The Hazards of Scaling Up Your Business (and How to Avoid Them)

Imagine this: the co-founder of a multi-million-dollar HR management software company with almost 500 employees likes to micromanage to the point he and not the HR department has sole approval over employee benefits.

Likewise, when any of those hundreds of employees requests time off for holidays, it’s he and not the HR department that says ‘yes’ or ‘no’.

The company doesn’t have a dedicated IT employee to fix computers or printers because that same co-founder believes its gifted engineers should be able to resolve any IT problems that occur—no matter if doing so pulls them away from developing products or resolving customer problems.

Far worse, a massive influx of business means the company can’t keep up with licensing its insurance agents in each of the American states in which it operates. News leaks out, and the company is embroiled in a scandal with the prospect of millions of dollars in fines. The CEO co-founder is asked to resign, which he does.

It might sound far-fetched, but these are just a few of the problems the US HR software company Zenefits experienced during its accelerated growth or scale-up stage, according to Claire Suddath and Eric Newcomer of Bloomberg.[1]

Zenefits, founded by entrepreneur Parker Conrad and Laks Srini in 2013, offered free software to automate the payroll, health insurance and HR services of small US companies. It made most of its money through brokerage commissions that were paid by insurance companies when clients bought one of their plans. The commissions recurred annually so once a business signed up, Zenefits continued to benefit.

That quickly drew the interest of investors—in particular, that of Andreessen Horowitz, one of Silicon Valley’s top venture capital firms.

Within three years, the company had gone from 15 employees to 1,600. During three fundraising rounds, it raised $580m (about £435m). By the end of 2014, it had surpassed a $20m (about £20m) recurring revenue goal and by 2015, was valued at $4.5bn (about £3.3bn).

By then, the company had about 14,000 customers and was in the process of hiring more than 1,000 additional employees. Things were moving at such a pace that a manager said he interviewed and hired people so fast that by the time they turned up to work, he’d forgotten who they were. One entry-level sales rep was told in an interview that the company was expanding so rapidly that he was guaranteed a promotion within a month.

That year, Conrad said in a talk, “There’s a low-level panic that suffuses the organisation, a constant pressure to keep moving faster and faster and faster.”

But then those serious compliance issues came to light and Conrad was advised to resign in early 2016, which he did. The company’s valuation plummeted by 55%.

The new CEO David Sacks wrote later in an internal email to staff, “It is no secret that Zenefits grew too fast, stretching both our culture and our controls.” [2]

Fortunately for the company, it survived and now has more than 20,000 accounts.

Timing was the biggest scale up challenge for Hyperoptic, which runs its own dedicated Fibre-to-the-Premises (FTTP) network and offers symmetrical gigabit broadband services across 28 cities and towns across the UK.

The company was founded in 2010 by entrepreneurs Boris Ivanovic and Dana Tobak. Two years later the duo secured an equity investment of £50m from Quantum Strategic Partners Ltd, a private investment vehicle managed by Soros Fund Management LLC.

Cofounder Dana Tobak told Alison Coleman of Forbes.com, “Startups, even well-funded ones, need to conserve cash and spend smart. Most companies have multiple ‘engines’ such as sales, marketing, production, and customer support.  We decided to ‘scale-up’ our sales organisation and used progress KPIs to determine when we needed to scale up the other ‘engines’ of the business. Some were faster to scale up than others, and in some cases, the lag negatively impacted customer experience.”[3]

Like Zenefits, Hyperoptic survived its early scale-up challenge. Over the last six years, it’s grown its network fivefold. Its full fibre broadband now passes 350,000 residential homes and business units.

Tobak credits its growth to customer support as well as external funding.

“We have a 4* Trustpilot rating; the highest in the industry. Our customers have really supported us by sharing their experiences with their neighbours, family and friends, which has meant that we have been able to expedite our rollouts across urban centres.”.

This year Hyperoptic received £100m in funding from a consortium of four ‘tier one’ European banks (BNP Paribas, ING, RBS and Dutch investment bank NIBC). Last year, the European Investment Bank agreed to provide £21m to fuel Hyperoptic’s rollout and market expansion.

With the new funding, the company plans to grow the network another sixfold and make its hyperfast broadband service available to two million homes by 2022 and five million by 2025.

While your scaleup might not experience all Zenefits’ internal and external challenges Zenefits or even the timing issues that Hyperoptic did, it is likely to face at least one of them. It might be:

• People challenges
• Sales and marketing challenges
• Operational challenges
• Administrative challenges
• Financial challenges.

As the FD Centre’s founder Colin Mills said in his book, ‘Scale Up: How to Take Your Business To the Next Level Without Losing Control and Running out of Cash’, the scale-up stage is when businesses really struggle because they’re growing but don’t have the infrastructure to support their expanded operations.

They might have the necessary revenue, manufacturing base or customer reach of a substantial business but their controls, processes, personnel, leadership and culture are often still that of the much smaller business they were a short time before, he said.

Worse, they often don’t have the resources to create and maintain such an infrastructure.

During the scale-up stage, they face running out of cash or simply getting stuck, he said.

It’s only possible to avoid such problems by revising your entire business model. If you don’t, then all the small problems that niggle at you now are likely to become major issues once you begin scaling up.

Even if your business is already going through the scale-up stage, it’s still possible to retrofit, design and redesign it, he said.

“In many ways, like most things in life, scaling up is not rocket science. No genius is required, said Mills. It can often be about common sense. “But common sense isn’t always common practice, and being able to focus on the most important things as you scale up is a skill that can get lost in the complexity of the whole process.”

The easiest way to focus on what’s important during the scale-up stage is to have expert help from a part-time FD who has big business experience.

And for a fraction of the cost of a full-time FD, the FD Centre will provide you with a highly experienced senior FD who will work with you on a part-time basis to help your business scale up. To discover how the FD Centre will help your company to scale up, please call us on 0861 127 280 or contact us here now.

[1] ‘Zenefits Was the Perfect Startup. Then It Self-Disrupted: What happened when an HR firm had some epic HR problems.’, Suddath, Claire, Newcomer, Eric, Bloomberg.com, May 9, 2016

[2] ‘Why Successful Startups Stumble’, Virgillito, Dan, Shopify.com, October 11, 2017

[3] ‘The Scale Up Challenges Every Audacious Startup Must Face’, Coleman, Alison, Forbes.com, September 13, 2015