Part of the cultural identity of tech startups is the drive to scale a business fast. The best tech has as many users as possible, which means that there has to be business infrastructure in place to serve all of those customers. People aren’t interested in just building a good product, they want to know how to scale a business and how to do it fast. They want to make the most amount of money in the least amount of time with the least amount of long-term effort, and scaling is the best way to do that.
That is the wrong idea and will lead your business to failure. And not the good kind that startup gurus promote in their books.
Scaling your business is important, but only if you are focused on the right things. While developing your business should always be customer centric, your strategy should not be premised on increasing the numbers of customers you have. At least not at first. Your mission should be to improve your customer’s opinion of you and build your reputation. If you do those things, everything else will follow.
This idea of not worrying about scaling your business might seem counterintuitive at first. The goal is to get more customers, because more customers mean more revenue. What is worse is that “customer opinion” is really hard to measure, and startups are all about measurement. Early customer growth is easy to measure, whether it is by units sold or website hits. Plus, many people make the argument that if a lot of people are buying what you are selling than they obviously like what you are doing.
Ultimately, some would say, customer acquisition and sales are the ultimate metric to measure overall customer satisfaction. If that were the case, MySpace would still be competing with Facebook and RadioShack would be fending off Amazon.
In the current environment, no one can differentiate the quality of their product for long. If someone develops something to sell to an underserved market, a competitor in the form of another startup or an established company looking to expand their customer base will develop something similar. If you focus on developing something that you can easily replicate so you can sell to more customers as they arrive at your brand, then it will be easy for your competitors to build something comparable that they can easily scale as well. As a result, competition in your “scale industry” will be based on price and advertising because that will be the only source of differentiation.
Competing purely based on price and accessibility to product will invariably lead to declining profit margins and increasing marketing budgets. The result is that even if you do succeed in holding onto some of your customers, you still lose in terms of your income statement.
Until July 2013, it was common knowledge that a successful startup was one that could be scaled quickly and efficiently. That changed when Paul Graham published an essay on why it was important for early startup to do things that don’t scale. While the title of his essay was eye catching and a little bit scandalous for the tech world, what Graham was preaching was less about scaling businesses and more about a shift in perspective for early stage startups from developing technical capability to expanding personal capacity.
Many startups focus on the technical components of their product, expanding its technical capability. Does it work right? Can people navigate it? Does it satisfy the customers’ needs? All of these are important questions. But while these qualities are necessary for a startup to succeed, none of them are sufficient to guarantee entrepreneurial success.
Success in business comes from doing things that competitors either can’t or are unwilling to do. Graham believed that founders were unwilling to put in the time to develop their personal capacity; to understand their customers as well as they understood their technology. Graham suggested a series of steps for entrepreneurs to take that “did not scale,” but at that list’s heart was the need to learn more about the customer.
Graham suggests in his article that early stage companies must aggressively attempt to reach customers by getting into the same room with them and engaging them in conversation. By conversation, he doesn’t mean the founder trying to sell the customer a product, but the founder listening to the customer’s use cases and explaining how the product can fulfil the customer’s specific needs.
What we see in the essay is that the “thing” that will separate successful startups from the also-rans is patience. The patience to engage with a customer face to face and instead of trying to do quick bulk sales online. The patience to develop awareness of the challenges your target market faces and adjusting your product to meet those challenges. The patience to ensure that your customers aren’t just satisfied with their purchase, but delighted by the experience. That all takes significant time and the actions necessary to do those things can’t be scaled.
There is a good reason that patience is something not a lot of startups can afford. Obtaining investment in a business is dependent on a company’s ability to demonstrate traction, and traction is a function of customer retention and growth. Critics point out that Graham ran the YCombinator, which meant that everyone who he was advising already had funding for their product development. This meant that these entrepreneurs could literally afford to take their time and do things that can’t scale. Scores of other entrepreneurs don’t have that option because they need to gain funding fast in order to keep their business running and survive, and that means knowing how to scale a business quickly.
The challenge is to reconcile the need to develop background on customer needs versus the demand to gain traction by creating customer growth.
The answer is you need to do both. First you need to understand your target market, deeply and completely. Once you have gained that understanding, you need to turn your attention to scaling your startup. In the past we have discussed the importance the Lean Startup Method for any new business. Lean Startup preaches rapid, cheap iteration of prototypes and efforts to discover the best strategies for your business. These principles do not just apply to the technical components of your business, but your customer outreach efforts as well. Many low-fidelity MVPs are actually things you can’t scale and are meant to help familiarise founders with their customers.
If you use these low-fidelity MVPs in the context of Lean Startup Principles, you will be able to quickly determine what your customers want and then be able to transition to high-fidelity MVPs meant to help you scale your business. You get the best of both worlds.
Do the things that don’t scale, and do them early. Do them long enough for you to learn your customers and build a culture of providing incredible experiences. Then quickly transition to activities that will help you scale, because if your reputation is sound you are going to need to be able to meet the incredible demand your business is going to generate.
Originally published July 3, 2019, updated July 11, 2019