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Verne Harnish

Founder of the Association of Collegiate Entrepreneurs, the Young Entrepreneurs Organization, the Birthing of Giants, and the Master of Business Dynamics. Moderator for the Fast Growth Network. Washington, D.C.

How Fast?? When Verne Harnish launched the Association of Collegiate Entrepreneurs back in 1984, most young businesspeople were hocking used books and pizzas. A few young standouts like Steve Jobs and Michael Dell, however, were beginning to catch the national eye. And Verne Harnish was there holding the monocle. Since the mid-1980s, he has identified hundreds of rising stars, and helped countless others — in China and the U.S. — reach those heights themselves. Today, he is head of the Young Entrepreneurs Organization and reigning expert on TV on the Web’s Fast Growth Network, profiling the men and women behind the new economy’s fastest growing companies and spreading the wisdom of his Fundamentals for Fast Growth” checklist. Verne Harnish was also recently appointed by the Secretary General of the Organization of American States, to chair the Millennium 1000 Award, which will identify and honor the top 1000 young entrepreneurs 35 and under in the Western Hemisphere.

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What numbers do you use to define fast growth companies?

The real authority on that is Dr. David Birch over at Cognetics in Cambridge, Massachusetts. He’s the one who actually coined the term Gazelle — the good health in the economy. And so generally speaking we target that number as first five to 100 million in revenue, doing at least 20 percent a year growth. They’re the real job generators of the economy. Everybody misunderstood David and they thought he said small businesses are all the job generators. And it’s really just 15 percent of those small businesses that are the gazelles in the economy.

How have you seen just the sheer number of fast growing companies — Gazelles — increasing with the Internet boom?

It’s an unbelievable contrast to back in the early ’80s, when it really was not fashionable to be a young entrepreneur. We constantly got folks from the college kids and the like saying, “When are you going to get a real job?” And that wasn’t even a joke. I mean Steve Jobs really was the first to come along and start to legitimize that a young person could build any kind of a significant company. And back then still, you got a lot of kind of vanilla-flavored companies, so to speak. There were more traditional things like Neil’s closet business and Julie’s yogurt business. And lots of them had pizza chains on their college campuses and stuff like that. But today, you’re able to — because of technology — launch significant companies before you’re 20 in many cases. So there’s no doubt that the cliché that we had a change in the foundation of the economy causes that to accelerate is just fact. And that’s what we see.

What do you find are the most common problems facing fast growth companies?

You really do have to discern between small business and fast growth companies. They tend to get lumped together. I actually kind of draw a chart in this program I do up at MIT where 96 percent of the companies are really just one to three employees. And then there’s quite a gap, which only puts about 4 percent of the companies in the U.S. ever make it north of a million dollars in revenue, which was the criteria we set for the MIT program and the criteria we set to get into the Young Entrepreneurs Organization. But there’s actually 90 percent of the companies that get north of one million, but don’t get much further than about three million in revenue.

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There’s only about four-tenths of one percent of all companies that ever gets around the ten million mark or larger. And then there’s only about 20,000 firms that are somewhere north of 50 million in revenue. And then, of course, there’s the Fortune 2000 and the Private 500 companies, and they’re something north of three to four hundred million in revenue. So it gets elite fairly quick. It depends on where you are in that growth cycle. From startup to about a million in revenue, your biggest issue is just revenue. You just have to figure out that you’ve got something enough people want that it can get you up to that kind of critical mass of a million bucks where you can start to afford some overhead and structure to build the company.

Between one million and ten million in revenue your biggest issue – and by the way it’s not like revenue’s not important all along. It’s always important, but it’s particularly important in that first stage. The second stage – cash is always important, but it is particularly important between a million and ten million, because that’s when you’re trying to figure out what you want to be when you grow up. That’s actually when you’re going to grow faster just because of the sheer numbers – between a million and ten million, than you’re ever going to grow in the history of your company. It’s the equivalent of when you go from being a five-year-old to a 15-year-old — you grow a bunch and you just need to survive the mistakes of your youth. And the equivalent of that in business is surviving all of the things — all of the trials and tribulations of trying to figure out what you want to be when you grow up, and you just can’t run out of cash. Now when you get over ten million in revenue — ten million to about 50 million in revenue — it’s all gross margin. You’ve always had competition, but it really becomes fierce when you add that extra zero to your revenue.

Ten million and north and you’re going to get lots of price pressures. The biggest problem from 10 to 50 million is getting your operations going so cleanly that you can reduce price and still maintain your margins.

Then between 50 million to about 300 million, which is the Sapients of the world and those hotshot companies in Boston, by that point you’d better figure out how to predict your profitability. It doesn’t have to mean necessarily you’re profitable, but you’d better be able to predict your profitability on a real regular basis. That’s why most companies don’t go public until they’re something north of 40 or 50 million.

What are some general stumbling blocks that pervade all fast growing companies?

We actually say there are three big issues in growing a company. Number one is the inability for the leadership to grow in the company. That’s first, second, third, tenth. As goes the leadership goes the rest of the company. And the fundamental issues around leadership is your ability to delegate. Said another way, it’s your ability to know how to let go properly. And you can’t just abdicate. It’s got to be that you really know how to delegate. I have a process of staying in touch and coaching you and growing you and developing. As Fast Company has said, the fundamental job of leaders is to create more leaders.

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The second biggest issue is your ability to get systems and structures in place, to handle the complexity as you arithmetically add people. You geometrically increase the complexity. Said another way, everything was fine at 39 employees. And you get the 40th employee and you swear things are twice as complex. And from a mathematical perspective, they are because that’s just how it works. And so what happens is when you’re small, you can trust your guts. You can hold things in your head. Now it’s gotten big enough that that doesn’t work for you anymore. And so you’ve got to upgrade your accounting systems, you’ve got to upgrade your information systems. You’ve got to start getting more formal in your organizational structure and accountability. And these are things that often the entrepreneur fights, because it’s not entrepreneurial. And that’s what cam limit them.

Number three is the effects of the market. As you grow, your effect on the market and the market’s effect on you are in a rapid transition. For instance, when you’re under a million, there’s no concept of market. It’s like, “I’ve got to go get seven customers.” And in this vast world, there is not competition. You can pick up scraps if you’ve got any kind of moxy. From a million to ten million — now you have to think about handling bigger customers. From ten million to 50 million — now you have to start thinking about your positioning against competitors. For the first time your executive team’s got to sit around and you have to start formally plotting strategy relative to competition and the marketplace. And then above 50 million, you actually have to care what Alan Greenspan says. The economy can shift a few percent and that can make you swing a million bucks all of a sudden. And you can’t put that on credit cards like you did before.

Tell me about your “Fundamentals for Fast Growth” checklist.

I hate to use the analogy, but it really holds true. It’s now coming out fairly clear that the Arkansas plane crash was simply due to the pilots ignoring their checklist. And in a real sense, we feel that strongly about this checklist. This is the kind of checklist of things that need to be in place or you can risk crashing. It doesn’t mean you crash, but you’ve got a much higher probability of crashing if you don’t follow the checklist. That’s our analogy.

Why is it very important for companies to identify their core ideology, to keep those ideologies close at hand?

You must bring them alive. Not just have them – you may have them close at hand, which is a poster on the wall or a little plaque on the desk, but that’s not anywhere near bringing them alive.

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What are some of good ways to bring them alive?

They’re not as critical to an organization till it gets somewhere north of 40 or 50 employees. When you’re smaller, they have less of an impact. They really become important when you’ve got people running around the company whose names you don’t know anymore, and you don’t understand what the core ideologies are. Core ideologies are the keepers of the culture. And I can get lambasted for the simplicity of that statement. But generally speaking, they are representative of what’s at the core of the company

When a company is not aligned or strays from them, it is usually at the root of all the bad stuff that happens in a company, from employee turnover and low morale to lack of focus to why revenues have come. The company starts to lose its way. In a positive sense, there are powerful tools for keeping everybody aligned in the organization. If I had an overarching idea that’s even at the root of our Master Business Dynamics, it’s that you can’t do 27 things. All you can do is hope you get four or five things done. And you know what? You probably won’t even get four of those done. You’d better know the one that matters. And by the way, that idea is hundreds of years old. It’s not like it’s any revelation, but it’s interesting that there’s something that gets fast coast companies in trouble, is they fail at the basics — at the fundaments because they get bored with them.

So going to the core ideologies, the way you can use them effectively is rather than have 27 lists running around — the list we use to hire people, what we do in orientation, what our performance appraisal process is, what we should be focusing on on a quarterly basis, the words we use in our ads — you can take your five or six core ideologies and imbed them in your ads. Build the questions in your interview around those. Make them the foundation of the orientation process. Use them as the top-line categories for your performance appraisal process. Anyone you’ve got to reprimand or praise, refer them in some way back to one of those core ideologies.

What happens when a company finds that it’s time to change those ideals?

The reality is they’re very difficult to change. So the short answer is, if somebody finds they need to change one, good luck. Now, they are in flux until a company has gotten five to ten years old. They are discovered — not defined — by looking inside the company.

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In your checklist you mentioned that it’s a good idea for companies to tell the stories of employees who embody their ideology.

That’s for both internal and external use. It’s the notion of creating company legends. And one of the best ways to teach is through parable. If a company has a routine where they have a quarterly meeting or an annual meeting where they give out awards, we encourage them to recognize people who have exemplified one of the beliefs or ideologies. And then the story of what they did becomes a legend that then helps the culture carry on as it gets larger. That’s your challenge — to inculcate folks.

One section of the checklist also was called employee hassles. What do you mean by that term?

You need good employee and customer feedback on a weekly basis as you — and in as timely and accurate a fashion as you demand from your financial numbers. My poster child for that was Michael Dell. When Michael was growing the company rapidly, I asked him how was he keeping the wheels on. And he said, “I do this little thing that people don’t believe is that important, but it’s really at the heart of our success.” He made it a routine for his people to jot down problems, complaints, concerns, issues, ideas, and suggestions that they picked up from customers and each other. I use the term hassle. There are these kind of recurring issues that won’t go away. Michael had it built into his culture to have those due every Thursday afternoon, and then he’d take Thursday evening and look at them and see if he’d pick up any hints about. If you want to find out about what the customers need and what the employees need, listen to the customers, listen to the employees. Michael didn’t get everything fixed every week, but he got a little bit worked on every week and it made a huge difference.

Today they’ve got north of 100,000 pieces. Their whole value proposition is the fact that they have direct contact with their customers, and they’ve got now massive computer systems that capture that data and crunch it in order for them to see trends and patterns. And so one of the things we encourage fast growth companies to do is get some mechanism in place of capturing that kind of raw bits of data and use it then to make improvements and changes in product and moves in the marketplace and the like.

Do you find that customer feedback takes a backseat with the fast growing companies that are just starting up? Are they more concerned with the money than they are with the communication?

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No I don’t. They first start wanting to get customers because they’re trying to get revenue or they’re trying to get eyeballs. Part of what made it nice to be an Internet business is that you could get feedback like five minutes after you’d put something out on the Web. So, at the fast growth companies, if they’ve gotten anywhere at all, it’s because they’ve been listening to the customer. What happens, though, is because the information is coming in bits all over the place, and you’ve got people all over the company touching different customers, if you don’t collect it and organize it then it becomes less useful.

Another thing on the checklist was defining your rock and moving it. When you say rocks, do you mean obstacles of any kind, or is there more specific definition?

In a bigger sense, fast growth companies are trying to move mountains. And especially a lot of the Internet companies. So at least on the short term basis, you’ve got to be moving rocks instead of dirt. And rocks are those three or four big things. This comes directly from Stephen Covey’s reference to the notion that here’s a little experiment where you have a beaker, which represents the fixed time people have. That’s the one thing you can’t change. And then he has rocks, pebbles, sand and water. And what you have a tendency to do — because you’re putting fires out — is do nothing but fill our beaker up with water. Then you can’t even get a little bit of sand there before it overflows. But if you put the rocks in first, then you can get a lot of pebbles still in. Then you can get a lot of sand in, and then you can still put in quite a bit of water. So it’s the whole idea of you’ve got to do the three or four big things and make sure that the urgent stuff doesn’t displace them. The art is knowing what those four or five are. The four or five you choose versus the four or five your competitor chooses makes all the difference in the word.

Tell me about the importance of the weekly huddle?

To me it’s higher than the top of the list. It provides the platform by which you can do all this other stuff. When are you going to review the core ideologies? When are you going to look at your measures? When are you going to focus on your rocks? It’s at the heart of it. The word I’m using now is “rhythm.” There’s a rhythm of gatherings that are important and need to become almost ritualistic within a culture if it’s going to be able to stay aligned and headed in the same direction. It’s like a music score. I equate it to jazz. I mean a lot of folks use the jazz analogy for fast growth companies. But underlying the improvisation is a structure and a rhythm, that if that base structure and rhythm isn’t in place, then you’re going to produce something uglier than what you might want to call music.

Do you think it’s important to have actual face time as opposed to e-mail or conference call updates?

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It needs to be synchronous. With our video conferencing technologies, voice conferencing and on-line meeting stuff, the key is it has to be synchronous. And there has to be the ability for mind melds. So ideally it is if it can be face to face. It’s no different from what Sam Walton did at Wal-Mart. The execs all left Monday, had to be back Thursday. Friday the executive team huddled, and then Saturday they flew people in from every one of the stores and had their little celebration to see how the week went.

Why do fast growth companies have a hard time defining their sandbox?

The issue they have is being focused enough. And the challenge arises because you see so much opportunity. There are so many things you can do. Your biggest challenge is being willing to live within a narrowly defined sandbox so that you can both dominate it and not stray. As you get bigger, you kind of figure out what you want to be when you grow up. You don’t have to be too rigid about it, but generally speaking you want to define it so you can own it. The second big issue with the sandbox is for companies I see trying to jump from 25 million to 50 million. The sandbox isn’t big enough to support that growth. They wake up one day and they’re up against their own limits. And that’s when they have to add some services or segment the product. And then number three — often they can’t define their sandbox. There’s all kinds of fancy terms for it — your differential advantage, your value-added proposition. But it’s fundamentally, what’s the real need versus wants? We’ve got to satisfy the customers’ needs. Well there’s really a need and a whole bunch of wants. And so we spend a lot of time satisfying those wants. But we miss the big need. And then all of a sudden our competitor comes in and nails the need, doesn’t have all the wants. And yes, the customers bitch and complain, but they still do business with that competitors who nailed the need.

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