During the last decade, during which I’ve spent three years as an entrepreneur and the rest as a private-equity investor, I’ve both asked and answered hundreds of questions about scaling companies. The basic gist has been: How do we get company X to scale faster, or why invest in activity Y if it’s not scalable?
While there is certainly a time and place for investing in scalable activities as a startup, the most valuable insights often come from the completely unscalable activities startups pour energy into along the way.
Related: Why You Shouldn't Scale Your Startup
In his book, The Lean Startup, Eric Ries shares stories of startup entrepreneurs doing things that don’t scale. For example, in the early days, Zappos founder Nick Swinmurn took photos of shoes at retailers and posted them online to see if consumers would actually be interested in an online shoe store, rather than building an ecommerce platform on a hunch.
Ries advises entrepreneurs to use such a lean mentality to test their hypotheses -- often by building and iterating on a minimum viable product to see how customers respond. After Swinmurn’s experiment showed that people were ready to purchase shoes online, he built a more sustainable platform and an eventual billion-dollar business.
Paul Graham of Y Combinator suggests startups do these activities that don’t scale to “delight” -- if the company does something special for its initial users (a handwritten thank you note, small gift, etc.), the user will be more likely to believe that signing up was a great choice. It’s actually one advantage of being a small company -- you can give customers more attention than most big companies can.
In our first two years at CircleUp, we’ve done things that don’t scale every day. For example, we speak directly with an overwhelming majority of the investors on our platform to understand how our product can better meet their needs. We also review every company’s investor presentation on our platform. If we can figure out how to make 50 companies or 50 investors be comfortable with our platform, then we can collect invaluable feedback from these users that can be applied when we get bigger.
We’re also starting to use more scalable machine learning now that we have more data, but our initial feedback from investors and companies will help us iterate and build on successful user experiences. Investors and industry experts alike have questioned the long-term prospects: Can we, and our competitors, scale such that we are not merely small investment banks, but instead engines of finance democratization?
There are two main reasons why startups (including us) do these things that are not sustainable in the long run. Testing ideas first, rather than going after them full bore because intuition tells us to, is a proven way to save time and money. Most importantly though, we do things that don’t scale because they are the best tool we have for building trust with customers and partners.
Investing in things that don’t scale is tough when you’re starting out and even tougher when you are faced with the criticism that your long-term viability depends on demonstrating your ability to scale. But startups need to invest in activities that don’t scale because they need to listen to their most important assets -- customers -- to win.
Listening to customers is like the early stages of building a relationship with a potential spouse: Can you imagine telling your partner, “I meant to call you back -- but that just doesn’t scale.” It sounds ridiculous in a romantic context, and it’s equally ridiculous for a successful business.
Related: The 3 Hires I Wish I'd Made Sooner