The Scale Fallacy
The Scale Fallacy (And How I Learned the Value of Success That Was Steady, Not Spectacular)
Services businesses don’t scale because they are based on manpower: to double your revenue, you need to double the hours worked. Unless there is unused capacity, that means doubling the size of your team. And that’s just to achieve 2x growth. But in the tech world, scaling often means aiming for 10x or even 100x growth because the marginal cost for making extra copies of a digital product is insignificant.
VCs are looking for many multiples of growth to make a return on the multiple businesses they’ll invest in that fail. They’re not interested in slow but steady growth; they want boom, and they’ll risk bust (for the individual startup) to get it. (That’s just another reason why investor interest is not a good guide of the potential of your startup.)
So VCs won’t be interested if your startup doesn’t scale, and neither will the media and neither will the public. This is because the American dream isn’t a fantasy of steady, incremental growth—it’s a dream of celebrity, stardom, and riches.
If you’re prepared to put the dream on hold and take a cold look at your prospects, you’ll realize that there are significant advantages to creating a services business—one that doesn’t scale.
You’ll see money on day one, instead of working towards a future payday – which may never come.
You’ll learn about the cutting edge of what customers are demanding (and developing).
And this combination of revenue to play with and a sense of what is in demand can provide the perfect ingredients with which to subsequently create a successful scalable product business.
Jonathan Siegel is the founder of RightCart, RightSignature, and RightScale, the chairman and founder of Xenon Ventures, and the author of The San Francisco Fallacy.
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