When growth hurts 📈 Lessons from scaling to exit | Simon Penson

There's a period in business where you look at somebody in the room that you're employing and you think, if they leave, we are in trouble and they become really, really important to you. But then you get a little bit further on in your growth stage and they can become the problem or the blocker. Actually, the business has outgrown them. And that's a really difficult scenario. And a lot of the work that I do now is helping people understand and seeing that early and making sure that they have a plan to move those people into the right seat or off the bus because you need better people around you. And I always talk about the requirement for 3, 4, 5 generals in a, in a people-based business. They usually fall in this order, but not always.

This week's Millennial Master is Simon Penson, exited entrepreneur, investor, and advisor at Scale. Simon built and sold one of the UK's fastest growing digital agencies, lived through the chaos of earnouts, and now guides scale-ups on the messy realities of growth. In this episode, we talk about why early hires can become your biggest blockers, the traps founders fall into with earnouts and how to avoid them, plus how to spot and break through growth plateaus before they break you.

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Simon, welcome to Millennial Masters. How are you today?

Do you know what? I'm very good, thank you, and thank you for having me on. Looking forward to the, uh, the conversation.

So am I, because you have quite a story to tell, Simon, from From my research and what I've looked up about you, you started up as a journalist, but also there was a moment when you had your first real taste of, let's call it digital leverage. So I'm wondering, when did you realize it was time to quit journalism and go all in on your own thing?

Good opening question. I think I was really lucky actually being in journalism. So, you know, I was in journalism back in the sort of mid to late '90s and digital wasn't really a thing. So we was working literally in print, but it gave you a real budge in the mineshaft moment, actually, because of course, when you're working in that industry and you see kind of print sales going like that, and actually I'd been started playing around with the internet, building my own sites in the background in the evenings, and they, as terrible as they were at the time, they were kind of going that way. And so to me, it was a real budge in the mineshaft moment. And it really, it really helped me understand, I think, that we were seeing a pretty seismic structural shift in the way that people consumed information. So, you know, in the late '90s, that was a pretty privileged position to be in, even though we probably didn't realize it at the time. And so, yeah, that would probably have been the moment I would have said sort of, you know, '98, '99 time that, you know, a kind of a light bulb went off in my head, I think.

And that was around the same time that the first proper websites were starting to appear as well. And we're not talking about the more intricate designs and features that many of us we know and expect today. There wasn't even such a thing as mobile web.

No, you're absolutely right. It looked very, very different. And the first sites that I was building were in, if any of the listeners remember, in Dreamweaver and Joomla, which was a sort of an early CMS. And yeah, quite frankly, they looked absolutely awful. But, you know, what I did learn and, you know, was able to do is leverage what I knew about content and, you know, started writing articles about very specific niches. So we had a kitchen website and a divorce website and a cosmetic surgery website, basically where they were kind of like big ticket transactions happening.

That was even pre-Google.

Google was around. Yeah. Yeah, Google was around because I mean, by this point, I'm probably talking started those in sort of, yeah, '98, '99, but really started in 2000. So And then basically continued to do that in the background in the evenings, but by about 2007, 2008, yeah, 2007, I would say, they gave me enough runway basically to leave the world of journalism behind, corporate journalism behind, and yeah, ran them. The sort of the evening job became the day job.

And at that point, becoming from an employee to self-employed, a lot of people are very scared to take that jump. Did you have clients in the roster and you knew you were going to be able to make up your revenue or what was the tipping point when you knew that, okay, I can turn this into my full-time income now?

It's a good question and I have to cast my mind back. It's a long time ago now, but I think we got to a point where actually the business that I'd been working with in journalism was acquired by a big print business because actually by this point, I'd actually started helping that business take some of its brands online, business called Emap. And they were, they had a lot of big consumer media brands. So it started that process, but, um, realized that they weren't really investing in it in a way that I wanted to. And luckily for me, the, the, the content affiliate sites I was building had actually started earning some affiliate revenue and some Google AdSense money and all of those kinds of things. And so, yeah, kind of, you know, it was probably hundreds of pounds a month, if not low thousands. So it wasn't a lot, but it was enough. To give me the, uh, you know, to give me the confidence, let's say, to make the leap.

And then at what point did Zazzle come through, which was at that point and will be one of your biggest successes?

Yeah, so I ran those sites, so left, left the corporate world behind, ran those sites for about 18 months full-time, I would say. Uh, and they grew then pretty significantly. Thankfully, we managed to kind of get an exit out of that to a US business, which has since been acquired and acquired again. So yeah, kind of a content affiliate group. And then that gave me, I think, two things. One was again, a little bit of capital to kind of go, right, what we're going to do now, don't have to go and get a job for a while. So can we build something again? And also, more importantly, probably gave me the knowledge to know that we'd built audience online. And back in— this was 2008, late 2008, 2009, and actually realized that there was some value in that knowledge. Basically built what became an agency business. I mean, at the time I had no idea what an agency business was. You know, the internet still looked really different in 2009, of course. But we, I, you know, I, I, we believed in the fact that, you know, there was definitely a problem to solve, you know, with content at the heart digitally. Content marketing is that we kind of helped coin the phrase. Digitally at least, was still very much a sort of a nascent thing. You know, there weren't, people weren't really investing in it. So we grew really slowly to begin with and Dazzle was basically the business that started, you know, that we, that we did that through, the business vehicle we did it through. So started that in sort of mid-2009 and that business then grew really slowly to begin with, but then the world changed and about 2012, it started growing really quickly.

What happened, what happened in 2012 that started marking this rapid growth?

I think, I think the world caught up, quite frankly. I think all of a sudden digital, well, budgets became more digital is probably the way around to think about it. So, I mean, now in the world of agency, you know, a £1,000 a month retainer is still a good retainer, but it's not unheard of. Whereas it was very, very rare then that just, you know, people weren't investing even big brands in digital and that just slowly changed over time. And we rode that wave. We built a bit of brand equity. You know, we had kind of. You know, really polished the service offering. We were doing something pretty unique in the market. And because of those things, we were getting to pitch and we were getting to win. And, you know, then we say we grew pretty quickly therefore.

So agency growth and any business growth is usually a roller coaster. There can be feast and famine. And from what I read, you had one of these pivotal moments as well with Jazelle. And I'm Wondering what was the hardest call you had to make to steer the ship when things got tough?

I mean, yeah, it's certainly not a straight line, is it? And we had, you know, we fought very fiercely for our culture because I believe that, you know, like, you know, that the saying that, you know, go fast, go alone, go far, go together. And I realized that pretty quickly. I was very fortunate to have a really good advisor who became a non-exec for our business actually, that kind of helped me kind of understand the importance of that as well. And I think we, several times we realized that we weren't setting the bar high enough culturally. So people were kind of, you know, you can't carry anyone in a small business. And, you know, we were 10 people and we were 20 people and we were 30 and 40 and 50. So several times we had to kind of make difficult decisions about not carrying people and removing them. And that was, that's never easy, particularly in a people-based business, right? To do that in the right ways. It was a path that we had help with because we had a good non-exact, but equally we were still in some ways, because we were growing so quickly, building the path in front of us. So yeah, there was, we didn't get it all right, that's for sure.

You also mentioned how you scaled from 10 people to 50 people. And usually by that point, most companies become different beasts altogether. Looking back, and I know there were different times, it was before remote work, before hybrid. I'm wondering if there is something that today's founder can apply in their philosophy for hiring that you learned from that experience.

Several things I would say, and I think, you know, I'm lucky that I work kind of as a non-exec now and an advisor, and so I see it through the eyes of others a lot, and I'm really passionate about it actually because of that, because I know how hard it is. And I think what I observe now and what we experienced then is the fact that You know, what got you to here won't get you to there. And often I, and I see this through others, I, as I experienced it myself now, is that, you know, you, you kind of, there's a period in business where you look at somebody in the room that you're employing and you think, if they leave, we are in trouble. And they become really, really important to you, but then you get a little bit further on in your growth stage and they can become the problem or the blocker, actually, you know, the business has outgrown them. And that's a really difficult scenario. And I think, you know, a lot of the work that you know, I do now is helping people understand and seeing that early and making sure that they have a plan to move those people into the right seat or off the bus because you need better people around you. And I, I always talk about the requirement for 3, 4, 5 generals in a, in a people-based business. They usually fall in this order, but not always. So usually an operations general and then a sales general and then a finance general. And in between, and depending on what sort of business you are, you can have a client and a strategy general as well.

So you're going to Divvy up the main responsibilities first.

Yeah, absolutely. It's about specialism, isn't it? Because you start a business doing all of it yourself, and then you hire a few generalists around you, and then you start hiring a few specialists to do specialist jobs. But then the stages of this become increasingly more difficult, and then you end up with specialists having to lead, and that is where accountability and responsibility and all of those things become very important.

And You grew Zazzle so big that there was then interest from huge players in the market about the work that you were doing. I'm hoping to understand, how did it all come about? Did you have a deliberate thought for a number of years that you need to build a business in a certain direction in order to be able to have it acquired, or it was an opportunity that came along unexpected and you never really planned for it initially?

I think I always focused on just building a great business, right? And I think the rest follows. So I think if you try and reverse engineer it, it never really works. That's kind of generally how life works, isn't it? So in doing that, we built a great business and we were doing great work for great clients and then more clients come. And I think when you're doing that, you make waves in a market and, you know, the more established legacy players perhaps go, well, we would love a piece of this because we don't know how to do it properly. And so we would, we would quite regularly get kind of inbound inquiries, which we kind of shoved off because we were growing quickly. But there was, there was one particular conversation I had, which really stuck with me with a business in Leeds that had really established itself in the sort of late '90s, actually, so it was 10 years before us, it got really quite sizable on the back of kind of what we would call now sort of old school SEO. And they'd grown to sort of about 100 people, but it actually kind of come backwards a little bit. By, this is sort of 2015 time. So we were the kind of the, you know, the kind of the competitor kind of going like that. And they were the kind of the legacy market leader kind of just sort of plateauing probably a little bit downwards. And over a period of about 6 months, you know, we, I had a lot of good conversations with the founder. Now I was a single founder on my side, single founder on that side. And we realized that, um, there was a kind of a 2, 1 plus 1 equals 3 opportunity. Yeah, basically, long story short, we merged those two businesses in 2016, 2015, sorry. And interestingly, we did that, put the news out into the market that that had been kind of completed. And we then collectively had a raft of really, really quite aggressive offers because I think we realized that, you know, what we were doing is that the one plus one would equal three. We created a business there for that, you know, it was probably about a hundred and 20 people, 2 offices, you know, good revenue, good EBITDA mix, um, decent amount of scale. And obviously in doing that, you know, the bigger buyers came knocking pretty much immediately. And while we weren't planning to sell that quickly, you know, sometimes timing of the market is really important. And so we decided to kind of run a process and which ultimately resulted in the group being acquired.

You started foreseeing some changes in the market that We did.

Yeah, we knew that, you know, that every, you know, particularly with services businesses, there is a moment, isn't there? Timing is important that, you know, you, when you're hot property, it can be a good time to kind of look for, you know, acquisition opportunity because, you know, that doesn't last forever. You know, this world moves really quickly. And we also knew that we had grander ambitions ourselves, right? And for our people and, you know, actually finding an even bigger global business. To be part of, we kind of really opened that opportunity. And so for us, in theory, at least it worked for everybody.

Now let's talk earnout, Simon, because, um, a lot of founders can screw this up and they can, you end up feeling burned and the earnout is actually, now that I've been speaking to more entrepreneurs, it's quite a, not as unusual as one would expect of a deal. So again, with the power of hindsight and a couple of them under the belt, I'm wondering what's the biggest pitfall and how did you structure your deal so you actually got paid what you were worth at the end of the day?

Yeah, it's a very good question. It's a very important one actually. And I think I vividly remember, it's worth saying this, I vividly remember the first meeting that I had with, you know, real and A people. And we had corporate dev kind of people come in, not actually from our acquirer, but from one of the interested parties. And they were talking a language that I just did not understand, quite frankly. And that scared the bejesus out of me because I, you know, realized that this was probably the biggest or one of the biggest transactions in, you know, the light of your life that you can have. And yet, you know, it was completely over my head. And so I think that literally for the past 10 years, I've, you know, kind of thrown myself into that kind of, you know, headfirst basically to make sure that that doesn't happen again. There is a saying in the world, I spend a lot of time around it now, that, you know, never separate price and terms. And I think we paid a lot of money, but we got good advice. And I think that is the first very important lesson. Do not try and cut corners when it comes to selling the businesses. It cost us a lot of money to sell it, but in doing so, we got really good advice, legal, tax, professional, M&A broker, you know, all of that kind of stuff to get the terms right.

And there wasn't ChatGPT back then. That's very true. Yeah.

Yeah. There were books. So yeah, we definitely lent into the kind of the expertise there. You know, we did things like we had a long earnout, we had sort of 3, almost 3 and a half years because we actually took a weird deal that most people thought we were crazy for taking in that we took less upfront with a longer earnout, but we backed ourselves to really grow because we'd figured out a couple of really key things about that growth trajectory and thought we'd unlock them. As you go along this journey, there's a series of kind of like growth plateaus and we'd kind of figured out, we thought, how to break that glass ceiling that we were in. Thankfully, that turned out to be the case. But we, so we backed ourselves to grow and we created a bit of an environment that allowed us to really profit from that. And, um, yeah, probably when, if I think about percentage terms, you know, how it ended out, we, we probably only got about less, just less than a third up front, I would say. Um, and the rest of it was on earnout and Yeah, we made sure that we had a series of interim payments. So we didn't wait right until the end to be paid. We had a payment probably after 6 months, we had a payment after 18 months, and we then made a payment at the end. So it wasn't all deferred all the way to the end, which I think is really good advice. And then we had, you know, lots and lots of really good control clauses in to make sure that ultimately we could control our own destiny and make sure that, you know, our acquirer couldn't, you know, for all the right reasons. It's too much strain on our P&L for integration reasons, for instance, and that kind of stuff.

So the best advice is to speak to specialist solicitors when you're selling your business or you're merging or you're acquiring.

So, I mean, I think the first step is, um, is to get yourself a good, um, NED or a good advisor because, you know, somebody that's been there because I think that's the first step because there's also an optimization piece to do before you get there to maximize enterprise value, right? So. You know, I'm lucky that I spend quite a bit of time now working with private equity and they're the main buyers of agency-style businesses as well as others. And so in working on buy sides and helping them buy good agency and software businesses, you get to see what they look for. And so obviously it is a financial product, you know, private equity. And so they, they very much use frameworks to buy things. And so you can apply those frameworks to existing businesses to make sure that you really optimize that. Undoubtedly a huge amount of money to optimize for, because, you know, if you, if you get a couple of the right metrics in the right place, it can mean the difference between a 5 and an 8 times. And if you're making a million quid, let's say, on the bottom line, yeah, that's what, what would be a key metric?

You said, you said two key metrics that keep things in line. Well, there are several.

There are several. I've literally got a tick sheet. And interestingly, I'm speaking about this at a summit in Ibiza in September to try and share some of this. But they look at a number of things, right? Because their job, buyer's job, is really quite different to what you think it is. What they're trying to do is mitigate risk, not look for upside. Good investors mitigate risk. And so what they're looking for is things like what they call quality of earnings. So how much is retained in this project? You know, how much client concentration is there, all of those kind of things, because they don't like to see that. They also look at compound annual growth rate. So how quickly is this business growing? What market does it exist in? And what's the kind of total addressable opportunity there? They look at senior team quality and kind of founder importance and all of those things. So yeah, there are a lot of things that they do look at. And part of the job of building a great business is to make sure that you're optimizing to make the most of that, you know, that kind of, um, that opportunity.

Um, and we're going to talk briefly about that because now you both coach and invest in early stage companies through Hatch and Scaled. Am I correct?

Yeah, so I, I actually, I left Hatch, uh, in summer last year basically to focus entirely on my kind of Ned and consulting work actually. But, um, that's a— yeah, so that, that— so Hatch for those that didn't, because we haven't talked about that, was a venture capital business that invests in B2B SaaS, brilliant business run by an amazing team. I was part of, I guess, the founding kind of 4 people in that business. And we started in 2018, sort of running concurrently actually with the earnout at the time. Because we'd started investing in B2B SaaS together, realized that actually the people that were building those businesses were great engineers, great product people, but had never run a business before. So if you could help them with that bit, then you kind of had better results, still failure, but better results. And then that business grew slowly. And now I think is invested in 180-odd kind of portfolio businesses. And I mentioned that actually, because when I came out of the earnout from the agency business, I threw myself into that business. And it did two things for me, actually. One is very validating for the lessons that we learned through building our business, because first time you do it to a certain level of scale, it's the first time, so it could be luck, but then you see it play the same problems playing out through all other businesses and you realize that, you know, there's a way through this. And then for me personally, I was very lucky in that it, I really loved doing it. And I think I found purpose and passion and all of those things in doing that process. And, you know, people that have exited, I'm sure you've heard this before, Daniel, people that have exited talk a lot about the importance of finding purpose. Afterwards, because you can't just go and sit and play golf and tidy your garden, right? If you're built like that. So, yeah, I was very lucky to have that for a time and really enjoyed it.

And speaking of marketing, there is something that's disrupting marketing again. At the beginning of your career, it was digital media, then, so to speak, the internet. And now we have AI, which is kind of like on the Hype Cycle agenda. So I'm wondering, Simon, what do you see most founders getting wrong about AI? And where's the real upside for the next 5 years? Where should we really be looking at for AI to take us in marketing and content? Yeah, it's a really good question.

As you can imagine, you know, the boards that I sit on, it's definitely a top 3 priority. And some people are embracing it faster than others. And I'm a very real, I take a very real world worldview in this, in that, you know, I've seen kind of new technologies come before. AI is different. It is moving faster. But, you know, there is also a reality to the fact that, you know, human beings are going to still play an important part in stuff for a long time yet. And so for me, it's about kind of taking a very practical, calm assessment of like two, two, two things. One is what can you do internally to create efficiency? So where is all your heavy lifting? And how can you build agents and workflows to improve that? And we've done some amazing work with some amazing businesses to help them kind kind of build that workflow because, you know, yeah, AI can do some of that stuff, but it still requires a smart human mind that understands that business to be able to build the workflow and the agents in the first place. And then the other part is related really to go-to-market, which again is, you know, a big passion of mine because, you know, agencies are generally not very good at it. I've learned a lot from SaaS businesses because they're really good at go-to-market and doing that really well and understanding what that really means. And because now, certainly post-COVID, I think agency business, the agency industry has become much more Buyers have become much smarter and more aware of what good looks like. So specialists are winning. So because they're buying from people that understand and talk their language. And so actually really sharpening go-to-market is really important. And then if you throw AI into the mix, um, there's never been a more important time to, I think, keep that as an always-on thing because we used to do go-to-market proposition and all that kind of stuff and put it down for 2, 3 years. Now I think it's going to need to be always on because AI is moving so quickly that it gives you the chance to think, what are the existing products and services that we offer? How does that change now? What should it look like now? And then on an increasing basis, what does the kind of the forward-looking service roadmap look like in the same way that, you know, a product business would have a product roadmap? So, you know, my advice to anybody building service businesses to make sure that you have a monthly meeting about AI innovation and products and service roadmap to make sure that you're consistently changing it.

And are you applying AI in any way in your current venture in, in Scale?

We've, we've built a couple of agents and a short workflow around our pipeline. So we've, we've got a little bit of kind of heavy lifting done in that kind of piece in the nurture piece. But I think Scale ironically is not massively scalable, right? It's very much a passion project for me. That's our consultancy advisory business. So, um, I'm not looking to kind of perhaps optimize it in the same way that you would ordinarily. I have to obviously understand the privilege of being able to say that. So for me, it's about working with a few of the really right businesses over the long term, you see, and building human connection and helping. Sometimes I'm a counselor, sometimes I'm holding feet to fire, sometimes I'm a strategist, you know, it varies. So I'm trying not to let too much automation get in the way of that at the moment.

Simon, this one is a shorter episode than usual. So I'm going to do a quickfire through my next 4 questions that we can breeze through. So looking back at your career so far, what's one belief or tactic you held as a founder that you now think is totally wrong? And what replaced it?

That whole thing that, you know, you go fast, go alone, go far, go together. And I think the importance of actually building great team and actually understanding what you're really good at and what you're not, and then building people around you that fill those gaps. Having that awareness, I think is really important.

And if you could have one piece of advice tattooed on every founder's arm before they raise money, what would it be?

Really think about whether that's the right thing for you, if you're raising money, because I think quite often it isn't. And I think people raise money for the sake of raising money and then find themselves in really difficult situations, you know, from a dilution perspective, particularly. And, you know, that, that's a horrible place. I've seen that happen lots. So I think, think really long and hard about what a good successful exit looks like for you, because, you know, you can raise a lot of money and have to build a £100 million business to have the same result as if you just bootstrapped it and got to a third of the size or a quarter of the size, right? So I think it's worth taking some advice around that.

And finally, this one's a little bit more personal, but what's your one or multiple habits that keep you productive and grounded, especially when you building and scaling big businesses, has there been something that you've done consistently that kept you sane, or you developed these healthier habits later on?

As lots of people say, right, I think exercise is an absolute superpower, quite frankly. I think, you know, I've always been sort of somebody that would get in the gym really early. And I think that endorphin release kind of solves or halves the problems that you've got in your mind, right, that, you know, perhaps is keeping you awake at night. That and having a notebook at the side of your bed perhaps, and making sure that, you know, if you do, because you often, you process stuff when you're sleeping and you wake up at 3, 4, 5 AM in the morning. And so just write it down and go back to sleep is probably another one. So you can, uh, you can deal with it in the morning.

So an early bird then.

Totally. Totally. I am certainly. I wish I, I wish I could stay up late, but I'm terrible at it.

And is there any one book, uh, business book that totally changed your view on the business world or investing that entrepreneurs and other founders should definitely have on their Liz?

It's a really good question. I'm looking at my bookshelf actually at the moment. And there's a, there's a book right at the end, which is an old book, which again, I read a long time ago. So I haven't read it for a while. So it's probably really obsolete now, but there's a book, I think it's by Boston Consulting Group. No, yes, Boston Consulting Group on strategy that really opened my eyes to like the methodology behind building, you know, business in a really structured way. So yeah, if you can find it, Boston Consulting Group on strategy, I think it's called, which is, you know, probably from the '80s or something, but, um, that, that really helped me.

Well, that's all we have time for today, Simon. Thank you so much for your time and sharing some of the wisdom and knowledge you gathered over the years. And I'm looking forward to see what you're going to do next with Scaled.

Amazing. Thank you for having me, Daniel.

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