Everything about technology startups is cool - the names, the founders, the logos, the offices. These young, high-growth businesses seem to operate with a different vision than the average small business - and not just in terms of innovation or riding the hype wave. A startup's focus is all about long-term value creation; they reinvest everything into growth via product development, people and market expansion. Take, for example, Twitter, whose recent pre-IPO filing provides deep insight into what it values: maximizing the company's long-term value. Expecting more than $500 million in revenue this year, Twitter will nonetheless be unprofitable. Why? Because it consistently reinvests in product development, infrastructure and talent.
Unlike Twitter, the typical small business does not have deep pockets filled with venture capital or the ability to tap into the public markets, so owners' focus is often on short-term needs - managing cash flow, paying suppliers, fulfilling a large order or developing a new prospect.
As the president and an owner of a Chicago-based manufacturer, these are the immediate issues my company deals with every day. However, there are three specific ways we try to run our company - which is 90 years old - like a startup:
1. Take a New View of Positive Cash Flow: Hi-tech startups often do not turn a profit for many years as they accumulate users and refine their products. For a company with high revenues, one would think Twitter would be rolling in profits, but this is not the case. In fact, the company has yet to report a profit - and losses last year were nearly $50 million. Spending more than you take in is not a valid long-term strategy, unless you are reinvesting to make the future even better. Twitter's CEO and leaders realize that this will lead to a future value and competitive position that will dwarf whatever they could squeeze out of the company today.
In effect, Twitter and similar companies use cash flow as an equity-free venture capital investment - from my experience a path more companies should follow. If stronger-than-expected sales boost cash flow, small businesses should use that as an opportunity to reinvest in something to get you to the next level - whether that's product development, new technology, or strategic acquisitions.
2. Empower Fresh Talent: There are two ways to run a small company - (1) from the top down, where the business owner or manager makes decisions and relies on employees to execute; or (2) a flat management structure where each employee is empowered to make decisions within their realm of experience.
Successful startups operate according to the second model. They have a rigorous application and hiring process - but once hired, they trust that decision and give employees real responsibilities and reward them when they succeed.
Too often for small businesses, a large amount of the decision-making and responsibilities are centralized at the top. The owner is also the CEO, COO, CFO and CMO, along with playing countless other roles. Not only does this put undue pressure on small-business owners, but it is not a good way to manage top talent. Smart, motivated people want autonomy and authority in their work - and without it, will look elsewhere. So, to win this top talent, be critical when hiring and then empower and reward employees.
3. Keep the Hustle: When small-business owners first get their start, there is a natural excitement - an almost euphoric state. During this time, new owners are uncertain and uncomfortable, leading them to do whatever it takes to create a new product, launch a service, get the next sale or enter a new market. However, as the company establishes itself, with payroll to meet and customers to service, that hustle can take a back seat to the necessity of actually operating the business.
Hi-tech startups - and particularly Internet startups - are all about the hustle. If they aren't innovating, their competitors surely are. If they aren't growing, it's seen as a sign of decline. More small businesses need to understand that the same rule applies to them, whether they are a local bakery or a small manufacturer. '
So, while your company might never pull in revenues like Twitter, you can start to think and act like it. Instead of maximizing short-term profits, look to maximize long-term value by reinvesting cash flow, by surrounding yourself with the best possible talent and by never losing the excitement you had when you were first starting out. It may never help you reach a billion-dollar valuation, but it will certainly make your business more successful.
Scott Eisen is the president of Ideal, a designer and manufacturer of corrugated packaging and point-of-purchase displays. Prior to Ideal, Scott and his brother Yale, a co-owner and Ideal's chief operating officer, worked at multiple startups in the Chicago-area, including Classified Ventures, LLC.