When Success Isn't Enough

By Chris Penttila

Rachel Ashwell started out as a wardrobe and prop stylist for photographers and TV commercials in her native England, where she spent a lot of time exploring flea markets as a child. By the late 1980s, however, she was looking for a change and decided to use her eye for decorating and furnishings to start her own home furnishings company, Shabby Chic. Launched with $70,000, the company's first location, a 1,300-square-foot store in Santa Monica, California, featured washable slipcover furniture and other décor—items she snagged using her mastery of flea market bargain hunting. The launch was an instant success for Ashwell, who admits that rent, cash flow and inventory were new concepts to her at the time. "In a funny way, it was my ignorance that made me as brave as I was," says the 48-year-old entrepreneur. "Had I known all the 'what ifs' that could have happened, I probably would have never done it."

Over the next decade, Ashwell added five retail locations, inked a licensing deal with Target, attracted a celebrity clientele, wrote five how-to books and hosted her own program on the Style Network. But a few years ago, she started to feel like the company was stuck in a holding pattern. "Business was fine," she says. "But it had definitely reached a plateau [at just over $10 million in sales]."

At some point, the rapid growth in your company will level off. Sales will be good, but not great enough to provide the sustained year-over-year growth needed to take your company to the next level. This scenario is fine for lifestyle entrepreneurs who want to keep their companies small, but not for entrepreneurs who aspire to run the next Microsoft, Nike or Starbucks. "There is a choice [of] whether you want to grow or not," says Larry Greiner, a professor of management and organization at the University of Southern California who has spent decades studying how companies develop. "If you get on the growth path, that's a whole different game."

Ashwell realized Shabby Chic's business model had to change if the company was going to grow. She weighed her options and signed on with private equity firm Goode Partners last summer to position Shabby Chic for a big retail expansion. The plan is to boost the company's sales by opening at least 45 new stores nationwide over the next few years. "I wanted to build a team that would really be able to support growth," she says. "There are so many things I haven't experienced with my company."

Picking Up the Pace
What's holding your company back? Ironically, the pressure for short-term growth can make you lose sight of your long-term growth potential, and no industry or segment is immune. Angelo Santinelli, an adjunct business professor at Babson College and a former partner at venture firm North Bridge Venture Partners, has watched companies stall out because they don't have enough capital to grow with the pace of the market, then cede market share to highly capitalized competitors. "They'll get to $50 million [in sales] and plateau," Santinelli says.

In some cases, a small company has the capital but underestimates just how long it can take to build a product and have the mass market embrace it. "Companies can stall out because they have new ideas but run out of early adopters," says Dave Lemont, founder of Lemont Consulting, a firm that advises young companies on growth strategies. "The company can get the first $8 million to $10 million because there are many people in the world willing to try a new thing. But to become mainstream, you've got to get the more conservative laggards in the market."

Brad Allen, founder and CTO of Siderean Software, is trying to grow his El Segundo, California, company from annual sales of $3 million to sales of $10 million over the next year and a half. Siderean started out in 2001 with its own sales staff, but the focus has shifted within the past year to building partnerships and indirect channels that will take the company to the next stage. The company has secured 12 partnerships in the past year, including a co-selling agreement with Oracle and a reseller agreement with software company Inxight Corp.

"Building a scalable, enterprise-focused software company in this day and age is something that needs to depend much more heavily on partners and indirect channels," says Allen, 48. "The real issue moving forward for us is putting people in place to effectively establish, manage and grease the skids for these indirect partners."

Greiner's research has found that successful companies go through five distinct stages of growth. The free-for-all, wear-all-hats first stage gives way to greater divisional structure, formal communication and hierarchy in the second stage. The third stage of growth is focused on delegation, where lower-level managers and employees have greater power to develop new products, chase new markets and help customers. The fourth stage—coordination—is geared toward creating product groups and formal planning and review procedures. Companies that evolve to the last stage—collaboration—are focused, among other things, on creating cross-functional teams and streamlining systems that have gotten too formal. The key is how companies handle the instability that lies between each push for growth. "The [company] starts to get really chaotic and unorganized," says Greiner. "This is often where they fail."