In addition to my regular consulting day job I occasionally moonlight as a coach for entrepreneurs.  I had the good fortune to meet a gentleman recently who is starting up a new business related to the Internet of Things.  He has a number of characteristics that could make him successful:  he has experience in the field, he has led a startup before and he is focused on getting the solution right, rather than getting to market quickly.  His major challenge now is a question that all entrepreneurs must face:  can the idea scale?

In the case of the gentleman I was coaching, he could easily create a small business that would become what some VCs call a "lifestyle" business - valuable, profitable but never very large and not worth a significant external investment.  His challenge is first to decide if he wants a business that scales, and then to decide how to structure his operations and business model in order to scale.

Lifestyle Business

A lifestyle business is a somewhat subjective term that entrepreneurs and funding teams use to describe a startup that will grow to a respectable size but isn't likely to grow dramatically and create an IPO.  In the case I've described the company could grow to a dozen or so employees and net a few million in sales with reasonable profits but never scale beyond that, under one of the operating models being tested.  And in some instances the entrepreneur may prefer that.  He or she can grow a business, control all aspects and never need a board or funding.

Experienced investors try to avoid funding lifestyle businesses, because they won't have the opportunity for accelerated gains.  Thus, they are always evaluating a business to understand how large a market it could serve, how valuable serving that market can be and how quickly a business can grow.  These are scaling questions.

Scaling an idea

There are a number of ways to scale a business and drive revenue and profits.  Before the internet you either sold large ticket items that were in demand to every household (white goods sold at high costs but infrequently) or sold smaller items that were acquired frequently by large portions of the population (consumer packaged goods, lower costs bur frequent replacement). 

With the advent of the internet and virtual products and solutions, scaling changed dramatically.  With the internet you could sell to the "long tail", you could sell very inexpensive solutions, items or data at very low cost to millions of customers or you could provide a service at no cost and make your revenue on advertising. 

Increasingly the best way to scale a business in the internet world is to provide a virtual product that anyone, anywhere can use (software, websites like Google or Facebook) or, in a neat twist, sell existing stuff through a different channel or business model (AirBnb).  The challenge with this model is getting enough investment early on so that you don't burn through your investments before you scale your user base.

Whether to scale

Entrepreneurs have a choice when they create businesses.  A lifestyle business is often viewed negatively by funders but these are perfectly viable businesses for entrepreneurs who wish to retain control. The tradeoff for an entrepreneur whether or not they want to grow a larger business and deal with investors and board members.  Corporate innovators and intrapreneurs don't have a choice:  if a business can't scale to some significant revenue stream within a few years, it will be viewed as a distraction and shut down. 

When you think about your markets and your offerings, think carefully about how you'll scale if you want to scale, because it will drive your business models and staffing decisions and to a great degree will dictate your funding options.