Turning a small business into a larger one is a huge undertaking – one that isn’t always replicable from business to business.
But although not all small businesses are the same or grow the same way, there are similarities and trends between them that often translate from one to the other, largely depending on what stage the business is in.
The 5 stages of small business growth
If you’re trying to grow your small business, understanding where you stand currently is the first step that will help you develop a strategy for moving yours up and to the right. Here are the five stages of small business growth and the key things you need to focus on to move yours to the next one.
Stage 1: existence
Businesses in this stage are just starting up and primarily worried about customer acquisition/finding product-market fit. They are typically small organizations run by one or two owners/founders and have minimal business systems in place, if any.
Does anyone want what we’re building?
Who wants what we’re building?
Can we build it well enough to sell it?
Can we create cash flow?
Businesses in the existence stage fail often: 20% in the first year and 50% in the first five years. This is usually because there simply isn’t a market need for their products or services, according to research by CB Insights.
The primary goal for businesses in stage one is to determine if the market wants what they are offering (and generate cash flow) before capital runs out. Businesses that do this successfully move onto stage two seamlessly.
Businesses that reach the survival stage are typically still small, tightly run organizations with minimal business systems. However, they have found a customer base that is willing to pay for their products or services and are able to satisfy them sufficiently for repeat business.
Can we generate enough cash flow to break even for now?
Can we generate enough cash flow to break even indefinitely at our current state?
Can we generate enough cash flow to generate a return?
Businesses who have reached the survival stage often fail because they cannot sustain the cash flow they have created. Their primary focus at this stage is building a stable business model that will allow them to break even short-term and then long-term.
Many small businesses stay in stage two for the duration of their existence, scraping by on meager margins. However, to move onto stage three, a business should focus on developing enough cash flow to generate a return (profit).
Once a small business has begun to generate a profit, the owners face a decision: what do they do with the profit? Most owners will use it for one of two things: to fund other things (personal or business) or to reinvest back into the company to grow it further.
What systems do we need to build to keep the business profitable?
How do we hire the right staff to help us achieve our goals?
How do we finance future growth, if that’s our goal?
Businesses that fail during stage three do so because the profitability they’ve developed crumbles, often reverting back to stage two. For owners who choose to use profits to fund other things, this often means an external market shift. But for owners in stage three that choose a growth track, failure often occurs because they neglect to develop the systems and staff to sustain the business while they attempt to do so.
Businesses who choose not to grow further should focus on sustainability and systems, whereas businesses who desire to grow further need to focus on finding resources (financial and staff) that can help them do so, in addition to maintaining sustainability. Businesses that do this successfully move to stage four.
Businesses that reach the takeoff stage are growing exponentially and management of that growth becomes the top priority. Businesses at this stage become more decentralized, creating challenges smaller businesses do not face.
How do we hire the right people quickly to keep up with demands?
How do we manage rapid growth internally?
How do we fund further growth?
How do we avoid growing too quickly and overextending ourselves?
Businesses in stage four are often described as “rattling rocket ships” and are growing so rapidly that if not managed properly, they could end up collapsing altogether.
Owners of businesses at this stage face the reality that they can no longer be involved in everything due to the complexity of the organization and the speed at which it is expanding. Delegation of responsibilities to talented management staff who can carry the torch is key.
Stage four businesses should focus on a growth strategy to fuel expansion sustainably. Outside investment is a common business funding strategy that many companies use to help them scale at this level, as well as find ways to increase demand through brand awareness and marketing. Those that survive the “rattling rocketship ride” move to stage five.
Rapid expansion doesn’t last forever, and businesses entering stage five face the reality that their growth is slowing. Businesses that reach this stage have well-developed systems and sufficient resources (both financial and human) to start focusing on stabilizing in orbit rather than worrying about reaching it.
How do we stabilize and streamline our operation for the future?
How do we keep our team engaged, even though we’ve slowed down?
How do we stabilize without losing sight of the importance of innovation?
How/where do we find new markets to grow into?
Businesses that reach stage five often fail because they lose momentum. Their teams become complacent and the business stops “playing to win” like they did when they were younger and scrappier.
Businesses that thrive in stage five and beyond focus on developing rock-solid systems and management structures that provide stability, while also remaining nimble in light of market changes. They find ways to innovate and stay hungry like a smaller company but at scale.
It’s easy to think that what has worked to get your business where it is today will always work. However, some strategies and tactics simply do not scale. So as you’re trying to reach the next stage or milestone, remember: what got you here likely won’t get you there.
Make sure you have all of the resources you need to grow your small business. See 30+ insights on G2 and help increase your profitability and knowledge!
Scott helps entrepreneurs and small business owners use their expertise to drive sales conversations with content. When he’s not laboring over the perfect headline, you’ll find him surfing, diving, or searching for the best tacos in San Diego.