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Outlook on Leadership

by Dan Wyant

Chairman & President

Not all entrepreneurs are alike: the 4 phases of second stage

By Dan Wyant

People tend to identify the term “entrepreneurs” with startups, but entrepreneurship is really a broad spectrum, and businesses make different contributions and face different challenges depending on their particular stage of growth. Along this continuum, the Edward Lowe Foundation focuses on second-stage entrepreneurs because we believe they have the greatest impact on job creation and economic prosperity.

By second stage, we mean companies that have moved beyond startup and have the aptitude and appetite to continue growing. From a numbers perspective, they typically have 10-99 employees and generate $1 million to $50 million in annual revenue. More important, they are the work horses of job creation. Case in point, from 2005 to 2015 second-stagers only represented 17 percent of all U.S. businesses, but they generated more than 37 percent of jobs and 36 percent of sales, according to data from YourEconomy.org.

And even though second-stage companies play such a critical role in our economy, they are underserved — something our foundation is trying to change. We’ve developed programs in peer learning, leadership development and strategic information that accelerate the success of second-stagers. We also work with communities and other support organizations to help them better understand these important companies.

With that in mind, last summer the foundation conducted a series of focus groups with growth-minded second-stagers. What was especially interesting, participants described four phases within second stage:

Overwhelmed. Second-stagers no longer worry about survival on a daily basis like they did during startups days. Yet they often reach a plateau or stumbling block and realize they need some sort of external help. Our founder, Ed Lowe, recognized this as he scaled his Kitty Litter business, and “know what you don’t know” became one of his general rules for success. One of the ways Ed felt he learned best was by talking with other entrepreneurs — something that our focus groups echoed.

Building the team. Bringing on people with skill sets that both complement and replicate their own expertise is one of the most important things second-stage entrepreneurs can do. To continue growing their business, second-stagers have to stop being technicians and start functioning as the company’s visionary and coach. Learning to delegate is not easy, nor is getting the right people on the bus and in the right seats. Second-stagers often try to promote loyal employees who have been with them since day one, but not everyone can grow at the same speed the company does — something Ed discovered the hard way. Indeed, after a number of unsuccessful internal promotions, Ed began to bring on professional managers, and sales at his company tripled within a three-year period.

Growing to last. This phase is about creating strategic plans, processes and organizational structure in order to scale the company profitably. After Kitty Litter took off, Ed assumed his core business was the pet industry, and he developed a number of related products, everything from catnip-filled mice toys and scratching posts to a chain of franchised pet stores. Then one day a light bulb went on for Ed: He was in the mineral business, not the pet business. Improved marketing and production of his clay-based cat litter became the focal point. Instead of just purchasing clay, Ed began to invest in his own mines, along with processing and packaging facilities, so he could control manufacturing operations from beginning to end. This vertical integration was a critical turning point, enabling Ed to control the shots up and down the supply chain.

Focused opportunities. As second-stage entrepreneurs become more strategic, they get better at recognizing specific opportunities to take advantage of — which can include anything from acquiring another company to expanding their product line. Although Ed created a brand new industry with Kitty Litter, competitors cropped up quickly. One of the ways Ed maintained his No. 1 position was through clever marketing. He was the first to take advantage of television advertising, introducing a cartoon character named Charlie Chuckles in 1977 and later appearing on TV himself as a spokesman. Ed also invested heavily in technology. His was one of the few companies of its time to have dedicated R&D centers, and dust-free versions of Kitty Litter and Tidy Cat were among innovations.

Although these four phases are somewhat linear, entrepreneurs may revert back to a previous stage. For example, if a company decides to introduce a new product or enter a new geographic market, they might need to build a separate team and recruit new expertise.

Yet the point is, second-stagers need different types of assistance at different times. As they move through second stage, CEOs usually begin to seek more targeted help — although the need for peer learning remains a constant. Understanding this framework can help communities and support organizations serve their second-stage companies. In marketing you differentiate among consumers to better understand their needs. With this research, the foundation is differentiating among entrepreneurs to better understand their needs and help them succeed. 

Originally published on LinkedIn March 28, 2017