Growing a Company That Doesn’t Grow
IF EXCESSIVE AND BLIND GROWTH are the main causes of business failure, then how do we start and run a business to avoid all of that?
Growth can definitely be enticing and exciting. Making more money, increasing a customer base, garnering national media attention—none of these accomplishments are inherently wrong or bad. They just need to be balanced with meaningful, long-term strategies. A lot of “growth-hacking” (a Silicon Valley term for the kind of exponential growth that tech folks salivate over) employs pushy and even sometimes shady tactics to keep growing in spite of the excessive churn that’s produced.
For example, by adding a pop-up message offering access to a free report on every page on your website, you might increase the number of subscribers to your company’s mailing list, but you might also end up with a list that has few email opens and more unsubscribes, making your net-net growth very low or even negative. A company of one would have a mind-set more in line with providing a great newsletter with lots of valuable content of interest to the people it wants to attract; its overall subscription rate might be lower, but the open-rate and retention would be higher.
Kate O’Neill, a consultant to Fortune 500 firms and an accomplished speaker, understands the type of meaningful growth that companies of one need to employ. She shows companies like Netflix and Toshiba how to use data to make customer experiences better; with this strategy, overall growth is the result of careful planning around user happiness.
Kate’s superpower is being able to look at data and then apply it to the human experience. She’s noticed a pattern where growth-hacking companies focus on exponential user acquisition. They prioritize attracting customers, not determining the type of customers they want or the experience they want to give people once they become customers. She has found that growth as a one-dimensional metric for success is useless in the absence of real reasons for it or ways to support customers once they’re acquired. Most companies don’t even need that kind of excessive growth to be profitable. Companies like Airbnb have to start with a huge inventory—Airbnb needed to amass places to stay before it could make a dent in the market—but most companies don’t require so large a market share to start.
When Kate worked for Magazines.com, her role was to assume the overall strategy for acquiring customers. Previously, the strategy had been to grow right away to gain more customers, the thinking being that simply adding more customers would lead to more revenue. In looking at the collected data, however, Kate realized that user growth would cost more than user retention. By decreasing the number of subscription cancellations, Magazines.com would see better profits and gains than it would by trying to increase the number of subscribers. Since its whole business model was based on renewals, the company had to totally shift its thinking—from constantly searching for new customers to making sure existing customers were so pleased with the service that they’d renew for another year. Kate showed the company that the number of renewing customers was a far more important metric for success (and far cheaper) than the number of new customers acquired. Magazines.com also changed its home-page messaging in order to speak to existing customers, added more renewal offers, and improved customer support for paid users.
Over and over again, Kate has seen that sacrificing customer experience for customer acquisition doesn’t work long-term and is not a sound strategy with which to start a company.
THE FOUR REASONS GROWTH IS DESIRED FROM THE START
It seems counterintuitive, but starting—and then staying—small requires examining growth from the outset. If a new company of one begins by looking at why most companies grow, it can determine whether those avenues are the correct course for it to take. Most companies grow for four reasons: inflation, investors, churn, and ego. By examining each, we can be ready for the decisions we’ll have to make and better able to prevent social or business pressure from swaying us into doing something we don’t want to do or something that isn’t right for our business.
Inflation is as close to a constant as you’ll get in business. Everything eventually costs more. The five cents your grandparents paid for a soda is not the same price that you’ll pay at a vending machine today. My parents paid $50,000 for their three-bedroom house just outside of Toronto in the early 1980s, but there’s not even a micro-condo available for that price now. So inflation always happens, and if a business can’t keep up, its profits will shrink. The simple solution is to raise your rates each year to keep up and then invest any extra profit in those places that pay out higher than inflation (in other words, don’t keep the bulk of your business profits in a bank account that earns 0.001 percent interest).
Investors, even if they own the company, are the biggest reason businesses want to grow. If a VC firm puts $1 million into your company today, it will want to see a return at least three times that much (and more if they’re early-stage investors) within a few years. To hit those goals, growth has to be excessive. Even if you invest your own money to start a company, you’ll want to see a good payoff for the risk you took. However, if you’re able to start small—with little to no upfront investments—you can focus on running your business and making it better for the customers you serve instead of being constantly aware of the need to be “paid back” for what you put in.
As discussed briefly earlier, churn is what happens when existing customers decide they don’t want to be customers anymore. So the revenue they generated needs to be replaced with revenue from new customers. If your churn is higher than your user acquisition rate, then you’re in a downward spiral. Most of the time, companies try to fix churn, as we saw with Kate O’Neill, by focusing on adding more customers to the mix instead of working at reducing the reasons existing customers are leaving. According to the Econsultancy/Responsys Cross-Channel Marketing Report, adding a new customer costs five times as much as keeping an existing one. So while prioritizing acquisition over retention can aid growth, it’s also extremely expensive. The same study found that companies are still much more likely to put their efforts into finding new customers than keeping existing ones.
Ego is the final reason most companies want to grow. It’s also the trickiest, because it’s harder to overcome. As a society, we give people more clout and respect if they own a large company, so building one is a desirable goal. Many of us dream of being in charge of a large company but fail to look at the bigger picture and think about the impact of such growth on our personal lives, or even on the type of work we enjoy doing. Growth adds complexity, often strains relationships, and ratchets up stress. Not all of us have a father who’s got a sticky note on the family computer monitor that says, “OVERHEAD = DEATH.” When we start to examine why we want to see more and more growth, we may conclude that the main reason is wanting to appear more respected than we really are. Ego is usually overcome once we determine what our reason was for starting our business in the first place.
Staying small and not focusing entirely on growth keep your own integrity and personality at the heart of the business, making it much easier to run your business or team in a way that suits you and helps customers.
As Gary Sutton, author of Corporate Canaries, says, “You can’t sell your way out of an unprofitable business.” So starting your own company of one with a focus on profitability right from the start, when you’re at your leanest, is imperative. Your measuring stick for success doesn’t have to be growth as a one-dimensional metric; it can be something more personal and focused on your specific company of one—like the quality of what you sell, employee happiness, customer happiness and retention, or even some greater purpose.
IN THE BEGINNING . . .
People sometimes tend to focus on the wrong things when starting a business, like office space, scaling, websites, business cards, computers. You can add expenses or bigger ideas later, once revenue is coming in. But if your idea requires a lot of money, time, or resources to start, you’re probably thinking too big too soon. Scale it down to what can be done right now, on the cheap and fast, and then iterated upon.
The comedian Steve Martin has had similar thoughts about starting out and immediately focusing on the wrong things. Budding comedians have asked Martin, over and over again, “How do I find an agent?” or, “Where do I get photo headshots done?” or, “What comedy clubs should I start at?” The only question they should be asking, Martin notes, is: “How do I get really good at comedy?”
To start a company of one, you should first figure out the smallest version of your idea and then a way to make it happen quickly. Automation can happen later. Scale, if desired, can happen later. Infrastructure and process can happen later. Focus on where you can test the waters without a massive investment of time or money, and then pay attention to what happens when casual contacts turn into customers, even if it’s only a handful at first. Why did they buy? What motivated them to do so? How can I keep them happy? And most important: How can I help them succeed?
To emphasize that last point, customers really don’t care if you’re profitable. But if what you sell them can help them become profitable, they’ll never want to leave your business. They’ll stay on as customers and then probably tell others to become your customers too. When you treat your relationship with your customer base as simply transactional, you’ll be preoccupied with how much you can sell them and how often. The more you begin to treat new customers as real relationships that you can grow and foster, and the more you can figure out how what you do can help them, the more likely they are to want to stay on as customers. Customer success is the cornerstone of a profitable company of one.
Alexandra Franzen is the author of several books and has written for such publications as Time, Forbes, and Newsweek for the last ten years. Previously, she had a full-time job in radio broadcasting. A few days after quitting, she didn’t start renting office space or buying business cards; rather, she just began emailing every single person she knew. Her parents, friends, college professors, former coworkers, internet friends . . . everyone she could think of. She wrote each one a personal email stating she had left her radio job, she was now working as a freelance writer, and she was ready for new projects.
Alex also mentioned the type of work she was looking for. By the end of the week, she had emailed sixty people, and almost everyone had written back—either giving her ideas about others to contact or asking to hire her. She began with three small projects, and those led to three more as her first clients hired her a second time for a new project or referred her to someone else who needed writing work done. It all snowballed from there, and now she’s booked almost a year in advance. She didn’t start with a vision for growth and profit or a vision of what the next several steps would be—she began with what could immediately result in paying customers. Then and only then, based on profit, did she increase her expenses (but only a little) and make some business purchases.
People often feel like they have to move away from obscurity in their new business as quickly as possible. While obscurity can equal less exposure to potential customers at the outset, starting out small and without a massive audience is perfect because it enables you to gain experience and play with your business ideas. Not to mention that there aren’t many people watching if you fall flat on your face. Starting out small is the best time to learn what your business truly is and why it serves who it serves. There’s no need to rush to be noticed faster than you can handle.
Starting a company of one requires that you embrace working on what’s achievable now, which usually means embracing less than your vision for your ideal future. Remember, at the start you’re the smallest and most agile you’ll ever be. You have fewer (or no) customers, less established processes, and less name recognition. Being small and measuring meaningful growth based on profits instead of projections ensure much more stability.
We often think that we need to have everything in place—all the systems, all the automations, all the processes—to be ready to launch a digital product. We want everything all polished and perfect before we hit “publish.” But most of the time this doesn’t happen. Most of the time, in fact, waiting until everything is totally perfect can only hurt or delay your launch.
You can’t start a business with every idea you’ve got for it listed in the “need to have” column. You’ll never get anywhere. Plus, a lot of your assumptions about what you need might change once people start buying and using what you’ve made. A true “need to have” is whatever will make your idea fall apart if you don’t have it. For example, if your idea is a health care SEO consultancy, your business first needs to thoroughly understand SEO and its implications for hospital websites; otherwise, your idea is of no use to hospitals. But does your consultancy need an office when working from home or in a cheaper coworking space would suffice? Does your company need glossy business cards if most of your connections are made online? Does it even need a printer if contracts and documents are all sent digitally? These are all examples of “nice to haves” that can come later, after your business is up and running.
Crew, a company we discussed in Chapter 3, started out with a single form, on a one-page website, that manually matched businesses with designers and programmers. Over time, as revenue grew, the company was able to create software and automations that helped scale the volume of matches. But at first, Crew was able to launch and test the idea of a matching service almost instantly by helping a single company get matched to the right freelancer. Scaling down an idea that you can start right now puts the focus on helping people immediately with what you have available right now and are resourceful enough to provide, like a sort of business MacGyver. If your business only has an expertise plus a figurative stick of gum, a paper clip, and a ball of twine, think: Whom can I help with these things?
In short, start small. Start with just the smallest version of your idea and a way to make it happen. Instead of waiting (sometimes for years) for bigger wins to happen, you can use small wins to propel you. That’s actually a much smarter way to launch. Easing up on the “growth equals success” mentality opens you up to starting and becoming more profitable much sooner.
IF SCALE ISN’T THE GOAL, WHAT IS?
We need to reexamine our relationship with thinking big and success. Questioning growth—or at least, not scaling—isn’t the same as staying static and unchanging. Even a business that doesn’t want to grow much needs to constantly learn, adapt, and refine. The cost of living, labor, equipment, materials, travel—all increase year over year. Companies of one aren’t anti-scale; rather, they’re aware that they need to determine which areas of their business need to scale and when it makes the most sense to do so. Scale can sometimes create efficiency, and volume can increase profit margins. But without business introspection, scale and volume could be chased as vanity metrics rather than as accurate measures that determine profit.
There’s a real difference between growth as a goal and growth as a direct result of profit from sales of a valuable product. Letting growth as a goal guide your company’s decisions can be shortsighted or result in high churn. Whereas if your decisions are guided by growth resulting from profit, you stay focused on how you can continue to make things better for your customers—with better products, better experiences, better support, and increased success for them. This is growth that stems from doing things correctly, not from making growth your top priority and just hoping you do everything right.
In public companies on stock exchanges, there’s pressure from stockholders to see stock prices increase constantly so that there’s positive return on investment. The same is true for private companies with investors—they want to make a return to show those investors that investing in the company was a smart idea. The majority of companies, however, don’t need to chase growth to appease outside investors. Companies of one can get by paying only an income to their owners.
Peldi Guilizzoni founded a wire-framing company called Balsamiq in 2008. Before that, he was a senior software engineer at Adobe. Balsamiq has always been privately owned, profitable, small, and focused on being better instead of bigger. Its goal—providing great software that’s valuable and easy to use—leads to more customers and more profit. This approach varies from that of other software companies, which is to acquire more customers and earn greater profits that can happen only at scale and sometimes at the expense of customer satisfaction. Each year Peldi takes out $1 million personally, keeps an eighteen-month runway in the company (in case anything bad happens), and pays out the remainder to his twenty-five-employee team (which grows by only two to three people per year). He’s faced pressure to grow much faster and has even been offered VC investment, but he continues to turn it down. To him, such investments, far from helping to improve his software, would just make him beholden to growing for the sake of investor ROI. He likes to make sure he has no business debts, and the only deadlines are ones that Balsamiq self-imposes. Peldi’s company grows because he focuses on simply making great software.
By focusing on customer success and happiness, Peldi avoids the dangers of “thinking big” or pushing aside profit in the hope that one day margins will be huge. Even business moguls like Richard Branson started small: the entire Virgin brand began with a single magazine called Student. Google began as a research project at Stanford. Facebook was targeted only at Harvard undergraduates when Mark Zuckerberg started it.
For Peldi and his team at Balsamiq, focusing on better, not bigger, removes any pressure to take shortcuts in software development. He gets to spend his time talking to customers instead of in board meetings or at investor pitches. Moreover, Peldi says, “I’m Italian. Italians measure things in generations, not quarters.”
If scale isn’t the goal, we can strip our business and business ideas to their essence to discover their greatest strength. This is the view held by Yvon Chouinard, founder of Patagonia, the clothing and outdoor gear company. Having business minimalism as its functional ideal has led Patagonia to create an ironclad guarantee for its products, which is in essence a lifetime refund/replacement policy. This ideal also led Chouinard to start the charity 1% for the Planet, instead of attempting to maximize and grow sales at all costs. Patagonia even has ad campaigns telling people, “Don’t buy this jacket,” and encouraging them to repair or recycle the clothes they already have.
GROWING WITHIN AN EXISTING ORGANIZATION
In many large companies, as your career grows, you’re promoted out of doing work with your core skill set and into managing other people with that same skill set. Since these companies operate as pyramidal hierarchies, advancement brings increasing influence over more and more people. This can only happen if a company continually hires more staff, since there need to be people to manage as others get promoted.
This doesn’t have to be the case for organizations that operate under a company-of-one mind-set. But then how do you advance in your career within a company that doesn’t grow, or that grows extremely slowly? Career growth in this case happens by increasing your scope of influence and the level of your ownership; success in these two areas allows you to stay focused on your skill set. This is how our friends at Buffer (introduced in Chapter 2) approach career advancement—with an interesting hybrid of a pyramidal bureaucratic hierarchy and a holocracy (a completely flat organization where no one manages anyone else).
It takes even less to start a company of one within an existing organization, like a team at a corporation. Although it’s not been my own path, working at a larger company does have its benefits—for instance, not having to worry, for the most part, about insurance, administrative work, or covering your expenses. And although you can sometimes gross more as a freelancer or entrepreneur, you have to take into account many expenses you wouldn’t have working for a larger company, from office rent to equipment to insurance to long sales cycles (which you can’t typically charge for). This is why many people opt to work as a company of one within an existing business, if it’s set up to foster this approach or if they can get buy-in. As we’ll see, there are several benefits to doing this.
Buffer has seventy-two employees, is happy at that size, and has no short-term plans to excessively grow this team. They saw that defining their scope of influence meant determining the amount of technical prowess they needed in a subject area. For example, with the goal of being able to program for Android devices, your scope of influence can start small—say, with being able to program in Java (the primary language for Android). It then grows by how much impact you can make, like a ripple. Being able to program to accomplish your tasks creates a relatively tiny ripple (you wouldn’t be hired as an Android developer if you couldn’t code) and grows only as you’re able to influence more, for instance, by having the expertise to make sound decisions around Android for your whole team. Your scope of influence can potentially increase to become industry-wide (such as being asked to speak at Android events), your tiny ripple having turned into a massive wave.
The second factor in career growth is ownership. Ownership is related to how Buffer assigns responsibility to each employee. Junior programmers just starting at the company are given only tasks to do, not any ownership on a project, along with responsibility for doing the work, learning, and being mentored by others. As their careers continue, they’ll be able to own specific projects within their team—and be accountable for the deliverables associated with those projects. Finally, as their career advances even further, they’ll be given ownership over entire disciplines within the company and all the deliverables that come from that discipline. For instance, a CTO is in charge of everything, company-wide, that relates to technology and programming.
Katie Womersley manages engineers at Buffer and helped come up with this “scope of influence” and “ownership career” framework. She’s what Buffer calls a “people manager”—she’s in charge of people decisions in engineering. In this model, Katie makes decisions in engineering as they relate to people, as she has a scope of influence and ownership over that entire team. But in this style of organization, an engineering team member can make specific decisions as they relate to their own scope of influence and control—for example, the team member who knows the most about Android. In this way of doing things, different people are in charge of different areas. So it’s possible to have a scenario where two employees are working together and one is in charge of one type of programming and the other is subordinate, but in an HR scenario their roles are reversed. Basically, the most qualified and best-suited person makes the decisions for each specific project.
Buffer’s goal in organizing the company this way is to illustrate that there’s no ceiling for rising: employees who don’t want to outgrow their jobs don’t have to. An employee who loves programming for Android can simply acquire more and more Android-related ownership and decision-making abilities. Other employees may choose to grow to manage Android projects, or to become people managers. Buffer employees never have to choose between stagnation and leading people—they can choose to go deeper into their area of expertise or go wider by building a name for themselves outside the company in their area of expertise (which is then rewarded).
This is exactly how you grow within a large company of one or how a large organization can operate more like a company of one.
BEGIN TO THINK ABOUT:
· How you could prioritize your existing customers or transform them into repeat customers
· The smallest version of your business idea that you could start with now, with little to no investment
· How you want to grow as a business, or as an employee who doesn’t require transitioning into work you don’t actually want to do