By Minda Zetlin
Ten years ago, Reggie Bradford started Vitrue, a provider of a web-based platform that companies such as Weather.com and CNN used to let customers and other users upload videos to their websites. But as usage grew, Vitrue’s technology proved unequal to the task. “It literally shut down based on substantial load,” Bradford says. “We were working with three large publishers, and they all fired us within a month or two.” Then the Great Recession hit. Vitrue seemed headed for oblivion.
It’s one of the major challenges that often plague small-to-medium businesses (SMBs) and startups: neither Vitrue’s business model nor its technology was especially scalable. Given the constant challenges of startup life, Bradford had little time to think strategically about his company. Instead, he made another common SMB mistake. “We tried to plug everything in that customers wanted us to,” he recalls. It was one reason systems buckled under a heavier traffic load.
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But Vitrue was Bradford’s third startup, and as a seasoned entrepreneur he understood the importance of cash. And so, even though he’d just received US$10 million in venture capital funding intended to be used to expand the business, he retrenched instead. “We went into cost-saving mode,” he says. “We went from 86 employees, including offshore contractors, to 20.”
The company stopped adding new clients for six months while the IT team created more-robust systems and the executive team planned a pivot. What emerged at the end of 2008 was a new version of Vitrue—a cloud-based platform that social networks could use to help brands market to their users. Bradford pitched the concept to Facebook COO Sheryl Sandberg, and she signed on. “Then they came out with Facebook Pages, and we began selling to enterprise customers left and right,” he says. Twitter, Pinterest, and Instagram soon became partners as well. The company grew quickly, reaching 180 employees by the time it was acquired by Oracle in 2012 for US$300 million. Bradford is now senior vice president of Oracle’s Startup Ecosystem and Accelerator Group.
Vitrue’s story is a perfect illustration of what can go wrong when startups and SMBs encounter the obstacles that typically bedevil small companies and how smart leaders can overcome them. Here’s a closer look at some of the biggest challenges.
Challenge 1: People
Hiring needed talent in a tight labor market is difficult for companies of every size. But it can be especially tough for small companies, because they lack the deep pockets and marquee names of their larger competitors and often can’t match a larger company’s salary or perks.
At the same time, the stakes are higher. “In a small business, every contributor makes a difference,” says Deborah Sweeney, CEO of MyCorporation.com, which provides online document filing services to startups and small businesses. Originally a division of Intuit, the company was spun off in 2008 and now has 52 employees. Hiring someone “can be super positive, like when you find people who have grit and a great mindset,” she says. “But a bad apple can have a very negative influence very quickly.”
This is why many small business owners put a great deal of time and effort into every hire. Marc Prosser, cofounder of FitSmallBusiness.com, a website that publishes content for small business owners, says he reviews more than 400 résumés for every position he fills. At MyCorporation.com, Sweeney and her team interview every candidate multiple times: over the phone and in person and in informal situations as well as office settings. She tries to have people from every level of the company involved in the interview process.
Hiring, she adds, is something few entrepreneurs get right. “In my observation, they tend to be a little whimsical in their interview process and then they cross their fingers,” she says. They also tend to hire people like themselves. “That’s not the greatest,” she notes. Because Sweeney herself tends to react quickly to challenges, she tries to hire people who are calmer and more analytical, “so not everyone on my team runs when I say, ‘Let’s run!’”
How do you get people to want to work for your SMB? Many small businesses use their culture as a selling point—for instance, MyCorporation.com is a freewheeling place where people have dance parties when paychecks are handed out. “The other day we had Hungry Hungry Hippos and balloons,” Sweeney says.
At Vitrue, Bradford overcame some hiring challenges by partnering with nearby Georgia Tech and Morehouse College to recruit recent grads. He looked for the right attitude and when he found it, “we were not afraid to bring in very young, inexperienced employees to train up,” he says.
Once they have new skills, these young employees may leave for higher-paying positions elsewhere. “You’re training people who will then get sucked up by Google or one of those places. You’re sort of a farm,” Bradford says. But he doesn’t resent it, noting, “They can go elsewhere and literally double their salaries.”
Challenge 2: Money
How do you find the capital you need to launch, grow the business, and survive the times when you’re not making a profit? Venture capital funding comes with a downside, because investors are always looking for an “exit”—either that you will be acquired or take the company public—usually within five to seven years. Bradford says that’s a trade-off he was willing to make. “I always had this philosophy that I would rather have a small piece of a big pie than a big piece of no pie.” However, venture capitalists will only consider companies that have the potential to grow to hundreds of millions of dollars.
In a small business, every contributor makes a difference.” –Deborah Sweeney, CEO, MyCorporation.com
Other alternatives include business loans (if you’ve already been in business for a few years and have solid revenues); financing from the vendors you work with; or taking out personally guaranteed loans, such as a home equity loan. If you have good credit, that’s a viable option, but a risky one. “If the business fails, not only has it failed, but you’ll spend a long period of time paying it back,” says Prosser.
Then there’s bootstrapping—starting a company without any outside capital at all—something that’s a lot easier today than it was in past decades, given the wide availability of inexpensive cloud-based services. That’s how FitSmallBusiness.com got off the ground. “The startup cost for an internet business is very small, so my partner and I could start out basically with sweat equity,” Prosser says.
Any funding is a precious resource to be used with care. “It’s so hard to decide where to spend your money as a business owner,” Sweeney says. A former Intuit executive, she quickly learned that small companies need to manage resources more carefully than large ones. For example, Intuit often hired outside counsel for its legal work. “I realized that was going to be very expensive,” she says. A lawyer by training, she decided to do the legal work herself, adding to her already full plate as company CEO. It took a lot of her time, but it saved MyCorporation.com around US$200,000.
“First and foremost is cash flow,” says Sri Gaddam, founder of ERPA, an Oracle Platinum Partner specializing in Oracle’s PeopleSoft, Oracle Database, business intelligence, and big data solutions and the author of Destination Success: Discovering the Entrepreneurial Journey (Morgan James Publishing, 2017). “Some entrepreneurs get very passionate, they run out of cash, and then they’re out of business,” he adds.
It’s hard to know not just what to spend but also when to spend. Let’s say you see a business opportunity your company can take advantage of—if it hires new employees. “If you are too early, you could wind up running out of cash,” he says. “If you wait too late, you lose the opportunity.”
Challenge 3: Technology
Which technology to buy, how much to get, and when to get it are other challenges small businesses frequently face. “Technology should make life easier, not more difficult,” says ERPA’s Gaddam. “You should be able to do more with fewer people. If technology is not helping you to do that, or to do things faster, then you don’t need it.”
It’s often worthwhile to hire a consultant to give you some perspective on technology options. “For a long time, I tried to resist that,” Sweeney says. “Eventually, I realized I would be more successful paying someone [US]$10,000 up front to figure out what was going on than continuing to pay developers basically to tread water.”
These days of cloud-based everything can help put small companies on an even playing field with large ones, Bradford adds, and they should take advantage of cloud and as-a-service offerings as much as possible. “There are greater capabilities and lower cost, and that’s where all the R&D is happening,” he says. “You’re going to get the best upgrades and the best path to the future. You always want to future-proof your technology.”
Challenge 4: Growth
Once you have a successful business, scaling can present a whole new challenge. “I work with a lot of companies around the issue of growth,” says Jeff Skipper, CEO of Jeff Skipper Consulting, who has advised such companies as IBM, AT&T, and Goldman Sachs, as well as small and startup companies. “They’re growing, they’re making lots of money, but at some point there’s a switch between operating a small ad hoc business where everyone is helping to get everything done, to a different level. I see a lot of small businesses struggling with this transition.”
That happened to ERPA. “When we started our business, it used to double every year,” Gaddam says. “Once we hit [US]$10 million in annual revenue and 100 employees, people started talking about standard operating procedures and key performance indicators. I had to hire salespeople, which was a challenge for me.”
In response, Gaddam completed an executive MBA program, followed by the Owner/President Management program at Harvard Business School. “Everyone doesn’t need to do that, but if they look three to five years ahead at what’s coming, they’ll know they need to learn,” he says. That learning can happen outside of a formal educational program by joining a trade or professional group or learning from customers or suppliers. But it needs to happen. Successful entrepreneurs must keep on learning; otherwise, they might not be the leaders their startups need for the long term. “Companies can outgrow individuals,” he says.
Illustration by Wes Rowell
Minda Zetlin is coauthor, with Bill Pfleging, of The Geek Gap: Why Business and Technology Professionals Don’t Understand Each Other and Why They Need Each Other to Survive (Prometheus Books, 2006).