Mark J. Ahn and Michael D. Meeks explore the paradox of managing high-growth firms

What’s the best advice you ever received? More importantly, did you act on it? Good advice is always welcome, and it’s essential for managing high growth ventures. High growth companies are typically financed with venture or risk capital, seek to create or capture large global markets, rapidly manage scale through global alliances, and are chronically under-resourced.

While recent headline scandals in large multinational firms have placed the focus of governance on controls and fiduciary oversight, the role of Advisory Boards and Boards of Directors in providing mentoring, coaching, access to networks for customers and investors, and other critical support for start up companies is often neglected, particularly in resource-constrained new ventures. Paradoxically, start-up firms are often in the greatest need of advice from sophisticated consultants and experienced executives who are prohibitively expensive to hire full time.

Growing on steroids. To use an analogy from biology, simply working hard and expending energy (or metabolizing) is not necessarily correlated with making progress. In nature, the desired goal is to create an anabolic process (one that efficiently uses energy to combine molecules into larger, more useful and beneficial ones) rather than a catabolic process (one that uses energy but produces no net gain in molecular growth). In business, we suggest that achieving anabolic growth is a function of effective collaboration between management and advisory boards and/or boards of directors which, in turn, enables:

• Compliance (regulatory and legal requirements),
• Contacts (supplier, customer, and investor networks), and
• Content (experienced and tacit strategic knowledge)

to create high performing, high growth companies with sustainable competitive advantage. When it comes to the governance of high-growth ventures, expending energy solely on meeting compliance requirements will leave firms destined to underperformance and increased operating risk.

Anabolic Growth = Strategic Focus + Collaboration

To assess the importance and impact of advisory boards and boards of directors on emerging high performing, high growth companies in New Zealand, we conducted interviews, case studies, and a survey of firms in the Deloitte/Unlimited Fast 50 database of some 351 individuals from 304 companies were asked to identify success factors and specific growth strategies, as well as perceptions of factors that may differentiate New Zealand with respect to capabilities and competitiveness. In addition to the critical importance of compliance, contacts and strategic content, other highlights included:

• Although all participants were from high growth companies, they were not necessarily in high technology sectors. Fast 50 firms come from a wide range of industries including information technology (35%), manufacturing (21%), services (19%), retail (5%), telecommunications (2%), finance/banking (2%), and other (14%)
• 73% of NZ Fast 50 companies responding to the survey had either advisory boards and/or boards of directors, although only a small number were required to have boards in place.
• 98% of firms cited strategic planning as an ‘important/very important’ role for their board members—and ranked strategy development as twice as important as any other board level activity.
• A productive management-board collaboration features an information rich environment where alternative strategies, market validation, and dialogue can occur dynamically (versus having static, periodic, and ceremonial meetings).
• 53% of participants indicated that their boards provide a “very high/high” influence on creating firm value through compliance, industry contacts, and strategic advice.

Four Paradoxes of Anabolic Growth. These results suggest four paradoxes in managing high performing, high growth ventures.

Four Paradoxes for High Growth Ventures

1. Breakthrough IP (intellectual property) often comes from outside the target industry and/or from the slowest moving organizations;
2. Entrepreneurship requires individual courage and is a team sport;
3. Financing covers near-term milestones and you need to build for the long-term; and
4. Plans rarely survive, yet planning is critical to success.

Paradox 1: Breakthrough intellectual property (IP) and ideas often comes from outside the target industry and/or from the slowest moving organizations. For example, since the majority of IP comes from universities and research institutions fraught with bureaucratic processes and comparatively minimal time pressure, using board networks (e.g., advisory board member experts from academia) to assist in obtaining licenses, access to resources, or other exclusivity arrangements can accelerate the technology acquisition and venture creation cycle.

Paradox 2: Entrepreneurship requires enormous individual courage and is a team sport. Entrepreneurs often start new ventures because they have a unique vision of the future and success is often portrayed in the popular press as a singular heroic act. In fact, the anatomy of high performing, high growth firms are often characterized by enormous operating risk far beyond the capacity of any individual or the funding constraints of start-up firms. Thus, Boards of Directors, informal mentors, and advisory board members were all rated as very important to high growth NZ firms because they bring valuable industry experience and functional expertise, as well as a rich network of supplier, customer, and investor networks.

Paradox 3: Nascent high growth firms have limited cash to reach near-term milestones, yet they need to invest for the long-term. In high growth firms, breakthrough technologies are being explored in conditions of limited resources, tight deadlines, minimal diversification, and narrow strategic degrees of freedom—all of which amplify the consequences of strategic choices into near life and death experiences. On the other hand, high growth firms with angel or venture capital investment typically require multiple rounds of financing before IPO or trade sale exit. Thus, building boards to enable future rounds within investor networks requires the continued confidence and engagement between management and institutional investors.

Paradox 4: Plans rarely survive intact, yet a collaborative planning process is critical to success. Nearly all firms expressed large changes in their initial plans, but there was a strong consensus that the process of strategic planning was critical to their success. In this case, strategic plan development was seen as twice as important as any other activity during board meetings—and the area where most wanted to substantially allocate their time.

In addition, for the strategic planning process to be effective, we found two prerequisites are necessary. First, an open, candid and trust-based debate between management and board members is required to explore issues requiring collaborative strategic problem solving. Second, another prerequisite is an information rich environment where alternative strategies, market validation, and dialogue can occur dynamically (versus having static, periodic, and ceremonial meetings). As General Eisenhower reflected, “Plans are nothing. Planning is everything.”

New venture creation is critical for economic development and individual wealth, and the establishment of high value-added industries in New Zealand is essential for national competitiveness. Building a critical mass of high growth businesses in New Zealand is necessary for her economy to prosper. Although it’s a monumental task, building a high growth business without good advice at each step of the company’s growth trajectory is reckless. This study of high performing firms in New Zealand demonstrates that breakthrough growth can derive from a diverse range of sectors, and that systematic collaboration between management and board members is necessary to ensure that the right legal compliance, access to enabling contacts, and strategic content is an effective means to manage risk and achieve anabolic growth.