Scaling & Financing

Previous: Maximizing Productivity

Smaller companies can often make more profit than large companies.

  • The only advantage a large company has over a small one is that it can do things at scale.
  • The founder is typically involved in a far greater percentage of customer interactions, meaning better customer service.
  • The founder gets to closely and quickly choose all the decisions for the organization.
  • Changing the business model is comparatively easier.
  • The founder isn’t wrestling endlessly with management concerns.

Smaller also means more freedom for the founder.

  • They can tell the truth on their blog without much fear of public backlash.
  • The founder is typically outsourcing boring and low-impact things (e.g., manufacturing, logistics, billing).

However, there are downsides.

  • Smaller organizations rely very heavily on other organizations for their needs, so they’re not as safe.
  • Larger company management can typically create small-scale units inside their larger conglomerate to compete with you (with the comparatively endless ability to scale).
  • If you want to retire or build something that lasts beyond yourself, you must keep scaling.

As soon as possible, legally separate and protect yourself from the business and associates.

  1. Open a small business bank account.
  2. Get business licenses, government permits, and applicable insurance policies.
  3. To limit liability to yourself, file for an LLC or file your articles of organization/incorporation.
    • Get an Employee Identification Number (EIN) or Tax ID.
  4. If you’re forming a partnership, enter a buy/sell agreement.
    • You may get along well right now, but money tends to corrupt people.
    • Irrespective of how well you know someone, you don’t know when they’ll want to retire or leave.
  5. If applicable, pick employee and owner retirement and health insurance plans.

Needing to Scale

At some point, your small organization will eventually travel down several possible paths:

  1. Its core market will be taken over by people more competent than you and your business will eventually fail.
  2. You’ll scale upward to compete with the changing conditions and the need to safely manage your resources against a growing market.
  3. You’ll sell the organization, and probably start again with another idea.

Even if you want to work alone, a successful business needs other professionals’ help.

Financing

To get the business plan as perfect as possible for prospective investors, revise the business plan a few dozen times.

Fundraising is easier when the business model is simple.

  • More complexities in your business model will make most investors skeptical over whether it’ll succeed.
  • More elaborate or untested plans are more likely to fail.
  • The only people you can successfully win over with a complex business model are typically terrible people to deal with when your returns don’t satisfy them.

When securing a loan, try to only use the organization’s assets as collateral.

  • A loan in your name can outlast the business.
  • If you need, move more assets over to the organization before asking for a loan.

Use investors and lenders you’re familiar with.

  • Borrowing and not paying back the wrong person or the wrong bank can destroy your reputation for years.
  • Unless you know for sure you’ll be able to pay them back, do not borrow from family members or friends.
    • As a general rule, be careful about borrowing proportionally to how close you are to them.

Not all investors are the same.

  • People who fund startups (“angels”) aren’t that hard to find, but it can be challenging to convince them to invest in your idea.
  • Conventional banks are highly reputable, but you’ll likely need to collateralize assets.

Search outside your present network for investors who have already invested in your type of business:

  • Startup incubators (e.g., for universities/MBAs, technology startups)
  • Your region’s Chamber of Commerce
  • Crowdfunding platforms
  • Trade-specific startup groups and networking events
  • Investing platforms like Republic or Open VC

Be careful with private loans.

  • Many loans with investors are not regulated by any government authority, which makes them more flexible but also more dangerous if you don’t read the contract.
  • Loan terms can often change arbitrarily, so stay informed on any changes to a contract.

You can give equity to investors instead of acquiring a loan, but be careful with whom.

  • Someone who has equity in the company has control over the company’s decisions, but a lienholder only has control over the organization’s assets.

A company can lose money many times, but it only runs out of money once.

  • It’s absolutely impossible to recover from operations if you can’t pay your workers.
  • To buy time to adapt, always keep 2-3 months’ worth of operating costs in an emergency fund along with an untouched line of credit.

As you scale, shift from focusing on profit to focusing on ROI (rate of investment).

  • Once you’ve adjusted for risk and long-term costs, the highest returns on the organization’s efforts aren’t always generating the most profit.

Hiring

At some point, you’ll reach a workload critical mass.

  • Workload critical mass comes from being too busy to fix how busy you are.
  • It’s a precariously dangerous place to be, since any increase in work (e.g., extra project needs, more work required than expected, contract renegotiation) can push you into a cascade of failing to fulfill obligations.
  • Before that point, you will need to hire a new employee or draw boundaries and say “no” to some things.
    • However, saying “no” to your customers is a quick way to lose them.

Employees are, by far, the most expensive increase to costs in a startup.

  • The hourly rate can be absurdly high relative to just about everything else.
    • e.g., a nice $45 hand tool is the same as 3 hours at $15/hour, meaning a week’s pay at that rate can cover a fully loaded toolset.
  • Further, that hourly rate requires extra considerations:
  • To that end, hire very slowly, and only the right people for the role.

Your first employees, like you, will have many small tasks.

  • Preferably, look for someone skilled in a variety of small things you’re not good at.
    • If you sincerely value that person and want a long-term relationship with them, consider giving them partial equity in the company.
  • While your spouse can be a vital co-creator in the organization, do not require them to do more than they’re comfortable with.
    • Establish boundaries by clarifying job definitions and working conditions beforehand.
    • You should both agree on their commitment to the work.
    • Leave work away from personal time.
    • Consistently, constantly thank them.
    • Consistently review whether your shared work together is working out.

If you don’t want to hire employees (or at least not yet), consider narrowing your specialization.

  • Your marketing will have to shift, but you’ll be able to more intimately focus on specific needs of clientele you’ve already had experience with.

Once you expect you’ll need employees, start writing an employee handbook.

  • The handbook clearly distinguishes proper conduct, and can be enforceable in civil cases.
  • Be very careful with the wording, since a few misstated words can make the handbook diverge from reality.
  • Use software or download forms.
    • Do not simply edit another company’s handbook, or you may be forced to do something against your will later.
  • Stay legal, but flexible.
    • Clarify employee behavior expectations.
    • Do not specify any disciplinary action in the employee handbook, since it may obligate you to perform or refrain from performing something later.
  • Always include a few key legal issues:
    • Harassment and discrimination
    • Wage and hour issues
    • Hours of the workweek and rules for breaks and meals
    • Safety policy that complies with state and federal regulations

Marketing

Delegating

Management Shifts

As you scale upward, you’ll assume increasing levels of managerial responsibility over others.

  • The scrappy personality that got you here may or may not work in a manager capacity.
  • Closely observe the shifts, and leave as soon as you feel uncomfortable with the new role.

Next: Exit Strategy