Combustion Matters More Than Scale

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A version of this article previously appeared in The Wall Street Journal 

 

Tenderfoot Boy Scouts are taught to differentiate between the three combustibles required to build a sustainable fire: tinder, kindling and fuel wood. It's a long, cold night if the tinder does not light the kindling or if the kindling fails to ignite the fuel wood. However, once the fuel wood is lit, a fire is relatively easy to sustain, as the resulting hot coals readily trigger the combustion of new fuel. In the business world, a fire subsisting on fuel wood is equivalent to a startup that has achieved scale.

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Don't Define Scale Too Early

Scaling normally occurs after a startup achieves product-market fit. Such fit exists when a profitable customer acquisition model can be repeatedly executed with consistent results and without the need of heroic efforts. Scaling also requires: (i) adequate capital, (ii) an infrastructure that supports internal operations and the efficient and economical delivery of the company's value proposition, and (iii) an execution, process-oriented executive team.

At Rincon Venture Partners, we are occasionally approached by entrepreneurs who excitedly describe the myriad of opportunities they will exploit once their ventures reach scale.These conversations include lengthy descriptions of various long-term opportunities, such as:

Network Effect - "Once our network is established, it will grow organically and we'll upsell our users ancillary products and services."

Virality - "Our virality quotient will be extreme because our users will be highly inclined to share their experience with others."

Big Data - "The real value of our venture will be the data we collect from our users."

Advertising - "We will monetize our customers via online ads."

Sophisticated entrepreneurs understand that everything is easier at scale. Self-sustainability results in numerous opportunities that can significantly impact an emerging business. At scale, entrepreneurs have the luxury of shifting their focus from survival to maximizing the return on their resources.

Trying to jump directly to self-sustainability is a fool's errand when building either a fire or a business. Thus, when pitching investors, entrepreneurs should de-emphasize what they will do once they achieve scale and focus on how they will strike an initial spark and nurture it into a scalable, self-sustaining business.

Early-stage entrepreneurs who overly focus on the opportunities they will exploit once their ventures achieve scale are akin to a hungry Boy Scout sitting in a rainstorm fantasizing about the delicious feast he will eat, once he gets his fire lit.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about campfire stories or that killer burrito I just ate.

Photo credit: Flickr born1945

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.


Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.





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