Why Most Small Businesses Never Scale

It’s a cliché to say that most small businesses don’t survive for more than five years, but it’s true.  Wild exceptions like Steve Jobs and Bill Gates aside, most entrepreneurs who start a business simply fade away once they’ve launched their venture.  During my career as a consultant to companies large and small, I’ve witnessed first-hand the different capabilities successful leaders possess in larger companies that some small business owners just don’t seem to get. Many habits and skills entrepreneurs develop early on can limit their ability to grow their business over time. I’ve highlighted a few of my observations below, and while I’m certain the list isn’t complete or in any prioritized order, it may serve as food for thought for small business owners looking to become an exception to recent statistics.

1. Lack of bi-focal Vision.  Most small business owners begin with single issue myopia;  a deep passion that drives almost everything they do. Most often, it’s that single minded focus that creates early success.  Over time, however, failing to recognize and capitalize on market and consumer changes erodes the early advantages of laser like focus.  Most large companies possess the ability to manage the short and long term business horizon simultaneously.

 

1. They want to control EVERYTHING.  After growing revenues become clear evidence of early success, many small business owners find it difficult to let go as their businesses become more complex. Many spend too much time trying to learn and internalize specialized skills like accounting, real estate, marketing and technology that slows their speed to market. While larger companies have separate divisions for these competencies, they didn’t begin with any of them. Those leaders recognized the need for specialization and often times began by outsourcing, then insourcing, each competency over time as their business grew.

 

1. Talk to everyone, listen to no one.  One small business owner I knew spent an inordinate amount of time with an “advisory group” to try and learn things “he didn’t know”.  The time spent obtaining this “free” advice resulted in a considerable waste of valuable time.  Better to have found two or three experts he trusted enough to really listen to, even when he didn’t always agree with the advice given. Larger companies face the opposite dilemma; CEO’s find it harder to really get to the truth because most subordinates tell them what they want to hear.  Perhaps return on time is more valuable than return on capital in the early innings of a business.

 

1. Employee loyalty.  In the early days, that small band of employees at the start of a business often makes the difference between success and failure. They become family; exactly the sort of people needed when there’s no assurance of long term success and security. Over time, loyalty to these first generation employees can become a liability as complexity grows. CEO’s, while not lacking sympathy with their people, simply understand that their future success depends on every team member’s strengths.  Allegiance shifts towards a growing employee base, customers, investors and business fundamentals and away from friends as good companies grow.

Please let me know your thoughts on why most small businesses don’t scale!