by Paul Jarvis
Sean is only interested in reaching his target limit. This goal feels very counterintuitive to what we’re taught about business and success. Society says that business goals should focus on ever-increasing profit and that, as profit increases, so should everything else — more employees, more expenses, more growth. But like many others, Sean feels that the opposite is true — that success can be personally defined, and that while profit and sustainability are absolutely important to a business, they aren’t the only driving forces, metrics, or factors in business success.
Sean’s goal of achieving a target profit and not exceeding it comes from shaping his business around an optimal life he wants to lead — complete with taking a three-month vacation each year with his wife and spending hours walking, cooking, and teaching and tutoring his two young nieces each day.
Typically awake by 4:00 AM — no alarm clock required — Sean goes to work early from a small office located in his backyard. By starting this early, Sean can record audio for his podcast before the world around him becomes too noisy. It’s an idyllic life filled with hourlong walks and ample coffee breaks. His work routine revolves mostly around answering questions for his customers in his private message board on his website.
Sean is easily able to meet his $500,000 per year profit goal, not through marketing and promotion, but by paying close attention to his existing customer base. His audience has grown slowly and sustainably because those listeners share his work with their own audiences and contacts — his current customers gladly become his (unpaid) sales force.
Too often businesses forget about their current audience — the people who are already listening, buying, and engaging. These should be the most important people to your business — far more so than anyone you wish you were reaching. Whether your audience is ten people, a hundred people, or even a thousand people, if you’re not doing right by them, right now, nothing you do regarding growth or marketing will make a lick of difference. Make sure you’re listening to, communicating with, and helping the people who are already paying attention to you.
Sean sees lots of people in the online education world focusing their time entirely on marketing, but his focus is on making his products better for his existing audience. He works to get more and better results for his existing customers, who in turn continue to buy from him, both established products and new products as he releases them. He likens his business to a kind of “Hotel California” — “You can check in anytime, but you can never leave” — except that his version is less psychedelically creepy and doesn’t feature pink champagne on ice; it features chocolate.
Part of Sean’s customer retention strategy involves sending his customers a box of chocolates, with a handwritten note and sometimes a small cartoon he draws himself. The package costs him approximately $20, which includes shipping from New Zealand (where he lives currently), but it’s the one thing his customers talk about. They’ll buy a $2,000 training program from him and talk about the chocolate. He’ll give a speech at an event, and people will talk about the chocolate. His customers love these small touches, and the attention his business gives them, because his company of one focuses solely on serving his existing customers, not on infinite growth.
When a friend of Sean’s had a remarkably profitable year, they cracked open the champagne (possibly pink champagne, on ice) in a meeting and vowed to double that profit in the following year. But Sean is absolutely certain that his end goal is to keep his business small. He questions the blind growth mind-set because he doesn’t require it. If he were to double his profits, like his friend was trying to do, how much more work would be involved? How would that extra work affect his family or his life overall? Sean doesn’t want that complexity, the added stress and responsibility. He’d much rather make a great living without his work taking over all aspects and hours of his life. So succeeding, for Sean, means staying small.
Sean’s Psychotactics business is a great example of a company of one finding its optimum size and staying put. He purposely keeps his business small as a long-term strategy that makes sense for maximizing his profits and his lifestyle. With Psychotactics at its current size, he’s able to get to know and better help his customers, who in turn are eager to spend thousands on his training products every year — as long as he also sends them $20 worth of chocolate.
Like Sean, Ricardo Semler, CEO of Semco Partners, has found the right organic size for the businesses he owns and invests in. And it’s working for him, as he’s grown Semco into a business worth more than $160 million. He believes that companies need to focus on becoming better instead of simply growing bigger. His approach is to question the idea that growth is always good and always unlimited. Ricardo works at determining the size at which each company he manages can enjoy worldwide competitive advantages and then stop growth from there in order to turn the focus away from getting bigger and toward getting better instead.
The current business paradigm teaches us that to make a lot of money or to achieve lasting success, we need to scale our businesses — as if larger businesses are less prone to fail or to become unprofitable (obviously not true). In fact, according to this view, before our imagined businesses are even off the ground we need to create them with the sole purpose of growth — and possibly eventual sale for a huge profit. This paradigm, however, isn’t rooted in truth, nor does it hold up to critical investigation.
A study done by the Startup Genome Project, which analyzed more than 3,200 high-growth tech startups, found that 74 percent of those businesses failed, not because of competition or bad business plans, but because they scaled up too quickly. Growth, as a primary focus, is not only a bad business strategy, but an entirely harmful one. In failing — as defined in the study — these high-growth startups had massive layoffs, closed shop completely, or sold off their business for pennies on the dollar. Putting growth over profit as a strategy, however trendy as business advice, was their downfall.
When the Kauffman Foundation and Inc. magazine did a follow-up study on a list of the 5,000 fastest-growing companies five to eight years later, they found that more than two-thirds of them were out of business, had undergone massive layoffs, or had been sold below their market value, confirming the findings of the Startup Genome Project. These companies weren’t able to become self-sustaining because they spent and grew based on where they thought their revenue would hit — or they grew based on venture capital injections of funds, not on where revenues were actually at.
Venture capital can be a quick way to infuse money into a company to help it succeed, but it’s not a requirement and it definitely comes with certain pitfalls. The Kauffman Foundation study also illustrated that almost 86 percent of companies that succeeded in the long term did not take VC money. Why? Because a company’s interests may not always align with the interests of its backers. Worse, investor interests may not always align with what’s best for a business’s end customers. Capital infusion can also leave a business with less control, resilience, speed, and simplicity — the main traits required for companies of one.
Paul Graham, the cofounder of Y Combinator (one of the largest and most notable VC firms for startups) explains that VCs don’t invest millions in companies because that’s what those companies might need; rather, they invest the amount that their own VC business requires to see growth in their own portfolios, coming from the few companies that actually give them a positive return. Graham notes that sudden and large investments tend to turn companies into “armies of employees who sit around having meetings.”
Startups, as serial entrepreneur Salim Ismail states, are extremely fragile by nature. They’re designed to be temporary organizations that may grow into large companies, under conditions of extreme uncertainty. They expend money and resources in the anticipation that revenue will catch up to spending. Most startups fail because that doesn’t happen often.
Although a lot of these examples involve companies that would be considered startups, companies of one aren’t always startups in the tr
aditional sense. Many startups focus on growth, buyouts, employees, lavish offices with foosball tables and open-concept floor plans, and massive profits at any cost, and they tend to rely on investors for initial cash. Companies of one instead focus on stability, simplicity, independence, and long-term resilience and rely on starting small and becoming as profitable as possible, without the need for outside investment. Companies of one, with their focus on what can be done in the here and now, not what can be done with investment, can also be started without an injection of capital.
Not all startups can be lumped together — some are challenging the mantras of blind startup growth. For instance, Buffer, a social media scheduling tool with more than three million users, has seventy-two employees and isn’t looking to grow that number quickly, unless it absolutely has to. Buffer wasn’t always in the mind-set of challenging growth — a few years ago the company got caught up in a hiring frenzy because it was looking to do a large round of raising capital. The idea was to be ambitious in hiring in order to do more to capture more of the market share and hit new revenue targets that investors were going to want to see. But Buffer hired more people than it had revenue to pay.
Two shifts then happened: Buffer realized that even after securing funding, it still had to lay off 11 percent of the team. That employees could be hired and paid based on revenue targets (instead of on actual and current profits) wasn’t a reasonable assumption to have made. Second, they realized that their leadership team was divided about what success meant to their company. The CEO wanted a more profit-driven, holistic, slow-growth plan and believed in hiring more employees only when the money was there, not in the hopes that it would materialize. Buffer’s COO and CTO, by contrast, were more motivated by high stakes and high growth — in other words, the typical startup game. In the end, they left the company and no other employees left or were let go; those who remained shared their CEO’s vision of slower, profit-based growth.
When businesses require endless growth to turn a profit, it can be difficult to keep up with increasingly higher targets. Whereas, if a business turns a good profit at its current size, then growth can be a choice, made when it makes sense to succeed, and not a requirement for success.
For companies of one, the question is always what can I do to make my business better?, instead of what can I do to grow my business larger?
THE DOWNSIDE OF EXCESSIVE GROWTH AS AN END GOAL
Often, in the pursuit of growth, companies or founders have to battle what Danielle LaPorte refers to as “the Beast.” A company focused on growth often puts into place complicated systems to handle exponential volume and scale, which require more resources (human and financial) to manage, which then require more complex systems to manage the increased resources, and so on and so on.
Danielle’s “Beast” was the system and structure (financial and technological) she created to match her grand vision for her business. She invested in a million-dollar website to take her business to the next level. The problem was that a million-dollar website requires a team of experts to manage and run it at all times. Updating blog posts or products can incur tremendous costs.
The Beast had an ever-growing appetite and required constant feeding. To keep the Beast satiated, Danielle’s focus was pulled away from her center — that is, from her purpose in creating and running a business in the first place. As her focus became muddied she found herself busier with feeding the Beast than in taking care of her core business. When Danielle realized that she didn’t want to exponentially grow to continue feeding the Beast, she decided it had to be destroyed.
In “killing her own Kraken,” as she put it, she began to radically simplify. Her strategy shifted from “broadcasting light … to as many people as possible” to “broadcasting light … to the people with eyes to see it.” Not focusing on growth and scale, she believes, was the best way to remove the Beast from her company of one and return her focus to the people who were already paying attention to her work. She likens her decision to stop trying to reach infinitely more people through paid channels to feeding only those people who show up for dinner — the ones who naturally or organically find her work through word of mouth or who are hanging out where her business hangs out. The fact is that she still has hundreds of thousands of ravenous fans showing up for “dinner.”
Lusting after the Beast, of course, feels completely understandable and human — even in business, we all need to feel loved and wanted, some of us more than others. However, unless we truly question this need and how relevant it is to our business, we can perish because of it. Buddhists call the Beast the “hungry ghost” — a pitiable creature with an insatiable appetite. There is never enough for the hungry ghost, so it’s always looking for more. In business, the hungry ghost is the quest for more growth, more profit, more followers, more likes.
Even large and established companies aren’t immune to the perils of chasing the Beast of high and infinite growth. Starbucks, Krispy Kreme, and Pets.com all pursued aggressive scaling and have paid a steep price in various ways.
Starbucks was opening hundreds of stores around the world but decided that it could scale faster by adding sandwiches, CDs, and fancier drinks to its offerings. This rapid expansion ended up diluting the Starbucks brand, and in an equally rapid contraction, the company was forced to close 900 stores. Subsequently, Starbucks returned its focus to doing its one thing — coffee — better. It renewed its efforts to recapture a boutique coffee shop experience by upgrading coffee machinery, retraining staff in the art of making a perfect espresso shot, and removing a lot of the superfluous products like music and lunch food. Starbucks learned the hard way that better isn’t always bigger.
Krispy Kreme’s freshly cooked novelty treats were so popular (and delicious) that it seemed like the company couldn’t fail. Its freshly baked sign would regularly lead to lines that went on for blocks. But in focusing on expansion into grocery stores, gas stations, and even multiple locations in small areas, Krispy Kreme diluted the very scarcity it had once capitalized on. As franchises were pitted against each other, the company found itself chasing diminishing profits: it dropped 18 percent in sales over the two years from 2004 to 2006. Krispy Kreme’s newly massive size also created some accounting and reporting nightmares that forced it into a $75 million settlement with the U.S. Securities and Exchange Commission.
Finally, Pets.com is, by most measures, the epitome of the dot-com boom-and-bust cycle — an example of prioritizing uncontrolled and overfunded growth while doing things like selling products far below cost (which obviously isn’t sustainable). Pets.com spent more than $17 million on advertising involving sock puppets in the second quarter of 2000 alone; meanwhile, their revenue (not profit) at that time was only $8.8 million. Pets.com was spending based on growth it hoped to see, not on where the company was currently at, and it ended up losing an estimated $300 million in investment capital along the way.
Of course, economies of scale can sometimes be required for success in certain markets and for some products, but often they aren’t required and it is ego, not a strong business strategy, that is forcing growth where growth isn’t necessary.
When you feel like you have to start out competing with the largest player in the market, you end up chasing your competitor’s growth instead of bettering your own offering. Sometimes finding and working with a single customer, then adding another, and then another, is a very useful and solid way to begin. And sometimes that can even be the end goal — one where your focus is on the relationship and the paid work at hand. Sometimes the best plan is focused on your current customers’ success, not on chasing leads and growth.
Not everything needs to scale to succeed — as Leah Andrews, founder of Queen of Snow Globes, discovered almost by accident. She runs an extremely unscalable business: creating intricate and unique snow globes, one at a time, for her customers. From the start, she was inundated with requests for these custom pieces of art, from big names like Quentin Tarantino and C
hanning Tatum and even from Netflix’s corporate offices. Instead of scaling production, she focused on raising her prices higher and higher until the demand leveled off to where she could handle orders. She focused on creating an amazing product that was better than the competition — mass-produced snow globes — and was able to charge a huge premium for her work. Because she focused on making the best product, not the most scalable product, she grew her profits quickly without scaling production, which would have also scaled complexity and expenses.
Pat Riley, the Hall of Fame basketball coach who led five teams to the NBA championship, coined the term “the disease of more.” He noticed time and time again that winning players, just like some startups, focused on more instead of better. Once they won, they’d let their own ego get in the way of all the tasks that had helped them win in the first place — like practice and focus — and instead become lured into more endorsements, more accolades, and more media attention. As a result, they ultimately lost to internal forces, not to competitors.
When you focus on doing business and serving customers in better and better ways, your company of one can end up profiting more from the same amount of work because you can raise the prices until your demand flattens out to where you can handle it. I did the same when my business was a client-focused design business: I doubled my rates over and over until the demand only slightly exceeded the time I had available to do the work. In doing so, I didn’t need to hire more people to grow profits; I just needed to focus on doing better and better work — putting in the same number of hours but vastly increasing the revenue generated from the work I did. Staying small is still my end goal, because like Sean’s and Ricardo’s visions for corporate success, I look toward betterment instead of infinite scalability.
There’s nothing wrong with finding the right size and then focusing on being better. Small can be a long-term plan, not just a stepping-stone.