Don't cripple your company's prospects by being confused about the meaning
My work as an executive coach and business consultant brings the opportunity to hear from entrepreneurs and corporate leaders at all stages in the business lifecycle. The phrase "growth stage" - even the word growth itself - is among the most inconsistently used terms I hear.
Gaining clarity on the stage of our company's growth is important. The support and resources we need for success are different at each stage.
If you're a business founder, owner, or executive leader, it pays to use the right language when you describe the stage of your company. If you decide to use actual growth stage strategies before you're ready, you'll be frustrated (at best) or cripple your company's health and potential (at worst).
To answer to the question "what is a growth stage business", it's important to be clear on three specific points:
What does "growth" mean in business?
Defining growth is a little bit like defining who qualifies as an entrepreneur (I'll update this post with a link if/when I write about that minor squabble).
At the most basic level, the definition of growth is exactly as we might expect find it in the dictionary.
Unfortunately, even services like Merriam-Webster have trouble defining the word without using it in the definition! They get there in 1.d. where they describe it as: "INCREASE ; EXPANSION"
In business, growth simply refers to an increase in the size of a metric that matters to its leaders and stakeholders. Examples include:
an increase in year-over-year net income levels,
the expansion in number of new team members, and
additional customers that outpace the company's churn rate.
There's an unimaginable number of available examples showing increase and expansion in business.
In a sense, every business that's increasing in one or more of its key metrics could be considered to be growing. There's almost no confusion when someone says their company is growing.
The confusion starts when a founder, business owner, or executive starts explaining that their company is in the "growth stage".
What does the term "growth stage" mean in business?
Most business leaders use growth stage as a signal that their product or company is in - or preparing for - a period of significant and intense expansion.
That seems clear enough. Unfortunately, it isn't.
It is exciting to tell people we've entered a period of significant growth. A business leader can gain a lot of status and respect for doing something that's generally difficult.
Companies grow at different rates. Some never actually enter the growth stage at all (which is ok, by the way, if that's the business owner's goal).
The trouble isn't the term itself. The confusion enters because so many leaders define it differently.
In an article from 1983, the Harvard Business Review's The Five Stages of Small Business Growth identifies these discrete steps:
There's a lot to say about this article. For now, we'll stay sharply focused on the question of a commend definition of the growth stage.
The HBR article describes initial research which identified "growth" as a discrete progression step within the "success" stage.
The same article contains a graph that shows the correlation between the stage and overall size of an organization over time. The conclusion the article's charts offer is that the major growth happens after an organization has already:
moved beyond two layers of management,
has more than basic processes and systems, and
is defined more by the organization than by its owner.
Much has changed since HBR published the article in 1983. For example, notable modern companies are still very much defined by their founder and owner teams. Others have explored decentralized forms of management (with varying degrees of success).
Yet the article contains a striking number of similarities to modern startup and growth strategy approaches including The Four Steps to the Epiphany, The Lean Startup, and Traction.
"Growth" is not a synonym for being in "growth-stage".
Rather, a business is in the "growth stage", its leaders have:
established a viable and sustainable market presence,
demonstrated it can continue at a reasonable profit by serving an existing market without substantial additional investment,
made an intentional decision to invest in structure and resources to rapidly expand within the market at a rate that would not happen organically.
Establishing a common understanding of the term will help avoid mistakes and confusion which can cripple a business that's not actually at the growth stage.
What are common mistakes when using the term "growth stage" in business?
The three most common mistakes I hear are related to:
Establishing "proof of concept" as a transition to "growth stage"
Viability as an automatic entry into the growth stage
Adding people to a startup means the company is entering the growth stage
Proof of concept exit does not automatically equal entry into the growth stage
Rapid and significant expansion of a technology company's code base is a form of growth but it does not always mean the company is in the growth stage. In the same way, a company that establishes "product market fit" is not automatically a growth stage company.
With the working definition in the section above, neither company has established a viable and sustainable market presence.
The most important actions these leaders need to take are not to begin rapid growth or scale. Instead they must focus on establishing a path to viability with the concept(s) they've proven.
Early product-market fit indicators are a great signal that the growth stage might be an option. At the same time, it is not possible to grow in a sustainable way without establishing basic systems that show the team knows how to reliably find, convert, and retain customers in that market at a level that meets or exceeds break-even business case requirements.
Establishing "viability" does not mean a company has entered the growth stage
At the most basic level, viability means the company has established some repeatable method of balancing its income and expense. It has accomplished the transition between early product-market fit and a sustainable operating model.
In more advanced definitions, a company is viable when it meets or exceeds the goals of its stakeholders in ways that are predictable and reliable - and, in which profitability might be significantly beyond the break-even mark.
In either case, this company is successful but not automatically within the growth stage. That subsequent transition may be very close but simply proving the team can avoid company death does not automatically mean it is ready to grow or scale in substantial ways.
Its leaders have not made an intentional decision to invest in ways that drive growth at a higher rate than the market would organically deliver.
These leaders need to intentionally plan for the defined goals, systems, and people they need to drive the pace of growth at the rate they want.
Adding people to a startup does not mean the company is ready for the growth stage
It is a fantastic success when a startup is able to grow beyond a single person or a small set of equity driven founders. Similar to the proof of concept and viability mistakes, many entrepreneurs equate rapid expansion of their team with being in the growth stage.
Our working definition (and the Harvard Business Review article) both support the idea that a growing team are components of the growth stage. However, a company must meet more than one factor to be considered a growth stage company.
These leaders need to honestly evaluate where they are in the company lifecycle. This will help them focus on the most critical aspects of their current stage. Growth in the early stages will position any startup for a successful expansion when the team meets all the factors for entering the growth stage.
If you're a leader of a growing business:
What changes if you adopt the definition of a growth stage business as it relates to your work?
How might you focus on the most critical decisions that will help your business thrive without the pressure of trying to achieve growth before you're ready?
Who is objectively helping you navigate the stages of growth so you don't have to do it alone?
Paravelle offers executive coaching services to founders and CEOs with big growth goals. It's a crucial support structure that helps leaders avoid the negative results that come from being lonely at the top.
We might be a good fit to work together if you're:
at the create (<1M ARR), build ($1-3M ARR), or grow ($3-5M ARR) stage,
curious and looking for ideas and answers, and
ready to invest in working with a collaborator that brings a co-founder's perspective (without losing half your equity).