Comments on: Premature scaling kills businesses.

By: Bill Fisher

Bill Fisher — Mon, 25 May 2015 19:34:42 +0000

Thanks, Dave. As someone who is now contracted as CTO for a fast-growth company, I’m facing this issue right now and appreciate any write-ups like this that can help map out the parameters that are going to drive our growth. My solution so far is to automate as many of our systems as possible and to minimize the use of pay-per-use resources, so we can scale without taking on massive personnel, physical plant or virtual resource commitments. Also, we’re building systems that should be able to add capacity quickly and painlessly, and designing today’s technology with an eye toward potentially supporting millions of users even though we currently have none. We’ll see how well that works in practice, but I’m definitely concerned about growing faster than a sane revenue model would allow. Thanks.

By: Nelson Paez

Nelson Paez — Mon, 25 May 2015 16:33:14 +0000

Brilliant… I agree.

By: Cricket Lee

Cricket Lee — Sun, 24 May 2015 23:28:59 +0000

Dave,
This is one of the reasons that I have steered clear of VC mentality for funding. Although my Fitlogic technology is a game changer for the fashion industry, everything we have done is innovation and cannot be put into a box. I can scale now with a business model that has never been available to the fashion industry, but it is only because there is so much pain around apparel fit. My methodical industry and consumer study has taken many many years. Angels let me do what I think we should do and although I would like to have a big chunk of money, I’m happy with the place we are, and I still control my company. I love your stories. Thanks! Cricket

By: Bob Kelley

Bob Kelley — Sun, 24 May 2015 21:51:08 +0000

Hi Dave,
& Hi Soham,

Soham raises a very useful question for an early stage business: “When to scale?”

Having successfully dealt with this question in three situations successfully, and at least five unsuccessfully (but failed fast), let me share a framework that will be useful… if your really ready to work it.

So, Soham, this raises the question before the question of “Slug for the fence VC” versus “Get a solid single oriented Angel.” Actually, I oversimplify, because some angels do know when, and when not, to swing for the fence. And there are VC firms that are actually more like what Dave describes as angels, in that they “focus on profitability first”. (you have to ask, and then verify, to really know.)

So, the question before the question is: “When to scale (fast), and when to grow incrementally?”

And, in my humble opinion, that begets three other questions.
– How big is the addressable market?
– How much of a temporarily sustainable advantage can your value proposition provide against followers? – Can you really quickly gain a sufficient, temporary, dominant position in the market, and then use your market power to keep (Most) rivals out (until you get a big enough ROI) (Amazon, Uber, Homeaway, AirBnb)?
– Is your business model either really profitable at scale, or will someone else pay enough to provide a grate exit (Skype, YouTube)?

Soham, to help you get a good handle on these questions, let me suggest you consider really reading/reviewing, and understanding, the following four resources: “Business Model Generation” (Osterwalder & Pigneur 2010); their follow up “Value Proposition Design” (2014); their recommendation of understanding Trends (Dave, who authors this blog , is my highly regarded source for an “annual deep dive” in to technology trends; and another recommendation in “Value Proposition Design” to understanding the “Five Forces” (Detailed in Porter’s “Competitive Advantage”); to the point of really understanding these books and presentations, you’ll have the granular level of understanding you need to most likely make a very good decision. Alternatively, Soham, find someone, or some group, who can take you through the right questions, within the above framework, to get a good answer. In any event, Soham, best of luck with your quest!

By: Soham Mehta

Soham Mehta — Sun, 24 May 2015 20:32:00 +0000

Hi David,

Thanks for this; very useful. There is also another side to this question: When to scale?

We have been fortunate enough to get off the ground without any outside investment. But this question is gnawing on me quite a bit: when is a good time to scale? How to anticipate demand? Especially in a market where there is no clear prior comparison? It’s obviously a chicken and egg problem. ie. I can reach a wider audience asking for “interest”, but who knows if the conversion is going to remain the same? And like you said, fixed costs is a step-function (not linear) even if you decide to go even a bit bigger.

I’m a first-time founder, so it’s hard for me to make that call. Any advice?

-Soham