Does scalability really matter to a small business entrepreneur?
The use of the term scalability in business discussions has always amused me. In meetings with investors, I would watch the excitement escalate to an almost euphoric level. A common occurrence when investors and entrepreneurs meet to discuss business ideals. Just as the participants were ready to pop open the champagne bottle someone would exclaim, “But…. is it scalable”. The energy in the room would suddenly die as if water was thrown on hot burning embers of a campfire. The warm glow of pure potentiality doused in a moment of reality. The frantic entrepreneurs would search for factual data and anecdotal evidence to prove its merits once more. As I watched the events unfold, I held a burning question in my mind, (of course unacceptable to ask), “Does it really matter?”
I have experienced similar situations while teaching in the entrepreneurial department at USC. The purpose of the class is to take students through a process to determine if their business concept is feasible. As the students struggle to define their business ideas, well-meaning professionals are already telling them it is not scalable. Worse yet, it is a lifestyle business. OMG—I said it! A lifestyle business—portrayed as insignificant, inferior and not worthy of discussion yet alone an investment in time or money.
With this said, I believe there are two underlying questions to consider:
Do we all want to create the next Google, anyway?
Is a lifestyle business not a “real” business?
According to the Small Business Administration (SBA) the trends show an increase in small businesses, many of which are lifestyle businesses.
- The 23 million small businesses in America account for 54% of all U.S. sales.
Small businesses provide 55% of all jobs and 66% of all net new jobs since the 1970s.
- The 600,000 plus franchised small businesses in the U.S. account for 40% of all retail sales and provide jobs for some 8 million people.
- The small business sector in America occupies 30-50% of all commercial space, an estimated 20-34 billion square feet.
I think the words written on their webpage say it all:
Small business is BIG!
Furthermore, the small business sector is growing rapidly. While corporate America has been “downsizing”, the rate of small business “start-ups” has grown, and the rate for small business failures has declined.
If this is true, why is scalability a crucial component of a business model?
The answer depends on the perspective of the players involved. The smaller lifestyle businesses are less dependent on the financial and legal community. They tend to be self-funded, privately held and less likely to sell stock or go public. For these reasons investors, bankers, corporate lawyers and consulting professionals tend to overlook this growing and influential sector. Moreover, since the financial community is often the author of business writings and metrics, scalability has been given significant importance. From this perspective, it does make sense. In order to earn sizeable returns on invested capital, a company must be scalable. However, it does not need to be a benchmark for all business models.
I am a business consultant focusing on smaller companies and a lifestyle entrepreneur. Therefore, I have a different perspective regarding scalability. Scalability is the ability to attract, service and maintain enough customers to provide the amount of income needed to support the owner(s) desired lifestyle. If the owners financial desire is to be the next Bill Gates or Warren Buffet, than the online business selling cool widgets or a local deli may not be scalable. However, if the end goal is to be your own boss, it may be scalable “enough”.
Perhaps we should redefine the term to include the “degree of scalability”. Whether you are a college student building a business on paper or a corporate person ready to explore entrepreneurship, do not let scalability erroneously affect your business plans. Instead, determine if the business model can support your financial goals, now (or very soon in the future).
If your statistical data and anecdotal evidence suggest there are enough customers, wanting to purchase your product or service, at an amount that will cover cost and leave you with an income that will satisfy your personal financial goals—then you have a scalable business!
It is also worth mentioning that many small businesses without an aggressive growth strategy have become some of today’s large businesses. So one never knows where the entrepreneurial journey will take you.