Scale or Fail?

Every startup idea that is sketched on the back of a napkin or talked about after 5 beers has the same eventual goal – world domination. If you don’t think big or scale to take over the universe, you suck. And when you talk to VCs their response is the same – they are not looking for small wins, they want their fund to be the next Accel Fund IX (which invested in Facebook in 2005). The Accel Fund IX is reported to be one of the most profitable VC investment vehicles in history.

If a startup fails along the way that is okay, because to get to scale you need to put everything on the line. I see more and more startups in India buying into this way of thinking. They are scaling up but their core offering is suffering. They rather be in 10 cities with a mediocre offering, then in 3 cities with a superb value proportion (yes, I just threw in a term VCs love to use at least twice in a conversation). What is painful to see, is startups that fail because of decisions from external forces – extremely vocal angel investors, over bearing VCs or a board member.

However, there is a 3rd option – organic growth with real revenues and amazing profit margins. The poster child for this option is the project management SaaS product called Basecamp. Some may call this option a lifestyle business. If that means you can throw down $4 million dollars for a one-off Pagani Zonda supercar, then sign me up. (David Heinemeier Hansson is a partner at Basecamp who reportedly paid that much for the Zonda.)

Usually, the 3rd option starts to appear once all the hype around a hot sector dies down and investors start to look at real business metrics. Not cocktail party metrics like unicorn tears, GMV, app installs or number of MBAs employed. It’s about tracking how much money is coming in, talking to customers to add more value (read: charge more), understanding how your sales funnel is working, etc… As they say, whatever it takes to make the cash register ring.

Of course, the 3rd option is not sexy enough for the press or cocktail party conversations. But, in the long run it is viable and many people have gone down that road – it’s just that you don’t read about them on TechCrunch or hear about them.