Doing Things that Don't Scale: Unpacking An Important Concept for Startups
DESCRIPTION
Phuong is back on the podcast this week to discuss the importance of doing things that don't scale in startups. Phuong explains that this concept, popularized by Paul Graham of Y Combinator, involves manually handling processes to acquire customers, test concepts, and iterate on products before scaling. We dive into examples such as Seamless and Diapers.com, showing how hands-on approaches helped them understand customer needs and refine their offerings. We emphasize the importance of prioritizing learning and validation over rapid growth in the initial stages of a startup. Being involved in the early stages helps founders understand their business deeply, which is crucial for long-term success.
LINKS:
TRANSCRIPT (this is an automated transcript):
MPD: Welcome, everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society. And this podcast is part of that effort. Today, we've got a Phuong segment. And for those who are new, Phuong gets in and crushes very tactical, Ways of building businesses. And there's a lot of little wisdom in this and I hope it's useful to you.
Enjoy.
All right, Phuong. Good to see you.
Hi Mark. What's going on?
Usual back to back grind, but I love it. That
Phuong: you feed off of that, you feed off the daily grind.
MPD: I used to debate. I'm originally from L. A. as and I used to debate whether or not New York was the right fit, but it very much is.
Phuong: I can't even see you in L. A. Yeah,
MPD: nor can I at this point. What did we got today? What's going on?
Phuong: All right. So today we're going to talk about a common startup lesson that I think is pretty widely known in the community, but I'm often surprised by how many founders I come across who either don't follow it or don't really know what it means.
So a few years ago, Paul Graham, the founder of Y Combinator, popularized the concept of doing things that don't scale. Doing that early on in a business. It's one of these things we take for granted, because sometimes early on, you have no choice but to do things that don't scale, because you don't have the money or the resources.
But what does it mean to do it with intentionality? Also, why would you want to do things that don't scale when you're trying to scale? So first, let's talk about what it means. I think there's a common misconception that when you launch a product or a startup, it either works or it doesn't, right? Customers either flock to you or they don't.
But that's not true. Most startups that work, they work because their founders make them work. They're on the ground, they're cranking the engine. They're doing things manually until they can reach a critical mass. And then the flywheel sets in, but how do you do that and why let's go through some of the common reasons.
So the first one of the first reasons why you would want to do this is to acquire and build relationships with customers. If you're a more established company, you can acquire customers by turning on a digital marketing campaign, right? You sit at your desk, you send out emails, social media and Google ads, and then you watch the customers come rolling it.
For startups, that's not enough. First of all, it takes a lot of time and money to get traction in those channels, especially early on. And then secondly, it keeps you too far removed from your customers. So let's look at an example. When Seamless first launched, their founders contacted law firms in New York, asked for their lunch orders, then placed the orders at the restaurants, and then oversaw the delivery.
Why did they do that? First, it allowed them to get their first customers for free, which is an attractive proposition. It also created a direct relationship with their customers and their suppliers. Or they gained a deep understanding of the pain points and the preferences. And then they use this information to really build out their product, to address the needs of both sides of the marketplace.
And then it also allowed them to deliver this amazing experience early on to these early adopters and created a group of customers that love them, vouch for them and were early evangelists for them. And I think a small group of this kind of customer is much more valuable early on than a larger group of customers that are just like you.
Secondly, doing things that don't scale allows you to test concepts before you invest in them. So this allows you to delay complexities until you've validated customer needs and demand. So here's another example. I used to work with one of the founders of diapers. com, which was an e-commerce site that sold diapers and other baby products with super fast shipping.
The company was later sold to Amazon, I think for a billion dollars. So in the early days one of the founders told me this story before building out their supply chain. They would go to Costco and buy huge amounts of diapers at retail and sell them at a loss to their customers, and they often delivered it themselves.
They had this funny story where they got to know the Brooklyn Costco so well that the manager would call them directly when a shipment arrived. And then the store associates would unload the inventory directly from the Costco trucks onto the founders trucks, which I thought was hilarious. Yes. And then when they started getting more and more orders where they could no longer keep up with demand this way, they knew they were onto something.
So this operation at a loss is definitely not scalable, but it did allow them to test their idea before they invested their resources into building out a really complex supply chain. And then lastly, doing things that don't scale allows you to effectively iterate on your product. So if you're sitting at your desk, Not directly seeing how customers are using your product.
How do you know what to do to make it better? Manual processes allow for you to wrap, to rapidly iterate, right? Founders can quickly test hypotheses, gather feedback and make improvements based on real world interaction. So last example when Airbnb first launched in New York, they did terribly. The founders hypothesized that it was because the images on the postings were not compelling.
People were just taking terrible pictures of their apartments on their phones. So it's not surprising that no one wanted to book those places. So what the team did was they rented a high quality camera and went door to door through the city, taking pictures of as many spaces as they could. So with these new postings, they tripled their bookings.
And once they had that feedback, they actually created a photo service that allowed hosts to hire a professional photographer, which let them grow their number of listings to 13, 000 in just a couple of years. Just another example of how keeping close to the process helps you really iterate and perfect your product.
Doing things that don't scale is about prioritizing learning and validation and building relationships over rapid growth. By putting in this work manually to do this stuff early on, you can lay a foundation for creating processes and products that eventually do scale.
MPD: I love this topic. And I want to add even one more reason why I think this is super important.
It's the undercover boss concept, right? Yes. If you've never been on the
Phuong: first time you've referenced that show on this podcast,
MPD: if you've never been on the front line, it's really hard to manage the ship. Once you have this big pyramid and mid level management and everything else. So for management, it is really powerful to get your hands dirty, learn the nuances and it changes how you build your team, right?
People will come in and say, Hey, I need to hire a salesperson because I'm going to build this company. Salespeople come in different flavors, right? There's enterprise sales where it's slow in relationships. There's more transactional styles and people are better at different types of skills and different approaches.
So really being in the fight for a while, even if it delays scaling the business. Increases the odds of success for all the reasons you've said.
Phuong: Yeah, I totally agree. I think there's, there's the idea of founders making those first few sales themselves, like first 10 sales. I used to spend five hours of my day directly taking customer service calls, like checking on people's orders and manually delivering them if they were in New York city.
And that really lets you, you're on the front lines. You understand what people are directly saying about your products.
MPD: This is a super important topic. Thank you for covering this Phuong.
Phuong: Yeah. Thank you. See you next time
*DISCLAIMER*
Interplay Family Office LLC (“Interplay”) is registered as an investment adviser with U.S. Securities and Exchange Commission (“SEC”). Registration of an investment adviser does not imply any level of skill or training. Information about the qualifications and business practices of Interplay is available on the SEC’s website at www.adviserinfo.sec.gov._ Interplay only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Offering of asset management services through Interplay is pursuant to an investment advisory agreement.The views expressed in this podcast are subject to change based on market and other conditions. The podcast may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.Information communicated during the podcast does not involve the rendering of personalized investment advice but is limited to the dissemination of general market information. A professional adviser should be consulted before implementing any of the strategies or options presented. The podcast is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Neither Interplay nor its advisory persons render tax or legal advice. Please consult your tax and legal advisors for advice concerning your circumstances.