Thursday, September 25, 2014

Nothing since 2002? Why is it so hard for start-ups to scale?

This might be a small point, but it seems worth making based on a pitch workshop I gave at London's Google Campus for TechHub.

If scaling is the single most important capability investors look for, it's not just a technology issue. Even if you have a great idea for a start-up, it's a much better idea to get some business experience to make sure you can run the company before quitting your job and going full time. Another alternative is to get a founder with a lot of business experience to run it for you, of course. Otherwise, how will you grow?

Resist the urge to take money - as a loan or in exchange for equity - before you have a team that can make it all work in the long haul. HBR said it in 2002, and it's still true - a successful business requires a lot more than innovative thinking. See Why Entrepreneurs Don't Scale.

Just as an example of why founders might want to reread this old chestnut, back to my workshop.
We had a class-wide debate on behalf of a founder's concern: would investors respond poorly if he told them that the company was 5 years old?*

Some participants suggested that the founder shouldn't tell investors the company's age - 5 years is when you exit, they said. Why haven't you raised funds before?
I voted with the other half the class who said that it's an advantage to have bootstrapped. It gave the new company time to develop the technology and client base before selling any equity. It shows commitment to your business, they said (and I agree), and you're in a better negotiating position with a higher valuation.
Here's my conern:

A very smart, accomplished, internationally experienced group of people had a heated debate about whether or not to take a cash infusion.

But the management team's ability - or inability - to grow the company didn't even come up.
Did I mention that article from 2002?

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