The Start-up Paradox
Patrick McDonald opened the Airdrome restaurant in Monrovia, California, in 1937. The Airdrome was a reasonably successful little business, so in 1940, Patrick invited his two sons, Maurice and Richard (Mac and Dick), to help with the flipping of the burgers.
Mac and Dick spent almost 10 years tinkering with their business before they introduced the "Speedee Service System," which borrowed techniques from the factory assembly line, to serve customers quickly.
In 1954, 14 years after joining their father in the business, Mac and Dick were approached by a man named Ray. Ray sold them their milkshake machines and wanted to know if the McDonald brothers would be interested in selling him the franchise rights to their restaurant.
Ray Kroc negotiated the rights to franchise the McDonald brothers' idea throughout the United States.
According to Interbrand, McDonald's is now the sixth most valuable brand in the world, with a market capitalization of more than $77 billion. The McDonald clan ran a single-location hamburger stand for almost 20 years before Ray Kroc came along. Mac and Dick had the skills to create a successful one-location business. Under their tight rule and foreman-like management style, they succeeded on a modest scale. But arguably the skills that allowed them to manage a start-up were not the skills needed to grow a business.
I have found that there are three skills that are essential to survival as a start-up that you must "unlearn" in order to grow a business. To be clear, I believe these three skills are prerequisites for getting a business off the ground but also become a liability as time goes on.
In the early days, when cash is scarce, you need to be flexible. Instead of hiring full-time employees, you may subcontract work to a partner. This arrangement works out well as you pay subcontractors only when you have work, and they pay their own expenses.
You also stay flexible when dealing with customers. As a start-up, you're not in much of a position to dictate to your prospects, so you listen carefully and adjust your offering to what resonates with the people paying the bills.
Instead of setting up a physical location, you may create a makeshift office by patching together a home office, car headset and a sprinkling of Starbucks locations across the city.
All of this bootstrapping allows you to get your business off the ground on a shoestring budget and enables you to stay in business. In fact, without an ability to remain flexible, most businesses would never get beyond their first year of operation.
The problem is, being too flexible can start to become a liability. Your contract employees may have other customers and can't be at your beck and call when you need them. What you may need instead is a dedicated employee, but you are afraid to make the commitment. Your intuition—the very thing that got you successfully past your first year in business—starts to limit your growth.
Your customers may start to ask for so much customization that the only person in your company with the technical skills to fulfill their special requests is you. However, what you need to build a valuable, sellable business is to standardize your offering so you can train others to do the work while providing a product that pleases most customers.
Eventually a customer will want to see where you work and may think less of you if your office is your car. Your intuition tells you to stay flexible, avoid signing a lease because you can fake it for another year. But maybe what you really need is a permanent place to do business.
It's a cruel twist of fate. Flexibility, a prerequisite in the beginning, actually becomes a liability.
2. Instant ROI Threshold
If you're bootstrapping a start-up, you have no choice but to make everything you do profitable from day one. Your time horizon for a return on investment is measured in days, not years. Simply put, if it doesn't make you money today, you don't do it.
This discipline—bordering on obsession for some of us—of getting an instant return on cash invested allows us to get a business off the ground. But the problem with fixating on immediate profit is that it can undermine your ability to grow.
For example, redesigning your website won't make you more profitable this month, but it could be a necessary investment to attract larger contracts from bigger customers in the future. Our natural inclination as a start-up is to leave well enough alone, but the growth-oriented leader needs to make the investment.
When you hire a new salesperson, you will have to carry him or her for six months until that first sale. This new employee will drag your profits down this year but could be the key to making your business more valuable and sellable down the road. Your start-up genes say wait—your customers are buying your expertise after all—but what you need is a salesperson to pull you out of the day-to-day.
I'm not advocating making wild investments and ignoring profitability altogether. But I am saying, once you have some cash in the bank, placing an equal emphasis on top- and bottom-line growth requires that you invest in some things that don't necessarily pay off right away. After a successful start-up, that just might feel very unnatural at first.
With no money or people to delegate to, a successful start-up owner gets things done on his or her own. Many of us grow to like the control of doing things our way and fear things might get screwed up if we give them to someone else to do.
Since we can do every job in our company, we often just keep doing some jobs long after we should.
To illustrate the point, let's imagine your start-up generates $10,000 in pre-tax profit and you spend 2,000 hours a year at your company. That means for every hour you invested in your business, you generated $5.
Therefore, instead of hiring an assistant to manage your calendar and handle the details of your business, you could argue that it makes sense to do the work yourself because you couldn't hire someone for less than $5 an hour.
Now imagine your business has grown and you're now earning $200,000 in pre-tax profit on the same 2,000 hours at work. Now your time is worth $100 an hour.
Your entrepreneurial upbringing dictates that you manage your own calendar, but the math says it would now make more sense to hire an assistant for $40,000 a year, or roughly $20 an hour.
If you're not self-reliant in the early days, you won't even get a business off the ground. But at some point, your inclination to roll up your sleeves and do it yourself can be what stops you from growing.
The take away is this: flexibility, thrift and self-reliance are the essential ingredients of any start-up. But the paradox of a successful start-up is that to get to the next level, you might just have to unlearn some of the things that made you successful in the first place.
John Warrillow is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released by Portfolio/Penguin on April 28, 2011.
JOHN WARRILLOW | Columnist | Sellability
John Warrillow is the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a cloud-based software company that helps business owners improve the value of their company.