I first read Geoffrey Moore’s bestselling book, “Crossing the Chasm,” many years ago when I worked in IT.(1.) It was, and to many, still is the seminal book about the challenges high-tech companies face when trying to grow from a startup technology to a mainstream product. The “chasm” Moore references in the title refers to the adoption lifecycle of a technology and the difficulty that companies face when they try to move their product from early adopters to the mainstream, where most sales occur. According to Moore, this “chasm” is where most high-tech ventures fail.
Since moving beyond IT and working with clients in other industries, I am continually reminded of Moore’s book and its relevance beyond the high-tech world. From my experience, I believe there is a “chasm” that most companies must cross in order to grow. Whether it is the hot new brand that currently appeals to a few trendy consumers that must somehow find a way to maintain that freshness while also appealing to a broader market or the manufacturer/wholesaler who needs to expand distribution beyond servicing a single, large customer on which the company was founded. Or it could be the retailer who is looking to grow from a few select stores into a regional or national chain. All of these companies face similar challenges to those of the high-tech companies Moore describes in his book. Some companies manage the transition better than others, and the “chasm” may seem more like a ditch, easily crossed. To others it may be more like the Grand Canyon, which they may never cross.
As a lender, when assessing a new deal or a current portfolio company that is moving into the mainstream and projecting significant growth, you need to identify the growth challenges that the company faces and the strategies they are planning to execute in order to address them. Only then can you better assess the size of the “chasm” and ultimately decide if the company will be able to cross it (or not).
Focus on a Single Market
In his book, Moore advises high-tech companies to focus on a single market in order to cross the chasm; then, they can strategically move into other complimentary markets. This applies to non-high-tech companies as well. Markets can be defined in many ways: whether it is a customer segment, a geographic area, or a distribution channel. All too often we see entrepreneurial companies try to tackle everything at one time. This may be a retailer who decides to start an e-commerce site as well as a brick-and-mortar business, or a distributor who tries to ship internationally in conjunction with their domestic business. Sometimes, there is pressure to grow revenue at a certain rate. Other times, it is the “throw it against the wall and see what sticks” approach. However, these extraneous markets can actually be a drain on a business early on, distracting the company and tying-up resources that could otherwise be deployed to build the company’s core market. Once the core market is established, the company can then more easily branch out into other markets within the mainstream in order to grow sales.
If you start to see new issues arise in areas that are core to the business, such as issues with product, shipping, or A/R collections, these may be signs that the company has expanded too quickly.
Things That Were Once Beneficial Can Become Liabilities Later
Moore states that the purpose of a business post-chasm is to make money, but this is not the case pre-chasm. Pre-chasm, he asserts, is to prove customer demand. While most companies that do not have sponsor backing are looking to make money or at least breakeven from the beginning, early on they are really just looking to make sales and get their name out in the marketplace. In order to do this, they develop processes and policies that work in the beginning but cannot scale or actually become liabilities as the company grows. It may be the wholesaler who offers extreme discounts or even consignment deals in order to get placement, the manufacturer who makes custom products and/or packaging for every client, inflating their SKU count exponentially, or the retailer who has a liberal return/exchange policy in order to build their customer base. All too often, companies get trapped by these initial offerings and feel that they cannot easily change them as they enter the mainstream. However, as companies grow, these processes and policies must change so that the company can right size expenses and plan their business accordingly in order to make money.
If you notice core metrics that are not in alignment with industry benchmarks, such as margin, returns, or SKU count, this could be a sign that the company has policies in place that need to be changed before they can grow.
Moving From Pioneers to Settlers
Just as policies and procedure must change as a company grows, so must the people. As Moore refers to it, the people must move “…from being pioneers to becoming settlers.” Entrepreneurs have a special personality. It is what drives them to start business after business, even if their prior endeavors have failed. It is what allows them to work endless hours to build something from the ground up. However, it does not always allow them to be the best managers of a business, once it’s ready for the mainstream. That drive to make a sale no matter what or to launch the next “hot” thing no matter the expense can be a detriment to a company. I am not necessarily advocating removing the founder of the company. In fact, several studies show that companies that retain the founder-CEO outperform those that do not. (2.-3.) However, their roles and responsibilities may need to be redefined. New personnel may need to be added to counter the founder’s natural tendencies, bolster his or her weaknesses, or fill need gaps that were not critical when the company was younger.
If turnover is high with senior leadership, company personnel in key positions are weak, or strategic positions go unfilled for long periods of time or are eliminated, there is possibly an issue with the founder-CEO that needs to be addressed before the company can truly grow.
Have a Good Set of Knowledgeable, Independent Advisors
One area that Moore did not mention in his book, that I believe is probably most critical to any young business that is looking to grow and cross their “chasm,” is to have a set of knowledgeable, independent advisors. Whether it is a Board of Directors, a mentor, or a trusted business professional, every entrepreneur needs someone they can turn to and get an honest opinion. These advisors can identify when a market is not profitable or the right one to enter, or they can determine if the policies and processes in place are not the correct ones once the company is in the mainstream. They may also see a need to bring in a new c-level employee or council a founder-CEO on when is the time to take a step back. Advisors can identify issues within the company and provide an unbiased opinion.
Knowing who the advisors are and their abilities can also help you to determine if the company will successfully cross the “chasm” from early adopters to the mainstream.
ENDNOTES:
- Moore, Geoffrey. Crossing the Chasm (New York: HarperCollins, 2002).
- Renee Adams, Heitor Alemida, and Daniel Ferreira, “Understanding the relationship between founder-CEOs and firm performance.” Journal of Empirical Finance 16 (2009): 136-150.
- Del Jones and Matt Krantz, “Firms, investors tend to prosper with founders at the helm,” USA TODAY, August 22, 2007 (http://usatoday30.usatoday.com/money/companies/management/2007-08-21-founder-ceos_N.htm).