Businesses Should Scale for Passion, Not Investors
Entrepreneurial passion is too often lost when business leaders are forced to chase hyperscale growth targets.
The pandemic served as a major accelerant of internet shopping across all markets. We’ve seen the IPO of market-leading ecommerce site 1stDibs and Chairish's acquisition of Panomo. In the wider periphery of the design industry, sampling platform Material Bank acquired procurement marketplace Clippings following its $100 million fundraise earlier this year, and home-furnishings firm RH has gone from strength to strength.
Indeed, interior design is the latest industry to be hijacked by the venture capital led mission for "hypergrowth." Many founders simply believe VC investment is what entrepreneurs are meant to strive for, and by the time they realize that it might be bad for their customers, it’s too late to go back.
The hypergrowth trap
"Scaling up" is a term investors love because it’s how they make money. Injecting their cash into a business when it’s worth little and aiming to get a multiplied return a few years later — having incentivized the company’s management team to accelerate growth as sharply as possible. The hypergrowth model is unsustainable and often results in failure, but as VCs do it in a wide portfolio of companies, they only need a couple to succeed for them to profit. Businesses that can’t scale quickly — or don’t want to scale quickly — are worthless to them.
Why wouldn’t they want to scale quickly? Well, because throughout the relentless pursuit for the revenue targets that will facilitate the VC-driven five-year exit plan, a large list of things entrepreneurs claim to care about can too easily be lost, like the passion to make a positive impact or the mission to provide a better product or service. Essentially, the core values promised to customers and employees alike.
VC-backed businesses care about growth, and once that investor has exited, the need for growth compounds the pressure to make the company profitable. Of course we hear a lot about the VC-backed "unicorns," but nothing about the many that fail.
Alas, most startups eventually buckle under the constant pressure for greater and faster growth. Along the way, valuations can be wildly off as the excessive investment and rapid expansion create a smoke and mirrors effect. One of the most high-profile examples of this was WeWork, whose real value was exposed to not only be a fraction of what it gleaned from investors, but also significantly less than the sum that had been injected in the company.
Scaling your own way
Businesses have always been judged by their growth rate — and for good reason. A strong company should always be steadily growing because it shows that its products or services have genuine value to its target market. In the eyes of VC investors, scale is very different to this kind of growth — it’s rapid growth, and when it’s fueled by venture capital cash, it ceases to be an indicator of a good business. When a business makes the decision to not accept VC cash, it's in the fortunate position of being able to define scale in its own way.
Keeping your community at the heart of decision-making
Scaling for passion is the best way to sustainably grow a startup into a global brand without ever losing sight of why you started in the first place. Crucially, it enables you to consistently keep relationships and community experience at the heart of what you do, which is a core foundation of a business that never allows the quality of its offering to dilute.
Identifying gaps you're uniquely able to fill
A business that scales for passion, rather than investors, can spend its time seeking to identify further problems in an industry that it is uniquely positioned to solve, rather than pursuing buzzwords or strategies that happen to fit the agenda of venture capitalists at that time. All successful companies should constantly be asking themselves if they are still making life better and easier for their customers — not doing what investors want them to do.
Focusing on purposeful growth
Unlike VC-backed businesses, companies that scale for passion must be profitable. Usually that will mean achieving slower growth, but that’s not a bad thing — particularly as profitability brings stability. Growth should be purposeful and measured by its impact on customers. All too often, startups make decisions that will give them a short-term sales bump but won’t land well in the community that matters, resulting in friction, fraught relationships and disenfranchised customers. Do right by your customers and the growth will come naturally.
Hiring for passion
A business that scales for passion is able to assemble an equally passionate team that shares the company’s vision and values and whose members complement the weaknesses of leadership. Of course, startups need capital to grow, so it’s not an option for every entrepreneur to avoid venture capital investment. But if you do decide to take it, do all you can to find investors who truly understand your vision and values and care about what you're trying to build. Don’t add yourself to the list of leaders who make decisions to please VCs.
Entrepreneur Leadership Network Contributor