An exploration of how growth affects different kinds of business and the reasons why, if some day I found myself in the situation of starting a new venture, I'd make sure that it doesn't scale.
If I were to start a business again I’d make sure it doesn’t scale. Not scale in PG’s definition. But being comfortable with the idea that the main focus of such a venture is not growth.
Nothing against enterprises that reap the scale of the Internet, it’s just that I’m not up for the challenge, once again.
When we — accidentally — started iomando, we did it driven by the sole joy of building delightful a product. That’s the reason why we founded the company — because we deeply cared about the craft. Particularly, it meant the world to me.
We were naive. By 2013 I didn’t even know what a P&L was. My scope was extremely limited to the product side of things. One could argue — and rightly so — that I had no idea of what I was doing.
We didn’t plan for what happened afterward.
The implications of committing to a venture-backed business are, literally, bigger than you. And while I don’t regret any step along the way, it is true that nobody warned us of where we were headed.
We quickly went from crazy-garage-idea, to hiring people, and planing for new product lines. Next thing you know, we were pitching in front of investors. We were dealing with a radically different business. Gradually, then suddenly, I felt pushed away from the product, and closer to the business side of things.
The stuff that kept me awake at night shifted from nifty product details to
boring discussions around CACs and EBITDAs. Want it or not, these are deeply connected to the product health. However, I felt disconnected from the building, what I loved the most, without having signed for it.
This unwanted move, away from the craft I was seeking, made me think deeply about the kind of business we had created. The first step of such exploration, led me to a better understanding of the different types of business that exists — and to some extend, to these words you’re now reading.
Here’s an over-simplistic TL;DR: there are two kinds of businesses, the ones that scale, and the ones that do not. Indubitably, all businesses need to grow at some point, but not all of them are designed to scale — we’ll review the scale idea later.
Businesses That Do Not Scale
The main idea behind the non-scalable business is that, somehow, they are subject to gravity. There is a physical component that prevents them to go from 1 to N with no marginal costs associated with such growth. I refer to this business as a lifestyle business (LB).
In my mind, a restaurant is the poster-child for a business that doesn’t scale. Imagine that you have settled for a location. You are given a fixed amount of square meters, where you can fit a limited amount of tables. By definition there is an upper bound on the number of people you can serve each day.
Physical space handicaps the revenue. However, it is also the driving force that allows them to focus on the product and thrive under quality premises.
Non-scalable ventures keep its core experience isolated from business development. If you had done some basic math and (correctly) planned for green margins beforehand, the health of your business will mostly depend on you delivering a great experience to your customers. You won’t become filthy rich overnight, but you’ll certainly be OK.
It’s not the only factor, but other things being equal, your customers will prefer a better UX. What is fascinating about this attribute is that it is not possible to overshoot. There’s no such thing as good enough in this axis of performance.
While it is true that, in an LB environment the physical limitations are ultimately constraining the revenue, they are also the driving forces that allow you to focus solely on the product. The UX is never capped in this regard.
Which leads us to the double-edged sword of LBs.
The problem you are solving for in an LB is probably well understood. There will still be room for innovation, sure, but its core experience has already been mastered by countless others before.
This is good news since you won’t have to reinvent the wheel. But on the other side of the blade, fierce competition will be awaiting. At the end, it is a tradeoff. However, another opportunity to focus on the core experience. What matters the most in an LB.
We hear the best product doesn’t always win. Within the LB realm, I’d argue, the best product does win. Few other market dynamics play out. Hence the single and most important lever you have to win over your customers is craftsmanship.
Businesses That Scale
From a societal angle, though, we tend to reward the CEOs behind the unicorns of the world. Organizations attuned to the Internet dynamics — where adding additional units of capacity comes at no marginal cost. Serving one or one billion is “almost the same” in terms of their fixed costs. They were born around Internet assumptions, thus able to leverage these capabilities from the get-go.
By the same token, it is precisely this underlying principle that ends up setting up winner-take-all environments. Market spaces where you either grow or die. If you are not up for the challenge, another will. When you are playing growth, staying small is not an option.
I’m not saying these companies don’t place importance on the product side. On the contrary, most of them are product-driven, and emphasize product above all.
But unlike lifestyle businesses, UX acquires another dimension that allows them to acquire and retain customers. The experience is directly affected by the sole fact that more people are using the product — the often called “Network Effects”.
If deltas of usage by any given customer increase product value for other customers as well, then it follows that the main motivation should be placed on growth. An irrelevant factor for LBs, but the most important one when dealing with unicorns.
Ben Thompson calls them “Aggregators” and defines them around a virtuous cycle:
By extension, this means that the most important factor determining success is the user experience: the best distributors/aggregators/market-makers win by providing the best experience, which earns them the most consumers/users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle.
Ok, so what?
I’m not saying that one is better than the other, I’m just laying relevant facts for the next business idea. At the end of the day, it’s all about personal motivations and incentives.
On a more personal note, I deeply enjoy the feeling of closeness that LBs radiate. It might be the craftsmanship, that you can manage the operations from end to end, that you can see, that you can literally touch the business.
This idea of simplicity, but at the same time, never ending refining, is what attracts me the most to LBs.
On the other hand, in a business with uncapped scale, expectations overcome you, the scope is almost infinite and the ambition of the project is insatiable. You’ll feel like you are never doing enough, this is an exhausting feeling.
As a society we tend to reward people behind growth business, and they absolutely deserve it. At the end of the day, they are the ones pushing humanity forward, making everybody’s lives easier because of their creations.
But we should also make room for the little, delightful things. We should not be worried about the size of our passion, what matters is being passionate about something and stick to it.
If some day I found myself in the situation of starting a new venture, I’ll make sure that it doesn’t scale, so I can primarily focus on delivering the best possible experience.