hired two people to make cold calls all day, everyday, from free Internet databases. They created direct mail materials and direct e-mail campaigns. All of these efforts helped bring down the cost-per-qualified lead to $25 from $110 to $125.
In addition, the Freiss brothers have refined their goals. With their new business model, their customers are medical libraries, health-resource centers, and small to large physician groups. What is important, they’ve determined, is carving out a definitive chunk of the market—specifically, licensing streaMed in one manner or another to 3,000 physicians, which is equal to one half of one percent of the total marketplace. That amount of market share would place them in the ranks of highly viable healthcare information software companies, opening up many doors for their future.
Your business’s financial strength is of particular importance in assessing growth readiness. Growth requires money to purchase additional equipment, invest in added staff, and support the rest of the growing operations. To determine if your business has internal sources of cash to invest in growth, you will need to review historical and projected financial statements on a regular and ongoing basis. By assessing the numbers, you can see where you’ve been, where you are going, and what it will take to get you there.
Information on your business’s sales, profits, and cash flow are key. Conducting a preliminary analysis of net profit and its components will provide you with a greater understanding of the current financial condition of your business. It will also tell you if you need to limit your plans for growth because of financial constraints.
One key consideration is the amount of cash generated from business operations available to support growth. Alternatively, does your business have the ability to obtain external funding? What about contingency planning? If cash from current operations were invested in growth, would there be sufficient additional resources available to offset unforeseen challenges that might also require a cash infusion?
Growth financing is typically the easiest to obtain from external sources, but it comes with costs: banks earn interest on loans and investors expect a strong return on their investment and may insist upon ownership in the business to ensure it. “Investors can make your stomach twist and turn,” says entrepreneur Natalie Tessler, founder and owner of Spa Space, a state-of-the-art day spa located in downtown Chicago. “On one hand you feel incredibly grateful to these people. They are facilitating and enabling you to live out your dream.” Tessler continues, “On the other hand, knowing that they are out there is bedeviling because you feel indebted and concerned about any failure and how they’ll respond to it. It’s really scary to think that I could let them down.”
Stage of Business
Growth, in some form, can occur at every stage of your business. The types of opportunities that are realistically available to you may be influenced by where your business is in its growth and development. Businesses go through similar, predictable stages; however, the length of time for each stage can vary considerably from one business to another. Your business’s stage of development will have a significant impact on the type and extent of growth appropriate to pursue. It will also have a major influence on the types of funding available to you.
A business’s growth pattern typically follows these stages:
Conception – Entrepreneurs determine the feasibility of the new business by evaluating the needs of the
market, the potential profitability, and the availability of needed resources.
Start-up – The business is launched and cash is usually tight. Sales are typically inconsistent at best, seldom meeting the entrepreneur’s expectations. Entrepreneurs modify products or services and experiment with different market penetration tactics. Resources are scarce and must be used judiciously.
Early stage – Customer responses validate the business concept and marketing efforts, but the business struggles to find its competitive advantage. All activities are focused on increasing sales.
Growth – Sales and profits are increasing as a result of new customers and expanding markets. Cash flow, staffing, and developing systems are issues because of the costs and considerations of growth. Minor modifications to the business strategy may be warranted as entrepreneurs learn more about the market and customer response.
Rapid growth – The business outpaces the industry growth rates and establishes itself as a viable concern. Sales increase rapidly. Some entrepreneurs decide to sell their business at this stage.
Maturity – Sales hit their highest point or may level off as a result of saturated or very competitive markets. Profits decrease as prices are lowered to compete. Customer retention and managing resources are key. Adoption of a new strategy to maintain historical growth trends is important if continued business growth
Innovation or decline – Sales and profits start or continue their descent. Without innovation, the business declines. New products or services and new markets are needed to recapture the historical growth trends of the business.
© 2006 Ewing Marion Kauffman Foundation. All rights reserved.