The Life Cycle of a Tech Organization

The ideas and opinions that are here written cannot be fully generalized, much of this is specific to the countries and cultures where I worked or interacted with. I don't think there is a universal template for a tech company but here I try to distil my observations while working in the wild.

I will focus more on the human side, the story of the people who work in these organizations and not necessarily focus much on the founders. The focus is on some key experiences and general cycles and how people who work in these companies, adapt and how they organize themselves. This, will be in part from my experience but also from other people’s accounts, in many ways it can be viewed as subjective experience. For that reason, I will divide cycles in 6 phases, and these names are simple monikers but that express the summary meaning of the idea behind that stage.

Starting up

Starting a new business is a difficult step, the risk of failure is great and most new businesses fold before the first or second year. These failures can have severe consequences depending on the legal framework of each state.

From the point of view of finance it was traditionally difficult to get funds to start a new tech company, not that much venture capital was available, banks will only give a loan against collateral. And, for those reasons start-up finance was only possible either by the well-connected, or founders that bootstrapped the initial capital by themselves with family members or using a partner that had available cash. More recently founders have been able to access to American VC capital, or similar counterparts in Europe.

Depending on the initial seed money the founders might be forced to relinquish ownership of the company and only be responsible for developing the business, or are full-fledged partners, or have full ownership. Also, the availability of new rounds of funding will condition heavily the scope for developing the business.

From most cases I had direct knowledge about, most had to be very lean and present a positive cash-flow position very early in the business development cycle. This usually resulted, in most cases, in businesses that set a low risk strategy like selling generic services, cater to a small niche or just do body shopping. A small number started working with a catalogue of customers that at least one of the founders already had a relationship with, this had the advantage of getting a better focus and more stable work pipeline. And, an even smaller number started working in an unproven product, usually for a client that was sort of an angel investor that funded most of the prototyping phase and initial product testing.

Companies that started providing services, or developed a product, usually had smaller teams composed of people that usually had a previous relationship with one or more of the founders. They might have worked with them, or were long time friends or/and former university colleagues. In these cases the environment and initial culture was very congenial. In other situations, the first employees would be hired through a traditional process, here depending on the personality of the founders the environment could vary from tense to friendly.

Surviving this stage not only requires developing a viable service or product, getting market traction and adoption, understanding the their market and having the right price point that can sustain the company. But also, and very important, keeping a solid relationship between partners. Many businesses failed because key partners leave or partners decide to squabble about the direction of the business. Difficulties in managing conflicts and bad conflict resolution will amplify problems, so even if the company survives this stage it will be very challenging to reach long-term sustainability.

From here the company can go through either the growth stage, steady state or extinction.

Growth

If the company survives the initial stages and has products or services that are in demand. Or, that new demand can be generated through a clever sales process, then the company enters a growth stage. This can also be the case for an established company in a steady state if market conditions are appropriate.

The growth stage can be followed by a rapid growth in sales but also a growth in the number of employees, maybe number of offices or extra locations. This is usually to support the growth of the business itself, there are some other issues that come here but more on that later… Though, this kind of growth isn’t for everyone, most will be stunted by a bad market fit, and inability to reach markets outside of the national market or lack of capital to support expansion plans.

In the case that growth is being amplified by external economic factors, or sectorial bubbles, we can see an exuberance that gets wilder as these factors go on for longer. Usually companies start to lose focus and grow into unrelated areas or products/services that don’t fit with the initial business offerings.

The increasing number of employees on the more successful companies will result in an increasing loss of control by the partners. These will need to delegate more and model the organization in a more structured way. It is at this time when we start to see the first embryos of political factions within the company.

While growth is followed by increased cash-flow, or ability to finance the business, in organizations that are more congenial or paternalistic there is a tendency for increased expenses, increasing wages and increased employee benefits. Conditions are pretty sweet at these organizations at this time, and most employees usually feel really satisfied with the company. And for most part, relations between colleagues are mostly friendly.

There is usually a big risk of overshooting or getting carried away when in a growth stage. If there is lack control on cash-flow and investment, this then can sour the survival prospects once things go south, or growth slows down abruptly. Many find that customers cease to pay for services, don’t renew licenses, or fail to pay at the proper time the payable invoices, just as their fixed costs keep increasing.

From here companies might go to steady state, the squeeze, the choke or extinction.

Steady State

When a company enters this stage it means growth has slowed considerably and their market has matured. This can be a simple transition for the company and for the partners. Specially if growth wasn’t too exuberant, so teams can adjust to the new condition in a stable environment.

For companies that experienced a burst of growth on unrelated areas and these didn’t pan out, then we would experience the first personnel cuts or reorganization. This doesn’t mean that employees would start losing benefits but it depends on the level of profitability of the main business line. Some types of expenses might start to be reigned-in and in general there is an increasing awareness of costs.

In terms of company culture, for congenial and paternalistic companies, the steady state doesn’t change things very much, at least not very quickly. Most of the relationship matrix is maintained, unless there are departures of key people or there is an unresolved conflict between partners or senior managers. Same goes in terms of benefits and wages for employees that are in the company for a longer time.

In the case of some companies, they might be affected by cyclical market swings after the high growth stage ended. This means that high periods of sales are followed by dry periods with only punctual new closed sales. This creates a constraint on hiring new people, so we tend to see that the company starts having a tiered workforce base. Where older employees that are in safe permanent contracts with full benefits, and contract or agency workers with no benefits that fulfil peak tasks or do work that the permanent employees don’t want to do.

At this time we also might see an entrenchment of political factions within the company, this might be along departmental lines, but it can also be along the different interests of the partners. Or, middle managers that created little fiefdoms while nobody was looking – this is usually done by arranging for their friends to be hired to key positions in their team while things are good.

A company can exist for a long time in a steady state, and most are very lucky if they find themselves in this position. From here it either can have a new growth spurt, enter the squeeze or the choke.

The Squeeze

This situation happens when an external element changes the balance of the company, either a market downturn, increased competition, the company going public, change in the partners structure or the company is bought by another. Usually it means increased focus on generating extra revenue and cost cutting, and it happens at a point where market growth is increasingly non-existent or difficult to achieve due to extra competition.

The initial motivation for the squeeze might be low profitability, or that it is not high enough, so management goals are set in a way that increase incentives for finding cost cuts or increased sales. In the case the company was bought through a leveraged buyout this is more acute. And the first thing that happens is to identify assets that can be sold to repay part of this debt.

The squeeze might not come in a swift and quick move but with a slow drip, this allows congenial and paternalistic organizations to maintain some semblance of the old normality for a while. In this case, this results from the difficulty in adapting the old management structure to the new way. There is some resistance and imposing the new methods right away might drive too many key people out the door. So the culture will start to change in ways that are increasingly more unpleasant, first focusing on the non-permanent work force that becomes more numerous and becomes responsible for an increasing amount of the work.

This stage becomes the opportunity for people who reached management positions to show some of their true colours. While things were good they behaved in a civilized way, now with the right incentives they can have the right opportunity to grind their axes and settle some scores. The targets might be this or that underling that became too independent for his own good, another manager that is dangerous competition or has slighted in some way his/her ego.

One thing that I observed as the squeeze progresses is that well-connected people within the organization start to leave. Sometimes they migrate in flocks to a similar company that can provide the same type of security they were accustomed to. The people who remain from the original staff either have their backs covered, don’t like to make waves and adapt or are too risk averse to change jobs. Personnel turn-over in some or all areas of the company increases and the culture becomes more impersonal. Also, wages and benefits for employees start to be decreased while benefits for middle managers and top manager start to increase, with structured incentives to reach particular goals.

The other thing that gets worse is low-level political infighting as resources get more constrained and each manager scrambles to maintain his/her own position. This also decreases the opportunities for advancement of talent that has little political backing, since most managers will only support people that they know will be aligned with them.

The squeeze is an unpleasant state of affairs that can be maintained for quite some time, and there are many companies that have been in this stage for a long period of time. And from here they either go to a growth spurt or enter in the choke.

The Choke

The choke is a prelude to a death spiral, and happens when market conditions and competition become too adverse. Or, when management has become ineffective, or when external actors, like shareholders or a leveraged buy-out, force the company into strangling the normal functioning of the business or taking in too much debt.

This stage is paradoxically plagued by both a high level of political infighting between factions but also a high level of sycophancy, and it creates some of the worst work environments.

Management decisions are framed by reaching increasingly short-term goals, these are done regardless of impact to the business. People are cut or assets are sold to meet short-term results, investment is cut or done in ways that are counter-productive, like buying a new business without much in terms of thinking how to integrate it. Cost centres are squeezed to the point they barely function.

At this time anyone that was connected or was very talented has left the company, much of the older staff suffers from some sort of Stockholm syndrome and are increasingly despondent. Much of the work-force is now temporary in some way or another, it is difficult to motivate and doesn’t have any incentive for helping to grow the business.

Information doesn’t flow from bottom to the top, this trend was set as the company started to grow and accelerated as the squeeze sinks in, and now it is its full mode in the choke. There are no incentives to state the facts to the higher-ups, messengers will be killed on the spot, there are only top down directives. So that any reality that doesn’t conform, doesn’t exist.

In the case of a leveraged buyout there might be perverse incentives to kill the company by strangling it with debt and milk it for cash for the parent company or owner. This might be possible if the legal frameworks allow this kind of modus operandi.

From here most companies don’t escape extinction, very few survive. And those that do, they aren’t usually very nice places to be in.

Extinction

A company might fold for all sorts of reasons, some go badly right at the start and fail before reaching any kind of dimension or any success. Some stagnate because they failed to find markets to grow, and limp for some time until some larger competitor or market conditions put them out of its misery. Others, grown too quickly and didn’t adapt their internal structures wisely and found themselves with cost structures that they couldn’t support when the market conditions changed.

But in some cases they go extinct because a competitor or some other company bought them, found a way to get rid of the previous founding partners, disbanded the product teams, allocated services/products to external teams, or just discontinued the product and kept the customers for their own range of products. It is actually very common thing to happen, and this wasn’t because of any failures on the part of the management or work-force.

Extinction is in some way inevitable once the organization starts eating itself, either by political conflict, or actions by owners, shareholders and managers that focus on extracting as much money as possible from the business. Usually the unpleasant conditions make any sensible talented person to leave or avoid the organization. And any remaining work-force is too despondent, risk-averse and anxious to be motivated to allow a recovery.

The other unpleasant side of extinction is that depending on the company’s type of legal structure, the partners might be liable for certain tax and state duties liabilities. This is a common thing in most western European countries, where bankruptcy might mean that the State becomes a privileged creditor for revenue taxes and welfare taxes, and that is something very difficult to get rid of. Even, if the company didn’t have any cash-flow to meet these liabilities at the time that the crunch happened, that isn’t an excuse for the revenue collectors. So, if you are thinking of founding a new tech company understand that if you need to exit then do it carefully.