Q. I’ve been told by a number of people that I need to take my business to the next level. I’ve been successfully growing the business (increasing revenue and adding people), but how will I know when my startup has grown to the next level?
A. Before we can tell you how you will know when you have reached the next level, we will need to define the three levels of businesses: micro, small, and midsize. In defining these three types of businesses, we do not use the typical measures of business size (i.e., dollars of revenue or number of employees). Rather, we look at management structure. This is important because the role of the entrepreneur changes dramatically as the company moves from micro to small and from small to midsize. In fact, at each transition, the principal has to let go of doing the very thing that made the company successful at the prior step.
The defining characteristic of a micro business is that the principal is doing the primary work of the business. He or she may have some helpers, but the preponderance of the revenue comes directly from the work of the principal. Obviously, the key to the success of a micro business is how well he or she does the primary work of the business.
When the business transitions to a small structure, the primary work of the business has been delegated to others. The owner may keep her or his hand in it, but others do the preponderance of this work. At this point, how well the principal does the primary work of the business is not nearly as important as it was when the enterprise was a micro business. Success now depends on how well the principal hires and manages workers.
The business has transitioned from small to midsize when at least one layer of management has been inserted between the principal and those doing the primary work of the business. The principal has gone from managing workers to managing managers. This may sound like a small change. It is not. To effectively utilize managers, the principal must delegate decision-making authority to them. This means giving up a measure of control, which is often difficult for entrepreneurs who are used to making every significant decision in the company. This is also the transition with which growing companies most often struggle.
Letting go of some control is a scary thing for entrepreneurs and they are right to feel trepidation. Ineffective delegation can lead to the ruin of the business—we’ve seen it too often. To enable effective delegation, the principal will need to ensure that the appropriate infrastructure is in place.
This means making certain that the business has the right managers, that processes are well documented, and that appropriate metrics are in place. Well-documented processes are how the principal communicates the way that he or she wants things done. Robust metrics ensure that the principal knows what is going on in the business without having to be there personally.
When the business was small, the key factor for success was how well the principal hired and managed workers. By the time a business reaches midsize, those responsibilities have been delegated to the managers. Success now depends on how well the principal implements the appropriate infrastructure, delegates responsibility to the managers, and holds them accountable for results.
To answer your question, you will know that your business has transitioned from micro to small when you have delegated most of the primary work of the business to others. You will know that you have transitioned to a midsize structure when you have delegated day-to-day decision-making authority to a layer of managers that is between you and those doing the primary work of the business. Good luck with these critical transitions.