Not everyone has to scale
I have been having this conversation about scale with investors and founders around many verticals. Bottom line is scaling is different for everyone. Investors want to invest in companies that plan on scaling to a certain level depending on each investors thesis. Not everyone has to scale.
There has been this rising tide over the past decade that all businesses must scale….and that everyone should raise capital for their business. I get business plans from people who are building agencies or building out PR firms. Since when did those companies raise money from investors? The company is as good as the person running it.
Years ago (many many years) people went to the bank for a loan to help them build their business. Even the art dealer, Paula Cooper, got a loan from the bank when she opened her gallery in 1996.
I have been working with a company who has decided that by scaling, aka raising money to do that, they were miserable. They had already built a solid business with a small business loan. The small business loans unfortunately take advantage of the people who they support but that is for another post. These women are going to do almost half a million in revenues this year and they love what they do. They came to the realization that they don’t have to scale. They can bring in a few investors who want to support entrepreneurs like themselves…and they are good entrepreneurs. In a few years the business could end doing a few million in profitable dollars. They could end up being able to grow in other directions with the capital they have built. At the end of the day they get to wake up and do what they love to do and enjoy the business they have built…a pretty good concept.
Scaling changes businesses. For some it is great and for others it is a mistake. You do have to figure out how to have a consistent profitable business year after year when you aren’t scaling. That is harder in certain verticals. There will be many more businesses in the years to come. With technology we are able to start businesses with very little capital. Many of these businesses don’t need to scale. Perhaps they would be better off not scaling but building a business without raising capital with a price tag on it. Scaling doesn’t always work.
We might be seeing more of these businesses in the years to come. These businesses are reinventing the old school businesses that our country is built on. That’s a very good thing.
Comments (Archived):
How does that change your returns potential, as an investor?
It’s about the thesis. On a rare occasion I do invest in these type of businesses. I think of them like restaurants. You hope to get your money back and get paid dividends over time.
This is an interesting topic.I’d love to see what you have to say about small business loans even though you mentioned it’s a topic for another post.Perhaps some firms that traditionally didn’t seek investment dollars are seeking out angel funding because small business loans are now so difficult to get and have terrible terms. I think this is due to changes in the ecosystem. There used to be many local and regional banks that were invested in their communities. It was easy to get loans with good terms but now that most of those banks no longer exist and because interest rates are so low, the big banks aren’t interested in funding small companies that may never scale big. These companies may grow from, say $500K annual to $5 or $10M and create jobs locally but will never scale in a way that big banks care about.Some numbers came out earlier in the week about how sluggish the startup landscape has been since the recession. We are at historic lows of new startups. I keep wondering if this is due to the lack of capital for companies that may never scale into monoliths.WSJ – Sputtering Startups Weigh on U.S. Economic Growth – http://www.wsj.com/articles…
There is plenty of capital so perhaps it is the latter.
Angel funding is non recourse which is what makes it attractive as long as you are ok with giving up equity. Bank loans are about recourse and/or personal guarantees. It’s all about the collateral that you have unless the underlying principles have changed (I am not up to date on that but I would imagine it’s similar). There are also obviously SBA loans.http://www.inc.com/guides/2…
I completely agree.Not every country needs to get funded and not every one needs to scale. To what end is that useful, anyway?I think it’d be so much more powerful for a small company to refuse to scale by increasing headcount and perhaps scale by greatly improving customer experience.
From a personal viewpoint, I have been thinking about scaling recently. When I lost my job in the first dot com recession in 2003, I started consulting. I didn’t have a plan. I was a recently divorced Mom to a five year old. I was offered several job in NYC but because there was so much talent available at that time, I was not able to negotiate a salary that made it worth it. I thought, “Well, I’ll consult for a year and utilize this time to think about what I want to do next.” What I decided during that time was that consulting enabled me to be the kind of Mom I wanted to be and that, unless some mind-blowing offer came to me to go corporate or to go startup, I would continue with what I was doing. It worked. It was perfect. And I did have several offers over the years, but none that allowed the same freedom. And none of the offers were things I was passionate about. (I may have jumped at a position I was passionate about.)Now my son is in college and I’m in the process of deciding what I’m going to do next. Am I going to continue as is? Am I going to build/scale into a consulting firm? (I had built a consulting firm in the 1990’s with my then husband and another partner so I am well versed in the practicalities of doing this). Am I going to select one of my many startup ideas and do it? As I explore each option, I create scenarios and ask myself, “What does this look like if I scale it?” “Do I want to scale this thing to that size?” “Do I want to commit to that?” These are important questions for every person who starts a business to ask themselves.
extremely important questions.
Am I going to select one of my many startup ideas and do it?I’d be glad to offer my help deciding what you should do next given what you said above. (I have my bias which I will disclose if needed!)
Thank you. That’s thoughtful. I am already conducting a strategic process on myself that I’ve been using (and refining) for many years. When I run into personal road blocks I seek out people for insight. Right now I am in the early, discovery phase, so I’m not ready yet for input from others. I’ve given myself a long timeline (one year) because I have a lot of options I would like to explore strategically before making my next life plan. I created my last life plan in 2005 and have hit all the milestones (though I do reassess yearly, and at other times, as circumstances dictate) so now it’s time for a new one.
Great post. Last time I borrowed from a bank (or from anyone other than a mortgage) was the early 80’s when I started a company after graduating from college. Back then iirc I was paying something like 15% interest rate for a small business loan for equipment. [1] Also did leasing for machines with a personal guarantee obviously. And that was back when defaulting actually meant something.Government financing. In another case (true story) we were sued by the US Department of Labor (Elizabeth Dole was the plantiff) for making an obscure little known mistake with employees payroll. I negotiated them down and then at the last minute (after the best deal was struck (50% off the fine)) I said “oh and I can pay that out over 5 years, right??” No problem, the bureaucrat agreed. All I had to do was ask. It was that simple.[1] The bank is where I got the roughly $30k (in 80’s dollars, $66k today) that my first Unix computer system cost. Without that bank loan I wouldn’t be doing what I am doing today, because I would have never learned Unix).
I’m aware of the loan terms as well as the SBA. In the 1990’s banks were very easy to work with for SMBs. I built several businesses with bank loans during the 1990’s without collateral, based solely on biz plans and current biz cash flow. Not anymore. Very few banks will touch similar deals these days. One of the companies I partnered in in the 1990’s had an ongoing revolving door loan with a local bank that covered the initial costs (insurance, bonding, infrastructure/tech) when bidding/landing new projects. Terms were 90 days and sometimes we were able to negotiate longer terms depending on the criteria of the contract we were bidding on (some government contracts don’t pay, for example, until you hit certain milestones — one project I worked on a few years ago did not pay until a certain milestone was hit at the one year mark. That means that I and my team worked on the project for a year before we saw any payment from the government contract.). I have pitched a similar plan (that I easily pitched and won in the 1990’s) to several banks in the last few years and have basically been laughed out of the room.
I am becoming more fond of the author model, write book, give to publisher and support rollout, go write another. I see now so many brands “scale” in a way that is really just more products which a watered down version of the core product. The author model requires each book be as good as the last, no dilution, and if as good or better, then the product is not scaled, just the audience. It keeps the author honest and true to craft or else they fail.
It seems that “SCALING” has become a social biz fad. The presumption that bigger is ALWAYS better reflects insecurity on the part of investors. The investors do not trust their own judgement about the investment and is hoping “SCALING” will provide a soft landing. Founders on the other hand use “SCALING” to satisfy ego drive. when the goal is no longer to create and serve the customer; the customers undoubtedly lose and that threatens the future of the biz. There is a balance to be reached between the personal financial struggles of small biz founders and those of founders outgrowing their executable limitations. Both will wear on the mental, emotional and physical. So what is the point? It seems that “SCALING” has become a social biz fad. Is it wiser to plan growth to a level that meets executable limitations and let the forces and wisdom of the investors to push the founders a little beyond their comfort level? If this presumption is correct, the fad will fade like all fads before leaving only lessons for investors, founders and observers alike. When the vision biz becomes a fad, is not a “bubble” trailing closely behind?
Generally a good article. I would only note, things have changed dramatically with bank loans since 1996. Credit is much tighter and it seems scaling in the eyes of a bank, some times can be viewed as risky. On the idea of scaling, if the growth is largely organic or driven by sales (i.e., revenue) that is always the better approach. Vince DelaRosa