Thinking Small is the Big Idea
Recently I had the opportunity of meeting with Jeff Rodman, co-founder and evangelist of Polycom, a company he started from scratch and took to over USD 2 bn in size. It was interesting to learn from him how he and his co-founder encountered the fallacy that big sound demands a big loud speaker. Thinking differently, they were able to go small by bringing two separate acoustic environments into a compact space. That tiny shift in their thinking was what set them on the path to selling millions of phones and changing what conference rooms look like today — a path that continues to be built from small innovations, small designs, and small habits.
There are plenty of other examples where entrepreneurs started with very small ideas and ended up building billion dollar companies. While thinking ‘Big’ is important in order to keep an eye on your future, big things usually happen because of aggregation of many small steps.
Most entrepreneurs are caught in the questions of how much money is enough to raise in any Fund raising rounds. Too large a Fund raise gives way to questions about their ability to deploy the money in the given time frame and too small a fund raise gives them discomfort of not having enough cash to run their businesses. The choice of investors also depends on how much money one is trying to raise. Going with dual strategy to raise smaller Funds from investors who have smaller appetite and larger Funds from those who have deeper pockets can backfire.
Our experience with our portfolio suggests that companies that are in early stage of growth and are not profitable yet, should think of Funds from the perspective of reaching their break even points, beyond which they do not need any more capital for sustaining their operations. However, if such capital requirement is very large, then they should break it up into stages and raise part of the capital first and try to find a way to keep costs to the lowest. The next rounds of capital should be raised with at least 12 months of cash already in the bank. Thinking small in the beginning and proving your business model is extremely important. The proof of the business model comes from the demonstration of profitability at the contribution margins level. Most investors in any case are not investing in business models any more, until positive contribution margins have been achieved.
In many cases in the past, entrepreneurs have focused mainly on the topline in order to maximize their next round valuations, an approach that has impacted quite a few businesses. Such an approach has mostly led to high burn business models, thus leading to issues on Fund raising, delays or non payments of vendor invoices and even shut downs. Once the path of high burn goes beyond a point of no return, it is extremely difficult to recover the business.
My advice to the new age entrepreneurs is to keep their costs to the minimum, stay focused on the activities that are core to their businesses, raise just as much Funds as you need and honor your commitments related to statutory payments, vendor payments and compliances. Thinking small in the beginning will take you to the point of inflexion beyond which the growth becomes an automatic process.
Founder & Managing Partner,