Scalable startups
This is a first in a series on how to build a scalable startup.
In this series we outline some aspects of how we did scale our previous company from zero revenue to a figure well above CHF 41 million p.a. with a highly positive net result(1) within four years, what we learned from it and on what we pay particular attention for our next startup Nektoon.
What is a scalable startup? Expressed in monetary terms: the revenue curve grows more rapidly than the cost curve. To put it simply: As of hitting intersection A in below figure your startup turns a profit and starts to pay back incurred startup costs.
Figure 1 - Startup Costs & Revenues
That’s at least the expected pattern after an initial setup and investment phase. However, this is a bit simplistic, I’m afraid.
At the heart of every company, especially startups, are its people. They are the essence of any company. And people don’t scale. In the morning between the hours 9am to 10am you can do one thing and be present in one spot, do one sales pitch, head one meeting, etc. That is one of the list, not two, not three, but only one item at a time. So a scalable startup is to some extent a myth.
Yet if you can’t scale your startup you aren’t likely ever to earn a decent salary or cash in big time on your shares. How to circumvent this contradiction?
Organizations - A lump of butter
Before going to some minutiae about scaling let’s start with the question "What are organizations?” The subject produced an entertaining and varied body of literature. We do not discuss this here in full but just state the obvious: many if not most of the big international organizations are perceived by the rank and file and actually most customers as dinosaurs. Sure some are gentler than others, some nimbler than others, but fossils still.
The average manager passes his or her days working their E-Mail client or on the move their Blackberries, producing E-Mails with cc lists next to which any decent VIP guest list at an average club pales. Mostly they attach large Powerpoint presentations, lengthy Word memos and garbled Excels. Now with the exception of some printed contracts emanating from Word I never saw a proper business earning a mainstay in the marketplace on just that: MS-Office output (2).
First observation: Real work is mostly something else than MS-Office output.
Yet corporate offices thrive on that stuff. The problem is just: this doesn’t scale. Sure the cc list scales, but this has no notable impact on the bottom line.
Second observation: Large organizations exist.
“[Aren’t firms like] islands of conscious power in the ocean of unconscious co-operation like lumps of butter coagulating in a pail of butter-milk?” (Robertson 1928, 85)
The body of literature on the reasons of existence of the firm is as wide as this ocean of milk. Two of the more influential books on the subject were written by Ronald Coase – The Nature of the Firm (1937), and Peter Drucker – The Concept of the Corporation (1946).
Coase was the first to note that there are transaction costs involved in using markets to exchange goods and services. The cost of obtaining goods or services may add substantially to the price of the good or service. Previous economic theory held that in efficient markets it is always cheaper to contract out than to hire. Coase suggested that firms will arise when they can produce cheaper internally.
Coase was already aware of the decreasing returns to the entrepreneur function. It took management guru Peter F. Drucker to table the first thorough study into the nature of corporations. In his seminal book Concept of the Corporation he studied mighty General Motors. They were very pleased with his book until they discovered to their dismay his suggestion to decentralise the company in order to even become more successful (Something they took only a bit more than 60 years to digest and finally start doing).
So, firms are indeed like a block of butter.
Next in the series how to build a scalable startup: Focus on people
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Robertson 1928 Robertson D.H., The Control of Industry, revised edition, London: Nisbet, 1928, as cited in Malmgren H.B., “Information, Expectations, and the Theory of the Firm”, Quarterly Journal of Economics, LXXV, 1961, pp. 399-421.
(1) local.ch is part of the joint-venture between stock traded Swisscom and PubliGroupe and does not disclose any detailed financial information. Nektoon is privately held.
(2) The notable exception being consulting companies that perfected the art of delivering nothing for something; see the delightful book Consulting Demons.
Comments
Big League Players Club
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