Denver should focus on second stage businesses, not startups
Five conditions second-stage entrepreneurs must create for their firms to effectively reach the middle market
Colorado business is trending and has been for some time. Forbes named the Centennial State the best place in which to do business, while the U.S. Chamber of Commerce ranked it the second-best state for entrepreneurship and innovation. If you’re a woman entrepreneur, Boulder is your kind of town, according to Version 2.0 Communications, which calls it the No. 1 metro area for this vital demographic.
Why reaching the middle market matters
That said, while business startups are a critical source of job creation, it is middle-market businesses that are arguably more important than startups for stimulating the economy. This comes from analysis conducted by the Congressional Research Service for the Small Business Administration, which found that businesses that have grown to between 20 and 499 employees after their first few years are more likely to have a sustained positive effect on job creation. Many startups, on the other hand, fail in their first five years.
Stuck in the second stage
The stage of business growth between the startup and the middle market is difficult. Approximately, 2.1 million small business in the U.S. operate between $1 million and $10 million in revenue. Many of these firms were exciting startups but now grow at modest rates in comparison to their early dreams. Even though they have the potential to be the greatest generators of good-paying new jobs, most investors and top talent have lost interest in them, making growth at this stage even more difficult.
A scientific approach to business building
Fortunately, recently released research has uncovered five conditions second-stage entrepreneurs must create for their firms to effectively reach the middle market. The research effort combines TrueSpace’s four-year ethnographic study of 147 small businesses across the U.S. with Gallup’s quantitative analysis of 2,494 firms of similar size. The effort produced a validated assessment for an entrepreneur to compare the operation of their business to a high-performing national benchmark. These five conditions include alignment, discipline, predictability, endurance and value creation.
“Is the business growth-capable?”
Businesses that achieve consistent growth have aligned the finite resources of time, capital and talent to focus on a clearly defined market or market segment where they can scale. This focus requires developing both a competitive offer with a specific point of view and talent with experience valued by the target market. The capability for growth then comes from repeating the offer to potential customers who are highly receptive to the company’s distinctive point of view.
“Can the business scale?”
Firms achieve scalable growth by increasing efficiency in various ways, all of which require the discipline to look past short-term operational concerns and build a capacity for continual improvement by identifying and monitoring key systems that bolster organizational resilience and lay the groundwork for consistent growth.
“Are the decision-makers continuously learning?”
Research suggests that the best predictor of a company’s future growth isn’t the speed with which it has grown in the past, but the consistency of that growth from year to year. Consistent growth suggests decision-makers have learned how to use market data and feedback from their own systems to set ambitious but realistic targets and reduce uncertainty about meeting future goals.
“Can employees and other stakeholders endure the growth journey?”
Achieving mid-market status requires an emotional commitment from employees to stick with the company through the challenges that will inevitably arise. Engagement and benefits are two key systems that support and nurture employees’ resilience and fosters company and individual growth.
“Is growth creating enterprise value?”
Among benchmark companies, the operational outcomes and market conditions that drive enterprise value are clearly understood. These companies have also demonstrated clear results in terms of consistent year-over-year growth in revenue, free cash flow and headcount.
Building Colorado business
Colorado’s robust talent pool and fertile environment for entrepreneurship makes it an ideal place to grow second-stage businesses, which in turn, will generate more jobs, higher revenues and a thriving economy. By using the five conditions above as a bellwether, local entrepreneurs will continue to grow and thrive.
Charles and Jamee Fred, a father and daughter team, are the co-founders of Truespace, which helps second-stage entrepreneurs achieve sustainable growth and add new jobs to the economy.