The scenario: Zenefits, a multi-million-dollar HR software company, founded by Parker Conrad and Laks Srini in 2013, experienced accelerated growth since its inception. The company accumulated most of their money through brokerage commissions that were paid by insurance companies when clients bought one of their plans, and their business model quickly drew the attention of investors.
By the end of 2015, in only two years, the company was valued at $4.5bn (about ZAR62bn). The company had around 14,000 customers and was hiring more than 1,000 extra employees. Their number of employees soared from 15 to 1600 in just 3 years. They were growing at such a pace that a manager said he interviewed and appointed employees so fast that when they turned up for work, he had already forgotten who they were.
The problem: Due to Zenefits’ accelerated growth during the up-scale of their business, they never had time to revise their business model. As a result, several issues arose that were not identified timeously and very quickly, things spiralled out of control.
For one, the co-owner was still micro-managing the employees (even though there were more than 500 employees). The company did not have an HR department to take care of factors like employee benefits, leave, etc., and they also did not have a dedicated IT department to fix the hardware – this meant that the company’s engineers had to waste their time and energy to fix their own computers.
Even worse, the gigantic influx of business meant that the company could not keep up with licensing its insurance agents in each of the American states in which it operated. The news leaked, and the company was entangled in a scandal and faced the prospect of millions of dollars in fines. At this stage, the co-founder (and CEO) was asked to resign due to serious compliance issues that emerged, which he did. The company’s value dropped by 55%.
Luckily, the company survived and their new CEO, David Sacks, later said: “It is no secret that Zenefits grew too fast, stretching both our culture and our controls.”
When scaling up your business, there are a few important factors to consider to prevent failure.
An influx of business requires a new business model that allows your business to adapt to new demands. If your business model is not restructured, all the small issues hampering your small business will become even more problematic when you are trading on a bigger scale.
If your business is already undergoing growth, it is not too late to revise your business model. Scaling up your business requires common sense and attention to detail. You need to determine what is important for successful growth. Whether it’s your company’s management, processes, culture, or leadership that needs revision, it needs to be planned carefully to ensure that you do not get stuck during the scale-up stage, or, even worse, exhaust funds or working capital.
Some general issues that may come to light when revising your business model include:
- Daily operational challenges
- Administrative challenges
- Employee challenges
- Financial challenges
- Infrastructural challenges
- Sales and marketing challenges
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