The scope of a startup is often a trap for a budding entrepreneur. It's a common trap for an entrepreneur to try and take on too much with their startup, either because they feel the need to offer something similar to what a large corporation can offer, or because they combined existing services to come up with their idea, not realizing that in the process it became unmanageable.
A few years ago I was reading through a book called Growing a Business by Paul Hawken. This book was one of the first influences that started me thinking about going into business. It's a good read, and one concept in particular that has stayed with me has been to start only one business at a time.
Multiple businesses
Entrepreneurs have to find an idea that they can do better than the existing competition. They will often look to existing companies and try to offer something better, or perhaps combine services to offer something unique. As a result, fresh startup ideas often incorporate multiple businesses in their pitch. The entrepreneurs often don't even realize that that's what they're doing, but when it happens the result is very difficult to get off the ground.
The example that Growing a Business used was that of a farmer who wanted to slaughter his animals himself to save money and sell the meat at a stand by the road. This is actually opening three businesses at once: A farm, an abattoir and a retail butcher shop. All of these businesses require very different skills and capabilities and could easily overwhelm the farmer. I've seen my own examples too, including:
- Authors who self-publish their book
- Coffee shops that also sell crafts on consignment
- Restaurants that also do catering
Just recently I met someone on the Internet who had programmed a database with details on old computer games. He wanted to make a business that offered access to this database, a portal that allowed people to access multiple online communities to discuss the games, and an auction function like eBay but with a different auction feedback system. Talk about biting off too much at once!
Why is starting multiple businesses a problem?
Running a business is about matching resources and capabilities that a business has to customer needs in the marketplace. When a business starts up, it has zero capabilities and very limited resources. The entrepreneur has to develop everything from scratch and that takes a lot of effort. In addition, having multiple businesses start at one time increases the amount of competition the business faces.
To put this in perspective, imagine a startup magazine that wants to open their own magazine stands to sell directly to customers. The idea is that they don't have to pay a distributor and can get a higher percentage of the profits. The capabilities required to produce a magazine include:
- Stories and journalism
- Photography and graphics
- Layout and typesetting
- Administration
- Marketing
- Printing
- Distribution
But to open retail stands requires very different capabilities including:
- Finding locations
- Hiring vendors (HR)
- Constructing kiosks
- Supply chain management
- Processing payments
And this list is not exhaustive. This is a mountain of work that would take dump trucks full of money to get going. In addition, now instead of competing with other magazines for sales, the company is also competing with other magazine sellers as well, all of whom are more established than the magazine startup. A venture like this would likely not last very long at all.
Questions to ask
it can be difficult for an entrepreneur to tell if their business idea is actually trying to start multiple businesses at once or not. One helpful took is to ask these three questions:
1. Is the business idea actually just a vertical integration of a traditional business?
Vertical integration is when a firm is its own supplier or distributor. This is what was going on in the example of the magazine company who wanted to have their own retail stands, or the farmer who wanted to butcher and sell his own meat. Vertical integration is a way of reducing costs and keeping a larger percentage of profits.
2. Is it possible to split my business idea into two ideas that need different capabilities to run?
Imagine a retail hardware store selling hammers and nails. This is still one business. If split into two, a hammer store and a nail store, both stores would require the same capabilities: purchasing supplies, having a location, selling supplies, etc. If, on the other hand, the business in question is a coffee shop that sells crafts on consignment, the story is very different. When this store is split into two ideas the differences in the two businesses become more obvious. Compared to a coffee shop, a consignment store has a very different way of obtaining supplies, tracking inventory, selling items, accounting, marketing, pricing and so on. This means that running both will require the entrepreneur to have both sets of capabilities. This is why every coffee shop/consignment store I have encountered has struggled.
3. If I split my business idea into two ideas, would they appeal to different customers?
Let's take the example of the hardware store that sells hammers and nails again, and compare it to a restaurant that does catering. Split the businesses in two. We can see that a hammer store and a nail store will attract similar customers. A restaurant and a catering company will attract very different customers. Trying to market to two types of customers at once is a strain on your marketing. It's often not appropriate to reach everyone with one business, so rather than adding to the business, start with a segment of the market, and establish the company first within the segment. Once it is established, then it can be appropriate to expand.
If you ask yourself these questions and find yourself answering yes to them, you are trying to use corporate-level strategy on your business. There is nothing wrong with starting a corporation, but corporations start as single businesses that establish themselves, then expand. Keeping the business manageable increases the likelihood of being able to meet your goals and grow your business. Make sure your startup is actually one business, and your odds of success will be greatly improved.
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