Growth at all costs is dead; Three lessons founders can learn from SMBs about sustainable growth

I’m sure it won’t come as a surprise to you that the VC-funding boom of the past couple of years is over. With those VCs still sitting on dry powder, hesitant to pull the trigger on growth-stage companies, there’s not much booming happening at all. Companies are raising down rounds to sustain themselves and looking for ways to get by indefinitely, in contrast to the standard cycle of  18 months until the next round. 

Unfortunately, the past few years left many companies focused on the wrong things. They’ve chased growth at the expense of business health, ironically out of survival. Rapid growth and quick exits were what many VCs wanted and what they rewarded with more funding. But when the music stopped, the growth habits that were left behind were anything but survival skills. With VC funding unlikely to rebound to pre-pandemic levels any time soon, successful startups need to learn what bootstrapped SMBs have known all along: profitability and sustainability matter more than scalability at all costs. 

Here are three key growth lessons startups can learn from the small business world:

If the numbers don’t pencil, don’t start writing in pen.

What many startups do:

Many startups operate on the principle of aggressive growth, often sidelining sustainable unit economics. They prioritize volume even if it means jeopardizing profitability per sale. There's an old joke that you’re "Losing money on every sale but making up for it in volume." While this was meant to be a joke, for many startups, it’s become their operational blueprint. This aggressive approach has been made possible by their abundant funding, which often obfuscates the need for sustainable profitability.

What small businesses do differently:

In contrast, small businesses operate with a different mindset. Most don't have the advantage of extensive funding or financial safety nets. As a result, they prioritize genuine value with each transaction, focusing on both the customer's benefit and a positive impact on their bottom line. For them, profitability isn't about sheer volume; it's about ensuring the right margins. 

When faced with challenges, such as high product delivery costs or inflated Customer Acquisition Costs (CAC), small businesses innovate. They may streamline their offerings, tap into growth hacking, or lean on grassroots marketing efforts. They understand that hoping for sales to magically offset an inflated marketing budget isn't a feasible strategy.

Action steps startups can take from SMBs:

• 1) Prioritize Profitable Growth and Genuine Value:

  • Evaluate unit economics to ensure each sale is profitable.

  • Emphasize genuine value in transactions for both the customer and the business.

  • Review and streamline offerings if costs are high, and analyze ways to reduce customer acquisition costs.

• 2) Adopt Innovative Marketing Strategies:

  • Explore growth hacking techniques to boost reach without relying solely on large marketing budgets.

  • Engage in grassroots efforts, leveraging word-of-mouth and community-based promotions.

• 3) Budget with Purpose and Efficiency:

  • Avoid arbitrary budget inflation. Allocate funds strategically to ensure sustainable returns on investment.

Seek first to understand your customers.

What many startups do:

Founders often assume they fully understand their customers' needs, especially if they've faced similar problems themselves. However, with the luxury of abundant funding and the drive for swift growth, they sometimes launch products without genuine product-market fit (PMF). Operating under the assumption that there will always be another funding round, some startups fail to validate the actual demand for their offerings, resulting in misaligned products and potential financial losses.

What small businesses do differently:

Small businesses, deeply rooted in their communities, often have a profound understanding of their customers' needs. One of the iconic examples is Intuit co-founder, Scott Cook. Back when Intuit was first getting started, Cook would observe customers setting up their Quicken software in their homes. This "Follow Me Home" approach exemplified his commitment to understanding the user experience in a tangible context. 

Today's small businesses might not use this exact approach, but the principle remains: intimate knowledge of the customer's experience and needs. Many of these businesses grow incrementally, validating each step with real customer feedback, akin to 'beta tests'. This methodology ensures they don't overcommit resources on unproven ideas and reinforces their product-market fit over time.

Action steps startups can take from SMBs:

1. Engage & Understand Your Customers:

• Dive deep into customer insights through comprehensive research.

• Speak directly to potential customers about their interests and concerns.

    2. Test & Refine Your Product:

• Start slowly with small rollouts and MVPs, gathering and acting on authentic feedback.

• Use "beta tests" or pilot programs to gauge market response.

    3. Prioritize & Stay Connected:

• Ensure a clear product-market fit before making substantial investments.

• Like small businesses, maintain active engagement with your primary user base or community.

When there’s only one runway, you have to hit the ground running

What many startups do:

The term “runway” is fairly ubiquitous in startup circles, but the metaphor doesn’t quite make sense. On a physical runway, an airplane has exactly x feet to get off the ground or face dire consequences. For startups, the runway is how long they can go without an outside cash infusion. In other words, they get to extend the runway indefinitely, so long as they make it long enough to reach another funding round. That all changes if there’s no round coming. If VC funding isn’t available, then there’s only one runway, and you’d better be off the ground before you reach the end. 

What small businesses do differently:

Unlike many startups, small businesses have always operated with a finite runway. With limited resources like personal savings, bank loans, or minor investments, they don't have the luxury of extending their runway every 18 months. 

There's a pressing need to be profitable from the onset. This urgency means every decision, whether it's product pricing, hiring, or marketing, is made with a keen eye on its immediate financial implications. This approach often cultivates a culture of adaptability, resilience, and financial discipline, which serves them well in the long haul.

Action steps startups can take from SMBs:

1. Prioritize Profitability and Financial Discipline:

• Aim for immediate profitability, avoiding over-reliance on future funding rounds.

• Keep a close eye on expenses, optimize costs, and invest in avenues that positively impact the bottom line. Emphasize lean operations to ensure efficiency.

    2. Embrace Adaptability and Strategic Financing:

• Be flexible and ready to adjust strategies based on market dynamics and feedback.

• Consider non-dilutive financing options to retain control and safeguard your long-term vision.

• When seeking outside funding, consider non-dilutive options that don’t leave you beholden to someone else’s growth priorities.

Conclusion

In a world where rapid growth and scale are often glamorized, the timeless principles of profitability, understanding your customer, and efficient operation reign supreme. Startups, buoyed by the lessons from small businesses, can create robust foundations that not only withstand economic downturns but also position them for greater success in the long haul. As the landscape of VC funding shifts, it’s not the size of the runway but the speed and focus of the takeoff that will define the next generation of successful enterprises. Embracing lessons from those who've treaded challenging paths before can be the very blueprint for enduring growth and innovation.