Investors often talk about growth stage and there are distinct funds for growth companies. But what does it mean? Understanding business phases can help you understand your business, explain its strategy, communicate with investors more effectively and create more stable, long-term growth.
The first few years of a new business can be exciting but exhausting. A whirl of late nights at the office, launching new products, pitching for customers, hiring staff and one person acting as the combined HR/IT director/stationery procurer /finance director.
If all goes well, the next challenge will be moving from the start-up phase to “growth” phase − characterised by strong and consistent growth, an increase in market share and a more systematic approach to how a company is run.
Creative companies making this transition face financial, organisational and cultural challenges.
What can they learn from companies that have made the move, and from investors specialising in the creative industries?
One reason so many companies fail to make the transition to a more stable growth-period is that it’s so different to the start-up phase.
Start-ups are typically in a “survive” phase. They are establishing themselves and their business, launching products, and trying to make sales. Often, it’s all hands-on deck with no support functions such as HR and finance. Management roles and a company’s governance are not always clearly defined.
Funding is usually early stage “seed” finance in which “Angel” investors put capital into a company in exchange for a share of the company. Alternatively, some early stage businesses choose to “bootstrap” their business − either from its own funds, from friends or family, or from early sales.
During the start-up phase, the main objective is usually to build consistency – in the quality of a product or service, in sales and financials and in the team. But cash flow is often a constant battle.
Content creation companies in particular feel the burden of cash flow, as business models for content companies often require them to front load a lot of their development costs. This is particularly the case for companies creating films, TV and games. They then have to wait until a product launches before making any revenue and recapitalising through profits and new finance to start the next content piece.
Paying staff, keeping the lights on, while also developing new ideas, and producing good work, is a perennial challenge.
In the growth phase, sales usually accelerate. However, other parts of the business stabilise – for example, its staffing, organisational structure, governance, brand, the quality of a product or service and the approach to sales become more consistent.
There is a level of systemisation within the business, which is particularly important within the sales activity so that they’re not reliant on the relationships and personalities of key staff.
This certainty provides stability, focus and resilience within the business, helping them to expand their revenue streams, expand into new markets and develop new products.
Antstream, which streams arcade games from the 1980s and 1990s, is a good example of an SME that is bang in the middle of the growth phase.
In 2016, Antstream got its first round of seed investment, of which Creative England was a part.
This and a more recent “series A” investment (a type of investment that often signals a maturing business) means that Antstream has the funds to licence games for software development, start to sell them and recruit more staff to respond to customer demands.
I recently asked Steve Cottam, CEO and founder of Antstream, what have been the main challenges of entering the growth phase?
“As you get more people the culture of [the business] naturally changes and you have to work hard to build the culture you want,” Cottam says. “That takes leadership and defining what the values of the business are going to be and making sure you’re employing people who share your values.”
“One thing we’ve done is to make sure that everyone we bring to the company absolutely loves retro games so that shines through in the product.”
This expansion and maturing of the business model have created additional pressures as well as opportunities, he says.
“Everything just suddenly grows,” he says. “Whether it’s the finance, product development requirements, customer support or leadership of Antstream.”
As external investment increases, investors typically expect that a company’s board and its procedures (financial, HR, procurement etc.) will become more formalised.
However, probably the main reason for formalising these things during the growth phase is because it helps a company handle growth and increased expectations. As Cottam says. “There is so much to do [in the growth phase] and if you don’t keep controls [within your business] you can end up in a real muddle.”
So, how can start-ups make a smooth transition from start-up to growth phase?
A piece of advice I often give to companies is to ensure you have a strong and supportive board. A good board can help keep a business focused on its vision, purpose and goals and provide access to new investment networks and business opportunities. It also demonstrates good business practice and shows investors that your company is well run.
Another key turning point in a company’s development is when founders start to relinquish control to a new management team.
We often observe that founders are slow to respond to the need to appoint expertise that will further galvanise growth in the business and move the company forward. The reasons vary but often stem from a fear of losing control.
It’s important to have faith in your direction of travel (business plan), in your organisational structure and in the people you appoint to help take the business to the next phase of growth. It’s also important to park your ego and understand where your own strengths lie.
Find out more about Creative England’s recently launched Creative Growth Finance Debt and about the team behind it here.