I was discussing with some friends at MBS about a better model for start-up businesses when this question came up. What is the right size for a start-up? The general agreement after the discussion was that most of the start-ups start small with only handful of people who at the start are called entrepreneurs and later become founders This smallness in size is very natural. These start-up businesses are generally based on some idea which the founders conceive and then try to shape up in the form of a business by securing finance (or self finance), setting up relevant operations, building up the right technology to create capacity to get to the customers etc. As the firm’s operations and capabilities grow, the company staff numbers grow accordingly and then the founders realise that they need a dedicated human resource personnel to manage the workforce effectively. In case of most successful businesses whether they are technology oriented or not, the market success of the operation has dictated the firm to grow. It all depends upon whether market needs the value the new company is offering or market is not interested. If market embraces the new offering and customer numbers grow then this is like more oxygen for the firm and firm grows quickly and then comes all the decisions about growing business, maintaining growth, hiring suitable workforce, building the right hierarchy for the various functions of the firm etc.

We all agreed on this when a friend asked another question. Is the same strategy workable for an incumbent firm too, especially if it is trying to open up a new channel to diversify its reach to customers or trying to grow into a new product line? This generated a mix reaction among the group. Some people were in favour of this strategy while other argue that an incumbent company should use its resources to invest some free cash flow to invest in the new ventures.

My answer to this question was that there is not a single right answer to this problem and it depends upon a firm’s intention, target market and its current position and product mix. No two businesses are similar in the sense that if they are similar then they are perhaps dealing in commodities and they are only competing based upon prices. If we exclude such businesses and consider only the businesses which are adding value by creating new technologies or introducing some new business model then these businesses by nature are different from each other. Whether it was B&N in USA entering into online bookselling in order to thwart the threat posed from 150 or some online bookstores (including Amazon) or Sensis in Australia going online for its directories business anticipating a surge in the number of customers, both businesses had different set of challenges and they must had to adapt their strategy accordingly. In case of B&N they threw bucket load of money into creating a good online presence but could not match the technical capability and sophisticated product development capabilities of Amazon which invested much less than B&N. But it also depended upon the business model of the two firms. While Amazon was a tech start-up and therefore did not have any investment in brick and mortar, B&N was a brick and mortar business having more than 700 stores in USA at that time. Similarly business situation was different for Sensis when it went online recognising that the online channel offers value to customers and they will embrace the online search in the coming years. If they did not move quickly or if they moved only when their print business started declining then they would have given too much time for any other start-up to get into their territory and eating their market share.

But the question is still unanswered. Usually the incumbent firm has a brand to protect from any fallout of the new venture while successful ventures are gradually brought back into the parent brand fold. I think in today’s globalised and competitive market it should be part of corporate strategy that how the new investments will be made into new ideas (line extensions, product extensions etc). The key factor determining the success for the new product teams is whether they can stay small while taking advantage of the common resources that the company offers and at the same time don’t bogged down by the traditional beaurocracy.