The Incredible Second Stage Company
According to the Edward Lowe Foundation, second stage companies (loosely defined as companies which have survived startup and are ready to add a level of managerial employees, all the way up to about $50 million in sales), comprise only 5 percent of total US businesses but account for a whopping 85 percent of new jobs.
That’s a staggering statistic, but it makes sense. Second stage companies are definitely where the growth is. Let’s examine why for just a moment:
- Most obviously, a second stage company has survived the startup phase. In order to get to this point, there is clearly demand for the goods or services provided by the company, along with the managerial ability needed to survive those difficult early days. Second stage entrepreneurs are creative, driven, and hard working. They’ve also usually benefitted from a bit of luck along the way.
- Once past the startup phase, these entrepreneurs are interested in growth. If an entrepreneur is not interested in growing, then they would not necessarily be classified as a “second stage” business, but as more of a “lifestyle” business.
- Second stage companies are of the size that interests lenders and outside investors. They have a track record, which outsiders are now willing to back in exchange for a financial return. Very few companies are backed by outsiders for more than token sums of money at the startup phase. Second stage is where the real fun starts.
Ironically, the skills needed to run a second stage company are often quite different than those needed to be successful in a startup. Entrepreneurs at this
stage often struggle with the transition. (I am excepting here those businesses that are started by experienced entrepreneurs who have already run a second or even third stage business). Here are just a few of the differences:
- In a startup, the entrepreneur must wear a lot of hats. The Company is run by the founder(s) and a few dedicated employees. I’ve heard this referred to as the “high performance cheap labor model”.
- In a second stage business, professional management is needed to handle the growth. This brings all sorts of challenges in the way that the entrepreneur manages the business. He or she now must hire, fire, delegate, and lead. These are skills that don’t necessarily come naturally to many of us.
- In a startup, the entrepreneur is often worried mainly about survival.
- In a second stage company, the entrepreneur becomes less worried about survival, but now must manage the challenges of growth, and the problems that are encountered are quite different than those that he or she had to solve during the startup phase.
Second stage companies often share one characteristic with startups: very tight cash flow. This means that as they run into issues, they cannot necessarily afford to hire more and more high level personnel, or contract with expensive outside consultants. Startups benefit from many free and reduced costs services in most communities such as SCORE counseling; Small Business Development Centers; Chamber of Commerce offerings, and the like. However, most of these services are not geared to the specific needs of second stage businesses.
Research from the Kauffman Foundation has shown that businesses in this stage of development, second stage, learn the best from their peers — the people who have “been there, done that.” These individuals often become their most credible sources for information and insight as they share similar responsibilities, stresses, opportunities and a passion for growth.
This process of peer learning helps second stage entrepreneurs navigate this stage successfully by making better decisions and being accountable to their peer group. It’s lonely at the top!
You can read more about the Edward Lowe Foundation and their programs supporting second stage entrepreneurs here.
