It’s true that some businesses must scale their financial model in order to achieve sustainable growth. Most Founders, however, swing for the home run because they can’t settle for anything less; and when financial scale is their only option, then a “stall” becomes their greatest fear. Each day jump-starts with “beat to quarters” and the frantic scramble to maintain top line momentum snuffs out any focus on profitability or strategic alignment.
On the one hand, it makes sense for Entrepreneurs to strive for the ultimate “Exit”. Private Equity continues its voracious hunt to distribute the unprecedented storehouse of dry powder that’s waiting find a target. On the other hand, why get caught in the whirlwind of “build and sell” when several long-term, less encumbered, and highly profitable options are available?
There are at least two exceptional alternatives for an Entrepreneur to consider other than financial scale:
1. The Small Giant
My friend Bo Burlingham wrote a fantastic book a few years ago and coined the phrase “Small Giant”. A Small Giant is often a regional, intimately managed, hands-0n, familial and PROFITABLE business. Take, for example, my favorite Small Giant, KATZ Deli. Whenever I’m in NYC I do my darndest to get to Houston Street and spend 1500 calories. This icon of the Big Apple, this Crown Prince of Corned Beef, this Pinnacle of Pastrami has created winding lines around the corner of Houston street for over 70 years:
My partner talked to the owner of KATZ and told him that a similar strategically placed deli in Buckhead, Georgia would create lines all the way down Peachtree Street. The owner responded that they had considered creating other locations, starting in other parts of NYC, but the water would have changed the flavor of the meat and that was unacceptable. What a perfect answer from the owner of a Small Giant. KATZ’s is immensely profitable and an icon of the community. But it will never become a scaled franchised business like Subway.
2. The Lifestyle Fastball
I have a friend who owns and runs a $100 million commercial development company in Florida. When I say he “runs” the company, I mean he IS the company. Outside of a few administrative support staff and one very talented junior partner who covers operations, my friend juggles between 25-30 short-term commercial deals at any given moment. He’s a master at his craft; like Nolan Ryan stepping up to the mound to throw a fastball. He’s kept this pace for over twenty years, and will probably continue until he’s 70. And why not? He loves the challenge of the business, staying innovative, and remaining highly profitable regardless of economic boom or bust.
The Lifestyle Fastball alternative is like working as a surgeon in the 1970s. In the 70s, before DRGs and standardization, the more surgeons worked, the more they made. Surgeons couldn’t stop working, their livelihood depended on their output, but that was fine because they loved their work as well as the status of their profession.
Most PE firms today are far less interested in projections than they are with risk management. In the capital markets, it’s all about risk. So why not consider the risks of your business before you make the decision to scale? Are you set on (possibly) divesting your business so you can move on to something else; or retire early so you can spend your days on the links or on a European tour bus? Or would you enjoy staying in the same game, doing what you do best, with your hands on the wheel of what you can personally control?
If you choose the latter, then build a Small Giant or hurl your Fastball. Both are exceptional alternatives to financial scale; and by the way, you might have a heck of a lot more fun.