When the austerity ends and the happy day arrives that you achieve profitability, you can start asking how to scale and, even more important, what does scaling look like for you.
Are you building a “lifestyle” business to support a relatively unstructured, autonomous lifestyle such as Tim Ferris of 4-Hour Work Week fame? Are you looking to be CEO of an enterprise with a growing number of employees? Is your goal a business you will enjoy for life or a runaway success to sell and fund an early retirement? Are you scaling to make more money personally, as a company or to have free time without sacrificing income? Do you scale by reaching a bigger audience or strengthening a relatively small customer base? How much “you” do you want in your business? How much are you willing to delegate?
Only after answering those questions should you start asking how to scale your business.
If running a business with a growing number of employees isn’t appealing, you need to be careful how you take your product from the soft-launch phase into the mainstream phase. You’ll either need to outsource production or focus on a product that you can build on your own, such as an eBook or basic software application.
If your goal is to build a thriving business that you can sell off and then retire, be aware that your chances aren’t as good as some of the alternatives. The corporation’s profitability is more important than your personal income. You certainly can’t make your own personality an important part of the brand. Finally, your business model probably shouldn’t focus on being intimate, personal or customized. You will likely need to sacrifice elements of your unique selling proposition and that is risky.
Should you seek funding?
Whether you’re approaching VCs, taking out a business loan, appearing on Shark Tank, or running a KickStarter, it’s easier to get funding when you’re already making a profit. You don’t have to rely on theoretical projections. Just show your balance sheets and how you turn every dollar you earn into more dollars.
Related: Why You Shouldn't Scale Your Startup
Should you seek funding from outside sources? If so, what’s the best way to approach funding, and when is the right time? A big part of this comes down to what you want for your business and yourself.
If you want to keep full ownership of your business, a bank loan is probably a better move than working with a VC. At the same time, bank loans don’t come with advice, guidance or expertise. It’s probably a better idea to use bank loans to scale things you can already do, like paying for larger manufacturing runs or advertising.
If you’re looking for a way to grow your business and gradually phase yourself out of the equation, a VC is probably a smarter way to go. Assuming the VC has a good track record, they can offer advice and can help scale your business in ways that you as an independent entrepreneur might not have experience with.
If you’re self-funded and dead-set on remaining so, but you want to launch a product that you can’t possibly afford to mass produce on your own, consider running a KickStarter campaign, asking for pre-orders or some combination of the two. If you choose this route, be very clear with yourself and consumers about exactly how the money will be used to fully launch the product.
No matter which method you feel is best for you, it’s important not to dive into this too quickly. I think some of the following sanity checks are important:
Are you already earning a profit? Figure out how to earn a profit before looking for additional funds. Then you will be certain you know what you're doing, that the market exists and you have a loyal customer base to carry you through unexpected shortcomings.
Have you successfully transformed revenue into business growth? When you’ve had experience using money to make money, you can be confident you’ll do the same with outside funding, especially if you’re investing the money in something with a predictable return.
It’s not enough to say “we need money in order to grow.” You need to know precisely what the money is for, how it will earn a return and what your return would be in the worst possible scenario. This must be based on hard data rooted in business that you’ve already done successfully, especially the first time you seek outside funding.
If you can’t confidently answer these questions, it’s probably not the right time to seek funding yet.