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Weekly Thoughts: Scale

Here is something that caught our eye this week:

Scale

As Chenmark continues to see opportunity in the small business space, we are constantly thinking about how to responsibly grow our operations. Accordingly, our interest was piqued by a new podcast, Masters of Scale, in which LinkedIn co-founder and Greylock partner Reid Hoffman explores ideas around how businesses should scale. In the first episode, Hoffman argues against the prevailing belief that one should start by focusing on building a high-growth business. From the podcast:

“If you want your company to truly scale, you first have to do things that don’t scale. Handcraft the core experience. Get your hands dirty. Serve your customers one by one. And don’t stop until you know exactly what they want.”

Hoffman explores this concept with Brian Chesky, CEO of Airbnb, who before having a company with more than 160 million guests in 65,000 cities, did many seemingly unscalable things, such as going door-to-door to hand-deliver rent checks and personally take pictures of listings. Although these are arduous tasks, this approach allowed the founders to gather valuable insights and adapt to feedback real-time, thereby building a product that their customers absolutely loved. Hoffman again:

“Steps like these are time-consuming but powerful. Over the last 20 years, I’ve worked on or invested in many companies that scaled to 100 million users or more. But here’s the thing: You don’t start with 100 million users. You start with a few. So, stop thinking big, and start thinking small.”

In a 2015 Stanford lecture series, Chesky elaborated further on this point, noting that advice from Y-Combinator co-founder Paul Graham caused his team to see the value of building something that deeply appealed to a small number of people before worrying about Pinky-and-the-Brain-level ambitions.

“The most important of this advice was that it was better to have 100 people who loved us vs. 1M people who liked us. All movements grow this way. The problem with Silicon Valley is when you build an app you are expected to make the app go viral and reach millions of people. This is the worst way to think about it — it’s much better to get 100 people to love you. There was no way we could get 1M people on Airbnb, but we could get 100 people to love us. This is when we decided to do things that wouldn’t scale.”

The topic resonates with us, not because we expect to be doing business in 191 countries anytime soon, but because much of the opportunity we see in small business investing is the result of an inefficient, somewhat unscalable market opportunity. On the search side, it is difficult to uncover opportunities in a replicable manner because information is fragmented, diligence is tedious, and successful deals are often the product of trust built over hours of conversation between buyer and seller. For the companies in our portfolio, managing the operation is often focused on ensuring that the expectations of core customers are consistently met or exceeded, even if that means bringing the senior management team to a late night condo association meeting, or having the CEO build a storage container from scratch to transport a trade show booth.

Overall, Chenmark partners and our CEO’s do many things that are not scalable, but we’re not too concerned about this since we believe that at the moment, these experiences provide us with invaluable insights into the various facets of small business investing and operations. As we refine our skill-set, we believe that we are slowly creating processes to identify opportunities, execute deals, and support the management of operations, which will, over time, put us in a position to successfully build a sizable portfolio of small businesses.

 

Have a great week,

Your Chenmark Capital Team

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