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07 Jun 2012

John Bates

The initial success of South African technology start-up Integr8 IT rewarded its founders’ commitment and the company began growing rapidly. And that’s when a whole new range of problems emerged.

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In the earliest days of a start-up, the central priority is clear: build the business. All entrepreneurs are familiar with the experience of devoting every available minute and every possible resource to that overriding objective. Thinking about what might come once that objective is achieved can appear to be a time-wasting distraction.

However, a whole new set of potential challenges and threats face a company once it is established and growing, and entrepreneurs need to prepare for these challenges before they arrive, however indulgent that may seem at a time when the company’s viability is not yet clear.

The case of Integr8 IT provides an informative illustration of the nature of many of these challenges and shows how they can threaten the survival even of companies that have established strong and growing positions in their markets. It demonstrates how unexpected problems can stem from a wide variety of sources including personnel, investors, clients, the organisation and strategic direction and underlines the need for entrepreneurs to prepare themselves for these challenges.

Integr8 IT was founded in South Africa in 2001 by three entrepreneurs who had identified significant opportunities in the country’s rapid take-up of information technology. The company focused on providing networking solutions to enterprises of all sizes and government bodies throughout the country, basing their competitive advantage on outstanding service from their dedicated and enthusiastic staff. Like all successful entrepreneurs, the founders and their core team were prepared to use every available minute and take every step necessary to turn their perceived opportunity into a viable business.

From the company’s beginning until 2005, Integr8 IT was one of South Africa’s fastest-growing companies, winning awards for entrepreneurial success and accolades such as Microsoft’s Gold Partner of the Year award in 2004. The company was very well regarded in its industry, was sought after by both potential clients and employees and had a staff of nearly 200.

Despite this promising beginning, a series of problems began to develop. In June 2002 one of the three founders left suddenly, followed by three senior managers. His departure came as a shock to the other founders and affected both morale and profitability. The departing founder’s shares in the company had been resold to a consortium of emerging entrepreneurs, whose involvement with the company started well but began to develop problems as they turned their attentions to other investments. At the same time costs were rising and margins were falling.

In late 2003, the remaining founders hired a new finance director who appeared to be the solution to their problems. He quickly identified operating weaknesses and suggested ways forward, and the founders gave him a free hand to implement drastic cost reductions. The result was far better cost controls and a surge in short-term profits, but at the same time staff turnover increased and some customers had been lost.

Amid cash-flow problems and falling morale and after disagreements between the finance director and the founders over the direction of the company, in December 2006 the finance director gave three weeks’ notice and left. This presented the founders with their biggest problem since they founded the company and left them facing a fundamental question: did they really have the skills or appetite to build a large, sustainable and valuable business for the future? 

It’s a question that many entrepreneurs face as their business develops from a nimble start-up into an established enterprise. This case study, based on extensive interviews with the company’s founders, deep research into the economic environment in which Integr8 IT developed and the Institute’s own expertise, identifies some of the many problems that can face entrepreneurs at this difficult stage.

To read the case study in full, email innovation@london.edu.

John Bates

John Bates is a Fellow of Strategy and Entrepreneurship at London Business School.