“They said my business won’t scale – does that mean I should give up?” Too often I hear from entrepreneurs who are discouraged from pursuing their dreams because they have been told by investors that they do not have a scalable and replicable model.
“Hmm, great question…” is my usual reply as I stall for time while I think up an answer that won’t dash their dreams forever. I’ve been asked it enough times now, to warrant a post of it’s own. So here goes.
What does replicable and scalable mean?
First of all, what do “replicable and scalable” actually mean? Well contrary to how often you may hear these terms bandied about, they are certainly not terms that can be applied to the majority of businesses. In fact the proportion of businesses to which this term applies would account for a vast minority of businesses in the world. Here in NZ I’d say it would be less than 5% of all businesses, given that 95% of our businesses are small businesses. (More by international standards).
In the context of entrepreneurship, replicable and scalable are terms whose roots stem from a definition of startups popularised in the tech sector by Steve Blank, which is generally something like, “a temporary organisation established to find a repeatable and scalable business model to execute.” (See Mr Blank’s definition of a startup here…)
For what it’s worth, these are just my interpretations.
Replicable refers to the ability of your product, service or business to be replicated and sold and delivered consistently and reliably, to serve (theoretically) infinite customers the exact same service or product, to the exact same standard, every time. (I prefer to use the term replicable rather than just repeatable, as some products and services which can be repeatedly and reliably sold eg haircuts, annual accounting services, flat whites are still not easy to replicate to the same standard every time, especially at high volume.)
Some examples of replicable products would be nearly anything that comes off a high volume production line (eg iPhones), McDonald’s Cheeseburgers (mostly), Xero’s accounting app, subscription TV. No new thinking or retooling is required for the business to clone these products for additional customers.
Some examples of a non-replicable products would be things like custom motor bikes, architecturally designed homes, Oscar winning movies, advertising campaigns. If your product or service requires new thinking, or relies on the expertise of particular individuals each time it is delivered, it’s not replicable.
McDonalds is replicable. Three Michelin star restaurant, L’Arpège is not. Toyota’s are replicable. Rolls Royce’s are not. (In reality, these terms are relative terms, not absolute, and all businesses sit somewhere on the scale of “high” to “low” in relation to each term, but you get the picture.)
To me, scalable is an indication of the ease with which you can deliver this consistency of product, to an ever increasing number of customers, before you hit your next profitability inflection point. That’s a fancy way of saying, how many customers can you serve at your current level of profitability before you need to build a new factory or shop, or redesign your product or logistics, or open a new sales office or market? This is what makes cloud based subscription software businesses (SaaS) particularly attractive to investors – once you have built your product, you can serve almost infinite additional customers, without any major additional costs other than those of customer acquisition. In fact, in a perfectly scalable business the exact costs of acquisition and deployment for each new customer are known, as is the lifetime revenue of the customer, meaning gross profitability and net profitability is linear to customer growth. So for instance, we know that once the product is developed, for every $10 we spend in marketing, we make $40 in profit – nice and simple for investors to understand!
Take Xero. The software team does the initial development, and a core management team, partner channel and online marketing program is put in place. This is the expensive part – like building the factory in industrial terms. From then on, customers from pretty much anywhere in the world can be signed up without the need of a salesperson, or any additional people to deliver the product – the software does all that and it doesn’t need to be paid, fed, rested or cajoled. Apart from some server costs (I imagine), once the core infrastructure of the business has been put in place, there are no major incremental costs apart from customer acquisition and customer service.
Why do investors care?
Well the first thing to remember is that rational investors, want the highest potential return, for the lowest possible risk, for every dollar they invest. (Just as you would if you were investing your own money.)
You’ve probably heard of the “10 x money” rule which is the guiding investment mantra for many angel investors. That is, on average for every 10 businesses they invest in, only one will do really well, while the others will come out neutral or lose money, meaning they have to look for investments they believe will give them a minimum of least 10 x return on their investment.
It just so happens that to deliver this type of return, businesses generally need to have the potential to grow really big, really fast. That is, they need to be able to serve a huge amount of customers, all at once, profitably, without requiring too many huge future infrastructure costs. Hence, replicable. Hence, scalable. So if you’re doing beautiful hand made custom wedding rings, through a slick online shopfront, it’s not you. If you’re building the biggest personal trainer network in New Zealand, it’s not you*. If you’re opening a new gluten free restaurant in Ponsonby, it’s definitely not you.
Your businesses are not “replicable and scalable” by traditional startup investor terms.
But it does not mean you should not be building them. And it does not mean you should stop seeking investment.
Replicable and scalable are the enemy of bespoke and unique
You see this is where you as the entrepreneur have to get really clear about what it is you want to do with your life. Is it more important to you to be an international squillionaire startup success story? Or to be renowned in your field for mastery, creativity and contribution. If the cost of being “replicable” is sameness and compromise, are you OK with that? Would you prefer to deliver perfection to an exclusive clientele who value your work, or good value to all at the cheapest price?
How sad would the world be if it weren’t for all those who dared to put their life’s work into their craft, regardless of what investors said? How much poorer would society be if people only embarked on projects, causes or businesses that made “financial sense”?
Because in most situations replicable and scalable are the enemy of bespoke and unique, and only you can decide what you will be happy with. By definition, replicable and scalable requires you to serve as many people as possible, as cheaply as possible, focusing only on the features that matter to most, and forgetting those who may want something more. If you understand Henry Ford’s “any color you like as long as it’s black” mentality, replicable and scalable is not likely to be a problem for you. Microsoft did well by enabling beige boxes for the masses. On the other hand Apple did well by bringing form as well as function to a smaller tribe of discerning users.
The important thing is that there is no “right” or “wrong” – just the right or wrong investors for you. So if you’re trying to raise money it’s important not to misinterpret investors comments as a slight upon your life’s work, or take it as a sign that your business idea is no good. It may simply be that your understanding of the investors you’re talking to is misplaced, and you simply need to find a different type of investor. One with a track record in your industry. One who cares just as much about your unique contribution and vision to your field, as the size of your addressable market, or life time customer value. They may not be the ones you meet at the angel showcases, more likely you will have to search harder than that. But they are out there, and in every industry.
It might seem ridiculously obvious but having a business that “won’t replicate or scale”, is only a problem if you’re looking for money from investors who care about it being replicable and scalable. That is, most angels other than friends and family, and VC certainly.
But it is not necessarily a problem if you’re looking for money from investors from within your industry or who care about what you’re contributing to your field or society, over and above what you can deliver to them in terms of ROI.
In short, it is only a problem, if you think it’s a problem. If your priority is the money and investment, keep searching for a different business model. But if your priority is mastery and brilliance in the pursuit of your passion, keep searching for a different investor.
*Although Les Mill’s range of international group fitness programs were very scalable.