When your startup is struggling and you can’t stop spending your meagre savings to make it profitable, venture capital funding appears to be the cornerstone. The most important question about “bigger is better” is whether there is a rule stating that it is always better.
Raising funds from investors allows you to expand your team, buys you time to do things right, and establishes you as a credible business person.
While all of this is true in some cases, there is another side to it that tells us that “bigger” may not often be the best option for an entrepreneur or a company.
Though “bigger is better” is the prevailing mantra among startups, keeping a tight rein on expansion may actually be better for the company. Every business owner has their own definition of success, and not all see the need for more money, customers, or employees.
In this week’s Let’s Talk, we asked experts to share their thoughts on business expansion and whether it is always the best option.
“Like most things in business, expansion has various positives and negatives. These are dependent on, for the most part, the people within the business.
“Smaller businesses often have more generalists, making it harder for the business to specialise in certain areas efficiently. When a business expands, it’s able to bring in specialists for unique roles, allowing the business to grow into areas it may not have been in previously.
“Another benefit of expansion is association. Bigger companies tend to want to work with other bigger companies, as it gives them the ability to scale up and meet demands with support, and without being reliant on certain individuals.
“A disadvantage of expanding is something that many SMEs thrive on – flexibility. Smaller businesses will naturally be more agile and can adapt to change at pace, which is harder to do in a bigger business with more employees, and therefore more considerations.”
“COVID-19 has broken barriers and challenged stereotypes in many ways and business expansion is a great example of that. In today’s market, business leaders can expand into new regions and still utilise the best of their talent without needing to spend enormous capital to set up a new office.
“However, while the recent shift to digital has made business expansion easier, doing so for the sake of it can prove detrimental to your business. A larger business doesn’t necessarily mean larger profits. In fact, smaller businesses with tight processes and operations can generate just as much. Revenue is vanity, while profit is sanity.
“Scaling an organisation should always involve a well-thought-out strategic plan. Likewise, it should be done diligently to ensure you don’t damage your brand, reputation and credibility. Business leaders should ask themselves why they need to expand, whether they have the required skillsets and if their customers will actually benefit from it.
“However, simply thinking of expansion as geographical is traditional and outdated. Your expansion can even encompass growth across your products and services or the development of existing and new staff. Ultimately, the focus should be on adding value for your existing and prospective customers and keeping employees motivated and connected to your business goals. Assuming bigger is always better, in business, is a myth.”
“Being from a background of venture capital (VC) investment, this is a topic that strongly resonates with me. The company I founded, ANDHealth, specialises in the commercialisation of cutting-edge digital health technologies. Most of these companies need to meet relatively significant clinical and commercial hurdles, including clinical trials and regulatory approvals before they are able to sell their product.
“This means they often have a long period of cash burn before they start to generate revenue or become cash flow positive. In cash burn businesses, expansion is extremely challenging to manage, because you need to expand the team to the level required to capitalise on the opportunity and undertake complex work in designing, developing and generating clinical evidence of your product. At the same time, you are dependent upon “other people’s money” via equity investors.
“As an investor, it can be concerning when companies grow large teams after a capital raise if their commercial and regulatory outcomes aren’t keeping pace. The really successful CEOs are able to “right-size” their business by having the right people and resources to reach their milestones, without adding unnecessary size and overhead.
“Growing too fast and running out of money before hitting key milestones can have a material negative impact on a company’s valuation. It can also create hesitation in the minds of investors as to whether the company is able to reach its milestones in a capital-efficient manner if they reinvest. Similarly, as an example, if a company is raising capital, and they are not cash flow positive, but they have a team of 150, I would be asking “am I funding growth, or am I funding overhead?” With respect to whether a larger or smaller company is more appealing, I think it depends on the investor.
“From a VC perspective, finding high potential companies and investing in them to generate exponential growth is the primary objective, so larger organisations may be considered to offer fewer growth opportunities. I also disagree that larger businesses are more complex than smaller businesses.
“In my experience, a small business that is in the process of scaling rapidly, and often internationally, is the single most complex business environment you can be in, because it requires that “right-sizing” of the organisation and the balancing of extremely tight financial management with other factors, such as speed to market, competitive advantage, and product-market fit.
“Larger businesses may be more complex in terms of the scale of Human Resources and the breadth of operations, but that doesn’t necessarily mean they are more complex to assess for investment or to run. A large business will likely have an extremely experienced CEO supported by an extremely qualified executive team, whereas with emerging growth companies, the CEO may not have done it before (and their executive team is likely to be very small).”
“Businesses should always be thinking about how they can continue scaling and implementing new services, but they should never feel pressured to expand for the sake of it. Above all else, it’s important to never lose sight of how businesses can also work smarter, and ensure they have a good grasp on the basics to set themselves up for success.
“With the shifting conditions created by the COVID-19 pandemic, many merchants and retailers are investing heavily to make their operations more online-focused. The first step should be to take an introspective look at the services they’re currently implementing to ensure they meet the core needs of customers.
“This could mean looking into how to better implement more omnichannel strategies to create personalised and consistent shopper experiences at every touchpoint as they balance online shopping and more in-store trips, small improvements to the search function of their websites or even the simple addition of a feature so customers can use their mobiles to check stock availability and details in-store.
“The end result is retailers and merchants expanding their total footprint in a targeted and measured way to work smarter, rather than bigger.”
“Growth and expansion is part of the entrepreneur’s shtick. It is often the driving force that motivates and propels that new business idea into achieving dreams, setting goals and taking action.
“Maintaining consistent growth, which you keep control of is far more important and limits the risk of things going wrong. Expansion is expensive and requires more working capital and often more debt and can affect your quality of service and production.
“Also, hiring and managing more people is not everyone’s dream. With that comes a whole range of HR issues that did not exist in a small business. Growth is the outcome of business done well, but bigger is not always better.”
“Expanding your business, whether that be with new staff or into new markets, is an incredibly exciting time for business owners. Whether that expansion directly equals a better business is something that can’t be determined by an outsider. It depends entirely on what the business’ goals are and if they’ve scaled their activities to be ready for that expansion.
“While a large business may be seen as a safer bet to some stakeholders, in theory, I don’t believe this rings true in practice. Throughout the pandemic, some of the largest organisations in the digital space have gone under, while smaller sized businesses have been able to prosper by offering niche, bespoke products. This isn’t to say one is more fallible than the other, it’s simply to question the notion that a bigger business equates to success.
“What’s best for the business will always rely on what the end goal of the business is and how success is defined. For many, ever-growing expansion simply just isn’t a piece of that puzzle.”
“There are multiple ways to expand your business, each with its own pros and cons. Two of the most common ones include adding a new product or service to the mix or introducing existing ones into a different market.
“Expansion normally means more sales and theoretically more profit. However, business owners need to be careful and make sure the company can handle the growth. The quality of the product or service cannot be jeopardised for more volume because customer loyalty could take a huge hit. Likewise, your current staff might get spread too thin handling more sales in a market they have no experience in. New talent who are not yet familiar with your company culture and beliefs may need to be trained right away.
“To be honest, a lot can go wrong with an expansion if there is no solid plan to address issues like the above and many more that are sure to arise. Growing your company too fast can be a double-edged sword. If handled properly, expansion lets the business benefit from various economies of scale and be extremely profitable. On the other hand, too much growth too quickly can cause the company to crash and burn.”
“It sounds appealing to invest in an already established business. It is because large companies provide stability. However, the returns in stocks and investments can be shallow. Small businesses such as restaurants, retail etc fail to interest any investors, although potentially they can take loans from banks and lenders.
“On the contrary, the returns can be much higher to invest in scalable companies. Tech startups are great examples. Over the last two decades, tech startups have done wonders for investors and lenders. Even though there are risks associated with startups, the return on investment is anywhere from 3X to 10X.
“Nonetheless, scalability and returns can be much higher for investors. Broadly, tech investors understand the risk and know if one investment wins, it will cover other investments. A few things intelligent angel and venture capital investors seek include: Uniqueness of concept, Scalability to different markets, Founder experience, Pitch deck and go to market plan, Team.
“In conclusion, it depends on the type of investor. If the investor has a conservative approach, he should opt for already established companies and stocks. However, if the investor understands the tech and is ready to take a chance with enormous growth, investment returns can be extremely high.”
‘Expansion through organic or inorganic growth presents real opportunities for many businesses to drive value but failing to pay attention to how organisational culture evolves through growth can have dire consequences.
“Many organisations struggle to create the culture they need to fulfil their strategic aspirations as they grow, and expansion often dilutes company culture or in the case of acquisition risks a culture clash. The result of this can range from lower retention to outright failure.
“As you expand, it’s crucial to assess how your company culture is performing. As a business owner or CEO ask yourself the following questions to preserve cultural alignment during expansion:
“Use the answers to pinpoint both where and why any cultural problems may be emerging as your business expands.”
“There’s no single way to grow your business. That’s why business leaders are often plagued by decision paralysis. Expand too fast, and you’ll fail. Expand too slow, and your competitors will eat up your profits. To determine if expansion is the right move, we’ve found it’s helpful to focus on three key pillars: research, talent and customers.
“Research: Analyse the competitive dynamics, consumer trends and potential gaps in your chosen market. Research provides the basis for your strategy (why this market?), timing (why now?) and ultimately if scaling is viable (why will we be successful?).
Talent: Before expanding, you need a view of resourcing capabilities. Not just the talent needed in the new market, but most importantly, your current employees. Ask yourself: Can my workforce support the increased pressure and demands of expansion?
A localised approach: Customer needs are different from one market to the next. It’s crucial you have the capability to localise your product, marketing, messaging and overall customer experience.”
“For many business leaders, the goal is always to get bigger. But while a new business opportunity can be exciting, scaling up too fast, or in the wrong way, can be devastating.
“There are numerous benefits to having a physical presence in another location – from growing your pool of customers to accessing highly skilled talent. But the traditional way of expanding overseas, which includes a physical location and a relatively large in-market team means you have to deal with more complex logistical issues from HR to inventory management. You will also need to take into account cultural differences and how that can affect your team’s productivity as well as client relationships.
“Rather than setting up a brick-and-mortar entity in the chosen country, companies can now take an agile approach that leverages technology and other tools to reach clients and grow their base. In this sense, staying small can keep you nimble enough to adapt to the new market conditions without having over-committed yourself.”
“Expanding a business to tap into new opportunities or to grow its existing market share is the goal of most business leaders. However, to be successful expansion needs to be strategic and it needs to be aligned to customer needs.
“Whether it’s expanding into a new country, a new segment of the market or expanding products, strategy has to underpin every action. A strategic approach to expansion means it can be done sustainably and with the right structures in place to manage the increased volumes of activity.
“If the structures to manage the operations and processes aren’t in place the expansion process can place undue pressure on an organisation and impact its existing operations. This will inevitably impact your people and may have flow-on effects on your customers.”
“It’s a big step to expand your business. Before jumping in, it’s important to do your homework. Ask yourself a few questions. Do I have the right information to guide me through the process? What opportunities exist that will benefit expansion and how do I implement these while minimising disruption? Make sure there is a logical route, for example, is there customer demand for new stores, products or services or could expansion simply mean a refreshed or expanded eCommerce store?
“It’s key to have solid processes in place to manage this heightened complexity efficiently. Ensure it is underpinned by a business management system that can seamlessly integrate all aspects of the operation and provide much-needed business data.
“The right technology will allow the flexibility to support growth while detecting areas for improvement. A cloud-based management system will also allow you to retain control over your business from anywhere with secure Wi-Fi.
“And from a resources point of view, it will enable your teams to bring maximum productivity to the tasks at hand, irrespective of where they are based. Armed with these insights, you can make an informed decision of whether bigger is going to be better for you.”
This post was aggregated from Dynamic Business (https://dynamicbusiness.com).