What the heck is a second-stage company?
The definition of “second stage” in business is a company that has 10-99 employees or $1M to $50M in revenue. But the real hallmarks of second stage are the almost universal growing pains that these companies experience as they scale. We have identified the most common themes and pains that early second-stage and late second-stage companies face, especially when it comes to managing changes in focus, positioning, and branding.
It was the signs, symptoms, and stages they described.
As I read about what second-stage companies face, suddenly the pain I was feeling as a business leader made sense. Maybe I wasn’t just a terrible CEO. These were growing pains…a byproduct of success.
It finally brought into focus that I was applying the same skills and tools that made me successful when we were smaller, without realizing that the size and maturity of my company meant that I needed different skills and different tools in order to have the same success at this new level of complexity.
Over the years working with second stage companies, we have identified two kinds of second-stage companies, early second-stage and late second-stage, both with some unique pain points.
Early Second Stage: A New Emphasis on Scalability
Early second-stage companies are usually owner/founder-led, with between 10-50 employees. In early second stage, there are three areas where major pain abounds.
Most early second-stage leaders experience delegation pain on two ends of the spectrum: the stuff they love and the stuff they hate.
For the things they love doing and excel at in the business, they will find it difficult to articulate exactly what is in their heads. In brand and marketing, this often happens when branding comes very naturally to the business owner/founder. They automatically infuse branding best practices and a unique voice or design aesthetic into everything they do. When they delegate it, it all of the sudden “doesn’t look right” or “doesn’t sound right” and fundamentally isn’t as effective, because it isn’t them.
For the things they hate doing and don’t have expertise in, the owner/founder will delegate it too quickly, often to the first person who shows interest and/or aptitude, and with very little direction or oversight. In brand and marketing, the first person who shows interest in managing the website or the social media accounts will get tasked with marketing, and will be given no plan to follow or framework to work within. They are often allowed to do or try whatever they want, and then when it doesn’t work, the owner’s response is: “See, I told you marketing just doesn’t work in our industry.”
The fundamental issue is that, whether it is trying to delegate the things they want to keep or the things they want to avoid, the delegation is not being done clearly and effectively. There is no shared vision of success and no clear understanding of what is off-limits and why.
In early second stage, leaders begin to realize that the company has gotten more complex, and needs specialized expertise in order to solve some of the challenges they are facing.
One of the pains they face in this is that they often won’t exactly know what they are asking for experts to do, or they might ask for the wrong kind of expertise.
One recent experience I had with an early second-stage business owner captured both of these pains simultaneously. This business owner was convinced that she needed a marketing strategy and plan developed to accelerate the companies growth. She was talking to several different providers of these services, and getting a wide range of costs that was confusing. I was trying to help her compare apples-to-apples and discern what might be the right fit mix of services and deliverables for her goals.
After about 20 minutes of conversation, though, I learned that the “expert” she had contracted with to manage her Amazon account was doing a terrible job, and that her sales and brand share on Amazon were in rapid decline. It was clear that even if she invested in marketing, it would be wasted time and money until the Amazon problem was solved. Once we had identified this core issue, I redirected her to a trusted friend at an Amazon brand accelerator.
This business owner was doing everything right in theory, but she simply didn’t know what she should be asking for, how much it should cost, or how she should judge success. And it makes sense. She was an expert in her product, not Amazon or marketing.
At its worst, this pain point hits home when an early second-stage company gets taken in by a great sales team that can’t deliver on its promises. It can be a costly mistake, and also one that then makes the company twice-shy about engaging outside experts in the future.
Advice and recommendations from trusted advisors and peer groups becomes the easiest way to manage this leap from working with generalists to working with experts.
Consistency is absolutely essential to building trust, both internally with employees and externally with customers. It is also one of the areas in which early second-stage companies struggle the most.
Early second-stagers are still working on creating and fine-tuning processes. They often don’t have the right people completely in the right seats. The owner/founder is still pulled into the day-to-day even while they are trying to spend more time as visionary and coach for their team.
The result of all of this is a lack of consistency. Internally, employees grow frustrated with the lack of clarity, boundaries, and what might feel to them like “moving targets” as they try to focus their own efforts and perform well. Externally, customers might hear and see mixed messages about what the company’s focus is, or might experience major swings in product or service quality.
Internally, the inconsistencies can be especially difficult to navigate because owner/founders are likely the source of many of them as they navigate the transition from “teammate” to “coach.” It becomes difficult for employees to point out the inconsistencies that they are hearing or observing, either because they are fearful of embarrassing their boss, or because they think that the leader is more aware about it than they are. Inconsistencies can be read as intentional, which further undermines the lack of trust, and can lead to a toxic internal environment.
Externally, the inconsistency is unlikely to cause the kind of turmoil that it does internally. Instead, the symptoms will more likely be stagnant growth, difficult sales, and an ineffective marketing budget. If potential customers aren’t clear about how the brand relates to them and what its value is, they won’t buy.
Takeaways for Early Second Stage
For early second-stage companies, the focus needs to be on:
- Getting clarity on what success looks like for all stakeholders.
- Finding trusted advisors to connect you to the right experts at the right time.
- Identifying and quickly mitigating inconsistency, both internally and externally.
Late Second Stage: Tension between the Past and the Future
Late second-stage companies are usually led by a CEO brought in as a change agent, or a next-generation in a family business, with between 50-100 employees. In late second stage, pain arises from two major areas.
Fear of loss
Whether we are talking about family business or simply an enduring privately held company, the stakes of failure are higher the larger the company gets and the longer it is around. Nobody wants to be the one who puts a long-standing business or brand out of business. Plus at this level, the company is likely a visible and important part of the community or its industry. More people depend on the company as an employer, supplier, or customer. It is firmly part of an ecosystem in a way that a younger company is not.
Also, it is likely that there are stakeholders in the company who have a strong fear of loss around certain elements of the company, the brand, or the customer base. Often, these companies were established for a specific purpose, market, or customer that has shifted over the years. In order to make sure that the company endures for the decades to come, some amount of repositioning and reorganization is needed. This can come in the form of strategic mergers or acquisitions, rebranding, product innovation, or simply new leadership with a new strategic vision for the future.
One of our clients is a family business that was founded with a bookkeeping and record-keeping focus, which gradually and organically evolved over the years into printing capabilities, and then evolved again into developing priority technology that can be used in the fast-growing security market, which was where all of their new customers and opportunities were coming from.
Even though the business case was clear, it became a difficult decision to change the original name of the company and to clearly state this new focus. There were still legacy customers who used some of the original products and services, and who had been with the company since the beginning. The fear of looking ungrateful, or abandoning the past is a real factor for late second-stage companies.
This same fear of loss can show up internally as well, as these companies probably also have employees who have been with the company, sometimes for decades. These loyal employees are often the ones that often resist change, or can lack the skills needed to propel the company forward.
It is also important to understand that late second-stage companies live in a place of constant tension between the past and the future. Even though certain elements of the company or the brand need to change, there are also elements that have made the company successful and that need to be preserved.
Change agents in late second stage companies need to walk into the company humbly and looking for what needs to be preserved as much as what needs to be changed. If you can identify the “DNA” (Do Not Alter”) of a company, it can go a long way to mitigate the fear of loss, and also to make the new growth much more efficient and effective because it is building on a firm foundation of success instead of starting from scratch.
Lack of alignment and communication
Since late second-stage companies are honing in on a clear focus for how the company will scale and compete profitably in its “next generation,” they are becoming more and more strategic and visionary. Late second-stage leaders need to make bold strategic moves, like geographic expansion, vertical integration, opening new markets, acquiring new companies or brands, and forming strategic partnerships.
This kind of visionary leadership coupled with the fear of loss described above can lead to a fundamental lack of alignment. To make matters worse, late second-stage leadership teams find themselves misaligned on two fronts, with a board of directors or ownership group and with the employees they are leading.
The cost of this misalignment is huge. Most often, it means that the visionary leadership that the company needs to survive and thrive in its next stage will be thwarted either from “above” by the board or “below” by the employees. But in both cases, it is both predictable and avoidable.
When we do brand strategy and execution work with late-second stage companies, we know that the process and the communication of that work is even more important than the work itself. We carefully engage all stakeholders (internal and external) in the work from the very beginning and have mapped out clear milestones when more communication and engagement are critical for success.
At the end of the day, leading a late second-stage company is a fundamental exercise in change management. For legacy customers, legacy employees, or a board of directors, the solution is always the same: Create a clear sense of urgency for why change is needed, and then clearly and consistently communicate how and why the change will happen. It is also important to celebrate the successes that the company while the change is in process, which will help to keep the momentum going and reinforce the benefits. We build in these moments as part of the process because we know how critical they are for success.
Often late second-stage leaders know who the champions of change will be and they know who the nay-sayers will be. Usually, the impulse is to engage the champions and avoid or steamroll the naysayers, but all it takes is one or two disgruntled employees or board members who feel like they have been left out of the loop to undermine the brand from the inside out. Instead, we advise working with these factions to find out what is important to them, what they are fearful of, and how we can be respectful of that in the process, even if it doesn’t alter the ultimate vision or outcome.
Takeaways for Late Second Stage
For late second-stage companies, the focus needs to be on:
- Acknowledge fear of loss and fear of failure as strong barriers to change that must be directly addressed for established and/or family businesses.
- Identify the “DNA” (Do Not Alter) of the company and brand and use it as a foundation for growth and change.
- Engage all stakeholders in a change effort early and often, especially if they don’t agree with the change being made.
Wrap up: The Strength of Second Stage
While the pains of second stage are familiar, predictable, and real, so are the strength and resilience of these companies.
Second-stage companies make up 17% of the companies in the U.S., but create 36% of U.S. jobs. They are often dedicated to the local communities where they were founded and are likely to bring growth and economic opportunity to these areas that would not come from enterprise-level organizations.
Second-stage companies are tenacious. They have likely survived more than one economic downturn. They have evolved their products and services as the market has evolved. They are often family businesses with a fierce dedication to their employees.
A client once told me that the definition of second-stage success is better problems. If you are the leader of a second-stage business, yes, you should take a moment to realize that you are not alone in your pain. But you should also realize that these new, “better” problems are also a marker of your success, your hard work, and your growth, not just as a company, but as a leader.
So here’s to better problems!