What if You Don’t Fail? Problems of Scaling

As a business strategist, which is not the same thing as being a business consultant focused on increasing your sales or accelerating your receivables. I like to look at the whole business. After all, as an entrepreneur, that is what YOU have to do.

After a while, when the launch is over, it’s not about the product anymore; the product is just a part of the business. And there’s as big a leap from product to business (see Twitter) as there is from idea to product. And if there’s one thing most entrepreneurs don’t get, it’s the path from idea, to product, to business, to company.

There’s a meme right now about encouraging failure, and it comes from the Lean Startup movement. It says, “get the most minimal product you can into the market as quickly as you can, and iterate using customer feedback.” That way, if you fail, you do it quickly, with minimal loss of resources, money and time. That’s fine to get from the idea phase to the product phase.

But what if you don’t fail?  Then, in the current jargon, you begin to “scale” and that’s where the problems really arise.

The “fast failure” might not be the end of the world, but the company that doesn’t scale quickly or the company that scales too quickly, can face similar fates: lack of real sustainability.

It’s counterintuitive, but it is much riskier to scale too quickly than too slowly. You can build a slow growing business into a nice lifestyle company,  even though you may not be able to raise VC money to do it. Slowly scaling companies can be bootstrapped, and after they become profitable they can get a line of credit; the founders don’t have to give up much equity, and they can take big bucks to the bottom line. That, by the way, is how companies used to be built and left to the children.

These companies, after a long period of profitability, can also be sold or taken public without much hype, and the owners can retire well.

On the other hand, companies that are forced by market acceptance (Twitter) or strategy (AOL) to grow quickly face a world of potential problems, including access to growth capital,  loss of mission and vision, and lack of innovation. On balance, these fast-scalers have less chance of ultimate sustainability than those who take the time to build for the future.

I’ve seen all this so many times, especially in tech, that I have to comment on it. I’m hoping I have the patience to write three posts in this “problems of scaling” series: one on capital, one on culture, and one on innovation. Although these issues are interconnected, any good strategy must take them all into account.

Again counterintuitively, the part about money is the easiest problem to solve, although that is what all growing companies focus on. Investment. Sales. Revenues. Profits. But that’s backwards. The hardest one? Culture. Because hand in hand with culture goes innovation. Culture+Innovation=Money.

You need all of them to be sustainable. Otherwise you are Microsoft (no longer innovative), Yahoo ( no longer a company with a recognizable culture) or Border’s (ran out of money).  And just think about Border’s for a minute. Was it capital that REALLY caused it’s bankruptcy? nope. It was innovation, or the lack of it.

More to come.