Startups at the growth stage need financial tools, controls, and resource planning as their products evolve from idea to IPO. Challenges, risks and dynamic changes arise along the way as the company’s products and services follow the steps that transform a product concept into marketable merchandise. Product development must iterate in response to customer feedback, and the company must introduce new products and services as the business expands.
To minimize risks and uncertainty—and keep on a path of sustainable growth—it’s crucial to migrate from basic accounting software to enterprise resource planning (ERP) tools at the right time, particularly when the business is about to reach its key milestones.
Here are four signals that indicate when an organization is ready to make this shift and scale-up.
1. Work Becomes More Complex
A startup generally will start with one product or service to test customer reactions before commercialization. If the product or service is successful, the business will expand and diversify revenue streams. This will require complex integration of data across departments and management perspectives.
Harry’s, a New York-based consumer packaged goods firm and a unicorn startup, was founded as a subscription-based razor blade company selling directly to consumers. The company purchased a manufacturer in Germany so it could make its own razors and vertically integrate its operations.
Harry’s business has become increasingly complex as it diversifies from selling to manufacturing and expanding to personal care products for men, however; the company is also offering shaving products for women under a second brand, Flamingo. A high-end cat products spinoff by the company’s innovation lab led to a third brand in 2020, Cat Person, and a fourth brand that focuses on haircare products for women debuted in early 2021, Headquarters. Additional brands are in the works.
As it transitioned from selling to manufacturing and diversified into a new product portfolio over a short time, the company required end-to-end robust, modular software as a digital backbone to prepare for scalable growth. Standalone accounting software couldn’t cut it.
One of the crucial elements that Harry’s lacked was standardization and process control. A small business accounting solution could handle basic financial processes, but couldn’t integrate and standardize processes across the company. The company’s existing small business accounting solution also was struggling to keep up with financial complexity as the business grew.
To meet both those needs, Harry’s needed an ERP system that would serve as the nerve-center for the business
Making the move to an ERP system enables a business to transition much more smoothly and limits the amount of accounting data that needs to be moved into the new system.
2. Investors Require Audit Activities
Most startups raise funds from angel investors or venture capital firms. Those investors will require a business audit before investment, and companies can prepare for that moment by standardizing their processes and offering transparency of data. That makes it simpler for auditors and investors to assess and evaluate the startup’s growth potential.
If investors or auditors find material weaknesses in a company’s accounting system, that poses a risk, making it a less attractive investment. Audits and accounting preparation will cost startups more time and money if they don’t have a good system and solid data practices in place.
3. Headcount Increases
A startup normally starts with just a few financial and technical founders. As it speeds up product and service development, it needs more employees to help expand business and go to market.
Increasing the number of employees doesn’t just raise a company’s payroll costs. More employees means higher software licensing costs, and a more complex approval process for management decisions.
When Rothy’s, a maker of woven, sustainable shoes, expanded from 15 to 100 employees, the company began looking for a Fortune 500-grade ERP system that could handle this headcount growth and automate the business end-to-end. ERP did the trick.
4. Going Regional—Or Even Global
A startup that achieves unicorn status, with a valuation over $1 billion, must have ability to scale their products and services locally and globally. The ability to become a regional player is a key success factor for a startup business.
Having an ERP that can support multiple languages and currencies will help ease the frustration caused by different regulatory frameworks in those overseas markets.
“Using the latest technology is important for a modern startup,” said Ulion Riebe, Rothy’s head of finance and one of the team leads for the company’s systems upgrade mentioned above. “I think of ERP as a second-generation accounting system. It provides all the multi-language, multi-currency stuff without a lot of the old-school processes and procedures.”
Overseas locations will need significantly stronger controls and financial tools to manage the new cost centers for startups and to handle this expansion.
The Way You Are Now—And What You Can Become
If your startup company is on track for growth, a high-quality ERP system can support your business’s increasing process and data complexity at each milestone. An ERP platform can help you save time and money, dramatically reduce audit risk, and put your startup on the path to commercial viability, making you attractive to investors.
Navigator Business Solutions helped both Harry’s and Rothy’s implement their ERP solution. Find out how Navigator can also help you.