You Can't Scale a Tech Company with a Small Business Mindset

It takes a very specific mindset to be the founding CEO of a tech company. It's a common misconception that because you have previously launched or ran another business before you can apply the same lessons and concepts to a tech company. Scalable, high-growth, venture backable, technology businesses are a very unique animal.

Brian Chesky never owned an bed and breakfast before launching Airbnb. Travis Kalanick did not operate a taxi company before launching Uber. Apoorva Mehta had no experience running a grocery store before launching Instacart. While it's possible that having that experience could have been an asset to those founders, it's equally as possible that it could have been a detrimental hindrance.

Here's why:

  1. Small businesses and tech businesses have very different types of value propositions
  2. Small business growth strategies have zero relevance to tech business growth strategies

Value propositions:

Here are a few example value propositions that a tech company never boasts but are forever a staple of a small businesses:

  • We have the best prices in town
  • We have the best customer service
  • We're the only company with this product selection
  • We create custom solutions for our customers' specific needs
  • We're a full services firm

Why don't you see these types of value propositions from tech companies? Because tech companies have different priorities and require different fundamentals to be successful. Tech companies need to have very strong unit economics, they need to start by being the best at offering one thing to one group of customers, they need to have repeatable and scalable sales models, and they need to be geographically unconstrained (usually by leveraging the Internet). If you fail at any of these you will struggle to do the thing that tech companies are design to do, make a lot of money very quickly. The above examples and other like it will lead you down a path toward very small margins, an inability to effectively target new customers, a strain on resources trying to do too much with too little, and no ability to create processes that can predictably scale.

Growth Strategies:

The difference in growth strategies primarily stems from the difference in operating environment and goals. If your small business grew 10% - 20% last year you're on top of the world. Continue that trend for 5 years an you could have turned your $5M business into a $10M business. That's good for the owners, the employees, and other stakeholders. As Peter Thiel often points out in his books such as Zero to One, if you're tech company is still a $10M business 5 years out, chances are you will either be crushed or eaten by competitors. The goal is not steady growth and maximizing profits on your P&L. It's market domination and being acquired for huge multiples before the company ever makes a cash distribution to shareholders.

The goal of a tech company is growing the companies valuation as fast as possible and ultimately leading to as big of an exit opportunity as is possible. As I wrote in a previous post, what drive's a tech company's value is different from what drives a small business' value. This is not a discount cash flows situation. Acquirers are buying tech companies because they have figured something out that the giant firm acquiring them couldn’t. That means tech companies pursue growth strategies that are focused on specific KPIs (like top line revenue, number of users, amount of data gathered, etc.) Small businesses will offer new products so that they can monetize more of their incoming leads regardless of quality. Tech companies will instead adjust their marketing strategies to focus only on higher quality leads and will only launch new product/feature offerings if it makes a significant impact on the business value (such as converting more target customers, collecting more data, creating more product stickiness, etc.)

For founders this really comes down to having a hear-to-heart discussion with yourself, your co-founders, and trusted advisors about what type of company you want to build. Sometimes the result is that you simply don't have the foundations of a tech company. Other times you'll realize the only way is to grow like a tech company. Many times however you have a choice. Whatever choice you make is up to you but regardless of the outcome, make sure you are creating the value propositions and pursuing the growth strategies that correspond to the type of company you want to be.

James Shomar
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