Business: Over the course of many years I have been asked what type of business is best to create and in addition, will draw the most investment from potential investors. My usual long drawn out answer is in regard to creating companies with big legs, meaning a business that will grow with no stops to her potential.
Over the last year or two, a new term has entered the venture investment arena; “capital efficient.” By seeking capital efficient, investors are looking for companies that have the potential to take a little capital in and throw a lot of capital out. (no factories here)
So what is the common denominator? Scale. Mark Maunder over at MM has written a very good piece that makes understanding scale downright simple. If you are seeking to create in the venture space, the questions he brings up could serve as a good first pass set of hurdle questions. Either you pass go, or start again…
Having coffee at 4am after an all-nighter with my co-founder and wife a few days ago we came up with a rather obvious but interesting concept. I’ll call it The Sleep Test.
Unless your business earns revenue while you are sleeping, it won’t scale.
If you’re an I.T. consultant or lawyer selling your own time, you can’t scale.
If you’re a brick-layer who employs other brick layers and also employs a sales person, driver, accountant and all the other corporate components so that your business runs while you’re not there, you CAN scale.
If you’re a web developer who writes an application that earns ad revenue or that earns subscription money while you sleep, you CAN scale.
Most enterprises start off with a founder selling their time and with the maximum earnable revenue being tightly limited by the founders available time. The founder works themselves into a stupor and at some point they go through what is often a difficult transition where they “step back” from the business and employ others to take over their various jobs. Many businesses don’t make this transition and it is the subject of much discussion in MBA programs world-wide. The birth of Kinko’s is a great example of this evolution. Paul Orfalea is dyslexic and in the story of Kinko’s he mentions how this forced him to step back from the company and employ others.
Many “Web businesess” or “Software businesses” need to employ a sales team or have components like fulfillment that don’t scale easily or cheaply. But if your business is a “Web App” that earns you money through advertising or through subscriptions and where the application is the business, it scales incredibly well.
Web App businesses scale so well that if you “get it right”, they automatically pass the sleep test from day one and they pass the test without you having to employ additional staff.
Two types of Web App that often pass the sleep test are:
- A service that attracts huge numbers of an attractive demographic that can earn you ad revenue or
- A service that is so valuable to a group of people that they will pay you for it, preferably on a recurring basis
Your web app business must also:
- Not require additional staff time per customer
- Not require additional staff time per dollar earned
- Market itself. If it’s marketing is limited by your time, you wont’ scale.
- Earn you substantially more money than your business costs to run.
And that’s it. You need to build a web application that markets itself, earns more money than it burns and that is either wildly popular or wildly valuable.
If you have a Web App that passes The Sleep Test, congratulations because you have just bypassed one of the most difficult stages of small business evolution and one of the most common points of failure that just about every other business type is forced to navigate.
Final caveat: I’ve written this post discussing this concept in absolutes i.e. you either do or do not pass the sleep test. Of course in reality there is not a single web app business that does not need to employ more staff as their revenue and customer base grows. Google is a fine example of a business that is designed to avoid having to employ more people as revenue or customers grow and they employ over 20,000 people today. But this test is a useful way to measure and think about how efficiently your business will scale.
Source: Mark Maunder
