The Scalable Entrepreneur

Many entrepreneurs have big dreams . . . really big dreams. We start a company; nurture it; live with it through thick and thin, and then someday it turns into a major enterprise. Perhaps we’re selling a product or service across the nation. Maybe we have hundreds or thousands of employees. Possibly our top line revenue and bottom line profits extend seven or eight digits (or more) to the left of the decimal point. At this point we’re thinking that the dream has come true. But how do we get to there from here?

Some entrepreneurs believe that they can achieve scale if only they had sufficient capital. I believe there’s more to it. There’s no question that capital is an ingredient to achieving scale. But I don’t think capital comes first. What comes first you ask? The customer. Here’s my theory. We scale to meet customer demand. We don’t scale to meet capital demand. As we grow our business we’re always looking for ways to design systems and processes that are scalable – that’s a really smart approach. Maybe we even hire team members who we believe can handle scaling when the time comes. In other words, we’re take preparatory steps toward scale. But we don’t actually pull the trigger and start moving to scale just yet.

Max started a premium t-shirt company three years ago. His t-shirts are unique in terms of design, material, construction and incredible artwork that feature the work of an up-and-coming artist. Sales have been steadily growing and the venture is now turning a small profit. Max has a wealthy uncle to whom he’s pitched the idea of providing capital that would allow for significant expansion. Uncle Frank has agreed to lend Max $5 million which would be used for a larger plant, equipment and raw materials. With this capacity, the company could produce five times the number of t-shirts as it can presently. In effect, Max has taken the “build it and they will come” approach to scaling his business. He is being capital-driven rather than customer-driven. There’s nothing wrong with what Max is doing, however it is inherently more risky than expanding to meet customer demand.

Here’s how the story might be told differently from a customer-driven standpoint. Max has customers beating down his doors to buy his product. He runs three-shifts 24/7 at his small manufacturing plant and has a six-month backlog. There’s just no way he can wring any more production out of the current facility. He has heard from eight distributors that they would double their already sizable orders if he could increase his production. Max finally decides to scale his business based upon the exponential increase in customer demand he is experiencing.

Now you might be thinking that this is all pretty obvious. But in practice we see entrepreneurs scaling their companies all the time because they have access to capital – customer demand is secondary. There’s often the belief that they need to get big really fast in order to beat the competition and succeed. There’s no question that bigger is better under certain circumstances. The unit economics may be more favorable at scale, and marketing, general and administrative costs may be more efficient. But what about the customer? Is the demand sufficient to meet the increase in supply? Or will the corporate balance sheet reflect ever growing inventory levels?

I understand the entrepreneur’s desire to grow and scale. We’re doing just that with our companies. However, the apartment-related businesses we operate are responding to an increasing demand for the apartment lifestyle due to some powerful demographics that are at work in our industry. Capital is abundant, but we’ve been driven by customer demand first and foremost. As long as customers want our product we will use the capital to scale our portfolio. We’ve seen other firms in our space that are awash with capital and are building apartments to soak up that capital. We’d like to think that our approach is less risky because we understand customer demand and are meeting it.

Scaling an entrepreneurial venture is exciting and can be very rewarding. Doing so by responding to customer demand is undoubtedly less risky than growing a business primarily as a result of accessible capital.

You can also listen to a weekly audio podcast of my blog. What you hear will be different than what you read in this blog. Subscribe on iTunes or wherever you get your podcasts. You can also click on this link – Click here to listen to Audio Episode 111 – Gut Check.

This blog is being written in tandem with my book, “An Entrepreneur’s Words to Live By,” available on Amazon.com in paperback and Kindle (My Book), as well as being available in all of the other major eBook formats.

Little Steps to Sweet Success

A friend of mine has a company he started several years ago and he’s on an unbelievable roll. If he’s not there already it won’t be long before his top line revenues exceed nine figures. When I first met him his business was grossing nearly $10 million. Not only has he seen a gigantic increase in his sales, but his profitability is off the charts. I fully expect to read about him in Forbes one of these days. How has he done it?

My friend is not a particularly flashy guy. He didn’t design fancy strategies or engage in crazy risks. Instead, he concentrated on taking little steps. You or I might see them individually as pretty mundane. But when viewed collectively these small steps have become giant leaps, propelling his organization to dizzying heights. What have I learned over the years about how my friend has built such a successful company?

In the early days my friend was the classic bootstrapper. He literally did everything. He and one key associate were the “executive” level management. They paid attention to the little details and obsessed over their customers. I remember urging my friend to spend more time working “on” his business than “in” it. Over time he took this to heart and began to be more strategic. But initially he was the chief cook and bottle washer as well as the CEO.

Also in the beginning, this man was allergic to debt. He re-invested his profits and made sacrifices to get through the leaner times. I suggested that he procure a line of credit to which he responded, “Why? I don’t need it.” I explained that at some point in the future he would need a lending relationship with a bank and that he should establish it sooner rather than later. He could borrow against it and then pay it right back if that would make him feel better. Ultimately he did obtain a line of credit and it was eventually quite helpful in accelerating his growth.

My friend was very particular about the business he would take. There were opportunities abound, but he showed great discipline in staying in his lane. He did not set out to be the biggest company in his industry, nor did he care if he developed a national footprint. By only taking assignments that he knew he could handle, he avoided the pitfalls that many entrepreneurs have made (including yours truly) by gobbling up every piece of business they could. At first I thought he might have an affliction of limited thinking. But I was wrong. Though it wasn’t articulated, it was obvious that he had a winning formula that was taking shape as a result of his intuition.

Over time, my friend learned how to scale his company. He gradually created the infrastructure necessary to meet the needs of more and more customers. Today he hires more than 50,000 people a year to staff the industrial operations of his customers. He attributes his continued growth to his ability to identify and value talent. The “value” part is especially intriguing. He genuinely cares about the team he has assembled. It would be easy to view 50,000 workers as a commodity. But he doesn’t. My friend goes to great lengths to make certain that everyone is treated fairly and with respect.

Above all, he’s played it straight as long as I’ve known him. He makes certain that he only hires team members who are legal and I’ve never seen him cut corners. Over many breakfast meetings and other encounters, I’ve observed this man to be grounded in principle and integrity. We’ve all heard about high-flying businesses that came crashing down when it was revealed that they had been involved in some form of cheating. My friend is Mr. Straight Arrow and has marched to that tune from Day One.

Overall, I think I can ascribe his level of success to his ability to execute. Some leaders are born to perform – my friend seems to do so effortlessly. I’m sure he’s stubbed his toe along the way. But I’m not aware that he’s made any major mistakes that would have jeopardized his future. I can’t say that he was studious about creating strategic plans and organizational charts or subscribed to the Harvard Business Review. Maybe he did. My guess is that he simply exercised a great deal of common sense and had an amazingly deep understanding of his industry.

My friend is a living example of how taking little steps can lead to sweet success. What he has done can be instructive for the rest of us as we grow and flourish as entrepreneurs.

You can also listen to a weekly audio podcast of my blog. What you hear will be different than what you read in this blog. Subscribe on iTunes or wherever you get your podcasts. You can also click on this link – Click here to listen to Audio Episode 79 – The Disneyland Story.

This blog is being written in tandem with my book, “An Entrepreneur’s Words to Live By,” available on Amazon.com in paperback and Kindle (My Book), as well as being available in all of the other major eBook formats.