If you own businesses, and you aren’t a total psychopath, you feel an empathy for other people who have taken that punt. You know what they’re going through, and it’s something nobody in Salary World fully understands.
It’s like seeing baby turtles flap down the beach past waves of predators. You watch the new neighborhood store owner standing alone at the counter, expectant face on, waiting for some nibble of customer interest, and you feel sympathy pains.
You do mental calculations of what it costs them each day to stay open. You think: damn, I hope you make it.
So sadness descended as I read this brutally honest story from Michael Fox, one of the founders of Shoes of Prey, which ended its days recently at age ten.
Shoes of Prey was a great product and an elegant brand. As an ex-brand namer, I take my hat off to them. Fox turns the Giant Hindsight Clarity Beam on the whole affair.
Focus Group Says Yes
In a nutshell, their focus group customers reckoned they sure would buy those customized shoes. No way are we all conformist sheep. So Shoes of Prey extrapolated that demand out across the population and jacked the whole thing up to 200 staff with external investor cash.
Turned out those customers were just sayin’ stuff that would never be backed by actual opening of wallets.
Yet deciding that everyone wanted customized shoes was a fair call. In the early years of this decade, conference stages teemed with futurists preaching the digital customization gospel: soon, every transaction will be a moment of personalized magic delight for customers.
Don’t base big investments on what futurists reckon.
Shoes Of Prey’s revenue never came near supporting a cost structure geared to massive global scaling.
The saddest part of the story was that in the early days, they had a devoted customer base and were growing without external finance. They could have had a smaller business that made decent money more or less forever from customers delighted to pay a premium. They took the unicorn* bait instead.
(*Attenborough voice* The unicorn is a non-listed business worth over a billion dollars).
Unicorn Life: Not All Rainbows
I don’t want our business to be a unicorn. And yes, I’m aware it’s not a choice that exists, because I don’t have the skills, brainpower or single-minded drive to do that.
Plus the live events industry is kinda the opposite of digital for scaling. For us, every step up the growth ladder is another investment in expensive shiny things.
But I see people I know with great software products that clients would pay good money for. They could create a sustainable, high-margin business from that. Instead they’re pretty much giving the product away to crank up the scaling that attracts the big valuation multiples.
And now they must get into bed with a motley pack of investor randoms, and lose all control over their destiny as they inject increasing doses of steroids into a business that will lose money for years. I genuinely hope they can cash out at some point so they can hire the big-name bands of their youth to play their birthday party, as is the custom in that scene.
If you read lots of startup media, you can get the impression that the venture capital path is your only option. A $250M payout makes for a better headline than a business just making a boring old $5M profit every year for its owners. Yet $5M buys quite a lot if it’s yours.
Don’t Call Us A Lifestyle Business Bro
The keep-it-smaller-but-profitable approach like ours has a supremely patronizing name from the tech bros: if your new biz isn’t a startup, you’re a lifestyle business.
Thanks for your searing insight, pre-revenue experts.
Ours isn’t a big business. We employ about 60 full-time staff and a lot more casuals. We’ve been cash-positive every year since Year 1. We’ve financed all our own growth from retained earnings. We have no external investors. And life is great.
Here are five reasons why you might choose the small-scale option:
1. You Focus On What’s Important
Business is full of distractions, and you need to stay focused on the right things. Which are your staff and customers, not capital raisings. Startup world talk is all raisings and rounds as if that’s their main business. So they can pitch more cash into the insatiable furnace of buying users and trying to vacuum up battalions of hard-to-find staff.
All that to hit bigger numbers so you can raise more finance. It’s a Human Centipede of commerce.
It gives startups exciting headline valuations, which are great except that business valuations are fantasy fiction until they translate to actual money in the bank, a path strewn with landmines right to the end.
2. You Are Not A Prisoner of VC/Private Equity Creeps
One of the best things about having your own business is being in control of your own life. Dilute your equity a few times and you’re little but an organ grinder’s monkey.
I’ve worked in businesses at board level when private equity arrived to start a wild-ass growth spree that snuffed out every atom of spirit in what was once a great company. (They left after they’d vacuumed every last cent out of the place, which has since bounced back).
Whatever they say about not interfering with your management style or strategies – that will last 3 months max. You may as well have a job, and an unpleasant one at that.
3. Managing Growth Is Really Hard
Our business has expanded at the old-school rate of 20-30% per year, which still compounds out quite nicely over a decade. Even that rate of growth is a hefty challenge, because quality staff are always scarce. Your systems get stressed. It gets harder to keep things personal with your customers. Every week there are more, bigger decisions and you get some of those wrong.
But at least we’ve got time to fix our errors.
If you’re a startup growing at the 180% a year that will keep your VCs pleased, managing that growth is going to be like doing your tax while parachuting. Your hiring frenzy leads to the magnificently-named Bozo Explosion. Let ex-Apple guy Guy Kawasaki explain:
Keen to manage your way through that? Me neither.
4. The Odds: Racetrack vs Lottery Ticket
Every business is a gamble. Understanding the odds is an essential part of the game. Starting a regular business is like a bet on a horse race, when you’re an educated punter. These aren’t odds that will excite your bank manager, but success is not unlikely.
Tech startups are like buying lottery tickets. Sure you read that story of someone who made a gajillion but your odds are infinitesimally low. It’s like deciding you’re going to be a movie star. Gamble responsibly, my friends.
5. Look at the Rich Lists
Not that being rich is a great goal in itself, but it’s a handy reminder that there’s more to our economy than tech. Check out the richest 50 in this country, and there’s just three tech companies there.
The rest are all people who got there selling actual tangible products and services that your parents would understand. Or inheriting one of those firms, that’s a good business model if you can swing it.
Yes, that list will look different in future as tech gathers speed. But it’s also worth pointing out that Atlassian are business heroes for how they got to #5: by working out how to make tech profitable from the start, so they got big without external capital. Likewise Envato, who are not on that list but well up there. It can be done, folks.
Don’t read all this as saying the VC-financed startup path is wrong. It’s just important to know that it’s not your only choice.
And VC cash is a business opportunity even if they’re not buying your shares.
My ancient ancestors had a terrific business: a bakery in the Victorian gold fields in the 1850s. If there was trade media in those days, Gold Panner & Prospector Magazine would have been filled with success stories of the few miners who struck it rich. Most of them didn’t, but they all had to eat.
Today, our business does large events for the tech sector, among others, and bless them for their expenditure. Ask yourself, how can you sell things to cashed-up coder folk with no spare time, poorly controlled spending habits and a burning desire to show their competitors who’s the most successful?
It worked for Allbirds, the preferred footwear of Silicon Valley and after five years … yep, a unicorn.
Unfortunately for Shoes of Prey, sometimes frumpy and comfortable wins the race. Hope to see them bounce back soon with something else that good.
If you’re interested in why those Shoes of Prey focus groups led them astray – and anyone in business should be – this piece in Smart Company by Bri Williams is really good.
Speaking of Smart Company, I’ve had a couple of pieces there in the last fortnight, Stop Saying How Busy You Are and Pet-food lickers and changing-room strippers: Why you’ll never sell to people you don’t understand, check ’em out if you missed them here.
And if you aren’t already, why not subscribe? It’s free, it’s just one email a week, and where else are you going to find Human Centipede references in business writing?
Nice one Ian
one of your best articles yet – as a small business owner this really resonated.
I’ve been (unwittingly) following the advice of Guy Kawasaki for years – when I’m asked how I choose photographers to join the EventPix stable, I simply respond that they have to be better than me.
The first time I heard of Jodie Fox on was on a panel looking at (your guessed it) future trends. I never got the concept – but then my feet are probably too big. The most telling statement in Michael’s article was that mass market customers want “to be inspired by trends and shown by celebrities and influencers exactly what to wear — down to the style and brand”
Another speaker I saw some years ago was Jane Cay, who’s business, Birdsnest, has transformed Cooma – her model I understood straight away.
Nailed it Ian. First listen to this and was definitely worth the time.
Hope you are well comrade.
Hey Joe, glad you liked it. All good with me, hope you guys are enjoying the Carlotta St vibes!
Late to the party commenting on this, but after reading this article only last week, I read this in the SMH a few days later: “We’re a loss making SaaS business, like all of the other companies that are propping up the Nasdaq at the moment,” Mr Elzinga said. “I know from the work that I do with both our investors and also the industry more broadly, we’re actually at the capitally efficient end of the spectrum.” Ummmmm…okay.
I literally don’t understand what he’s talking about! Hey are you the Andrew I did some work with years ago at L9W?