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Valeria Mecozzi

The Next Closet: Success Factors for Industry Disruption

The Next Closet: Success Factors for Industry Disruption


I would think about a girl or woman living in small town like Baarn where there is only one local second-hand store with a very limited selection,” explains co-founder Thalita van Ogtrop, describing the inspiration behind the luxury second-hand resale platform The Next Closet. “What we did was innovate a market which is now almost entirely run by brick and mortar thrift shops, all very nice but totally dispersed in terms of how they run and how they work. Accessibility and empowerment were really attractive concepts for us when thinking about retail.”

So began The Next Closet, an online platform dedicated to reselling second-hand luxury items. It started over a decade ago inside an Amsterdam design agency, where Thalita and co-founder Lieke Pijpers discovered a passion for sustainability practices in new developing business concepts, especially within corporates. One summer, a friend told them about how the resale retail market was booming in France and the US,and despite neither having a background in fashion, they were compelled by how it seemed to actively solve a large social challenge. Five years ago, together with a small team, they started up inside an anti-squatter’s building in Amsterdam-Oost to create the business model for what is now The Next Closet, one that continues to grow and feature elements of all the scaling success factors.

The Scaling Success Factors cover the intrinsic dynamics that create potential for growth in any enterprise. Our research on hundreds of fast-growing companies has given us an implicit understanding of which ones will go beyond the first valley of death, and which features are vital within each company to grow toward making outsized impact. Small and mighty, The Next Closet has created a business elements from each facet of our scale-up success factor model.


Great Business

Our ‘big hairy audacious goal’ is to make second-hand fashion the #1 choice,” Thalita tells us from their headquarters in the heart of Amsterdam Oud-West. “Fast-fashion is both trend-sensitive and of such bad quality, so what we created was a new alternative without having to go the activist route of preaching and scolding.” The platform is unique in that gives second-hand clothing a luxurious, appealing, and commercial quality. They also aspire to change consumer behavior in a way that informs them of making smarter purchasing choices – “what we aim for is that the young buyer will be deterred from buying the latest H&M t-shirt expressly because it has no resale value.”


Riding Waves

Fashion is currently the second most pollutant industry in the world. The numbers are staggering: the textile economy is projected to use two Earths’ worth of resources. Today, 87% of the 53 million tonnes of clothing produced are incinerated or dumped in landfills. While consumers are becoming more aware of the impact of their choices, they often struggle to balance style and sustainability. “We now have a little green leaf next to all the sustainable brands featured on our website, to inform buyers on what sustainable brands they are when they want to buy something new. We measure the impact of their choice by calculating how much you contributed to saving an X number of liters of water, or trees, or CO2. We’re improving it further by redesigning our sustainable mission with infographics and educating people in a positive way about their impact by buying quality new and reselling it later. This for us is storytelling,” Thalita explains. Not only do they empower consumers through positive nudges, they also are testing ways to directly collaborate with brands. “Together with the help of ScaleUpNation, we are piloting a retail partnership with brands where retailers can outsource their material, and we resell it so it becomes part of a healthy loop.”

Adherence to the cause abides by strict rules: the website allows no fur or exotic leather, nor can users sell fast-fashion brands. Instead, more environmentally effective fashion houses like Stella McCartney, Reformation, and Vivienne Westwood are promoted to create positive solutions for effective change.

Lean Ops

In the beginning, TNC only had a premium service offering, which meant users could send their items to the headquarters and the team would handle the entire process of cleaning, photographing, running authenticity checks, uploading, and shipping each piece. It was designed to test whether there was enough demand and need in the Dutch luxury market for such a business. With the flyaway success of the first trial run, they scaled their model as a Do-It-Yourself platform, allowing users to photograph and upload the items themselves. They also developed an ambassador program with 40 promoters who spoke out on the value of TNC and the resale industry, which they credit to successfully financing their first -and most vital- crowdfunding campaign. The full DIY model kicked off soon after.

Learning Velocity

Thalita comes from a background in business and marketing, and Lieke studied engineering at TU Delft, so both were exceptionally green to the retail industry. Lieke was able to take over the tech side and customer journey flows, while Thalita focused on the marketing and communications aspects. “We really experienced the learning by doing – we had no idea what an online marketplace would entail. So much was about logistics, providers, shipping, and about keeping lean and not having the means, so we really focused each decision on whether it was a key priority for scaling.” In true entrepreneurial spirit, they attribute a lot of their success to their inexperience, as well as being limited in resources and keeping exceptional focus on the most pressing matters. “At first, we met with a lot of founders and grilled them about metrics, platforms, must-knows, platform strategy, so many things. They were super insightful, but the real leaps began as we incorporated growth-hacking methodology. Doing rapid test sprints took us to a whole new level of increased learning. We look back every year and say to ourselves, ‘how could we have possibly not known then what we know now?’”

Access to Finance

TNC recently got funded which makes their total investment 3,5 million euros. Given that all scale-ups are going through investment rounds, we wanted to probe on what was most significant to achieve the funding: business model or triple bottom line? “We got money because of the business model itself. Having a sustainable mission was a nice-to-have addendum, but not the reason. One of our mentors that is deep in the fashion industry told us that having a social mission was not going to get us in the door – the product itself had to be sexy, commercial, and appealing. So, in the beginning, we were more about fashion and less on storytelling, just to get the attention of the crowd and our name out there. As we go into a redesign, we will emphasize our impact and mission much harder.” However, among a group of investors from the industries of e-commerce, and media, the one fund focusing on sustainability businesses in the Noord Holland, PDENH, doubled their last round. Maybe doing good does pay back.

Thalita closes our talk by sharing an inspiring anecdote from a conversation with Prins Constantijn van Oranje: “I was telling him how bad it is that people are not aware of their footprint and are not changing their behaviors enough, and his advice was, don’t to wait for behavior change. Just let technology make it easily accessible and guided toward your purpose, because people don’t want to go on holiday less, or sacrifice their lifestyle. They need to be aided toward the simplicity that technology can offer. That was quite eye-opening for me: just make it really easy.”

Read more about the State of Fashion in this report.

Learn more about ScaleUpNation and its programs here.

Photo credit: Anne Timmer

Storytelling for Impact

Storytelling for Impact

By Valeria Mecozzi

One of the strongest ways for humans to bond has always been through storytelling. Listening to each other tell our stories builds empathy, forges trust, and creates deeper connections. It is also a highly effective way to unite emotions with meaning and intention. Science supports this point: listening to a story actives parts in the brain that allow the listener to embody the story and their own ideas and creates neural coupling, where the brain activities sync up and release the feel-good hormone dopamine. Thanks to this, we feel closer to one another and the story becomes easier to remember with greater accuracy.

In tribal history, our ancestors listened to the chief elder’s stories on traditions and culture and to make sense of the world. In the tribal setting of an enterprise, storytelling shares the same goals: to tell stories that bring the company forward and closer together. Storytelling is not sitting around a campfire, or finding those perfect moments when the music starts to swell. Storytelling is serious business. It is the voice of a leader that impacts the audience through a story and toward the future.

A famous study by Jennifer Aaker tested the most effective storytelling methods among a class of students: one in ten made their pitch by weaving a story, while the rest used facts and figures to make their point. When the professor asked the class to write down everything they remembered about each pitch, 5 percent of students cited a statistic, while 63 percent remembered the story. Logic and reason only go so far. Stories, no matter their objective, bring together a loyalty and excitement that forges deeper bonds.

In the scale-up phase, the right story can have game-changing impact and empower your growing team. It’s all about timing – whereas startups begin with little more than their story, and larger enterprises replace stories with processes and silos, scale-ups step up from the initial phase and evolve into a serious company. A powerful repertoire of stories can be wielded to support the company’s founding principles and purpose, can bring the team closer based on shared values, and can tangibly demonstrate how they will contribute to a better future together.

In assembling a story, leaders are often driven by a need to be as explicit and clear as possible and will opt for direct messaging, stating that the future is attractive, or that business needs to work in such and such a way, that the company is founded on the following values. However, audiences don’t appreciate being told what to believe and what to do, will distrust the intent, won’t follow the logic, and will disagree with the conclusions. Storytelling always aims to get a message across, and has a higher return rate by being shared as story instead of delivered directly. This is how storytelling becomes much more effective than simply “because I said so.”

We elaborate on six fundamental elements that every leader needs when crafting a well-told story: audience, storyteller, objective, structure, content, and delivery.

Audience: the audience is the most important piece, and the first to consider before you begin to speak. Who are they? Why are they here together in this space? What do they need, what do you need, and how can these two needs be bridged? How will they relate to this story, and relate it to our value, mission and goals? Storytelling is understanding the audience better than it understands itself.

Storyteller: this is you, standing in front of a group. You have to infuse credibility and trust. Ask yourself, why are you telling the story? What do you bring to it that is unique? What about you needs to be featured in the story to bring the message across? By making these distinctions, you establish yourself as reliable and the right person to be standing in front of your audience.

Objective: having a clear objective brings gravitas to your story. You are asking for time and attention from your audience, so be clear to yourself what you hope to achieve from this investment. What is the meaning and objective of the story? For maximum impact, a clear intention should be determined, after which you can select from your rich arsenal of stories.

There are several objectives to be told in any company story:

  1. Use storytelling in the reasoning process and in convincing others, especially when situations are complex: when you are presenting the company, the founding story, engaging customers and investors, or moving employees to action through an urgent call.
  2. Using storytelling to interpret the past and shape the future: when you want buy-in for the future, better understanding the world in terms of business, economics, organizational dynamics, etc., as well as teaching skills and ways of working.
  3. Use storytelling to resolve conflicts, address issues and face challenges: to better understanding ourselves, our values and the trust we have in each other.

Structure: stories won’t make an impact if they are told haphazardly. A structure will create a narrative sequence that is easy to follow and easy to remember. Many frameworks already exist already in the creative world, and all have a three-part structure of beginning, middle and end. In the first act, the main character and context are introduced; in the second, a challenge is presented, and the hero is tested; in the third, a revelation has come to surface and everything is now different. By working with this skeleton, all stories can be built and embellished for specific objectives.

Content: what makes an unforgettable story? For storytelling for impact, the adage “everything is copy” still holds true. Everything about your story is crucial to making it resonate: involve a cast of characters, who in this case are your customers and audience. Balance big picture and details, and include conversations to add flavor. Engage your listeners through the senses – appeal to their senses and take them on a journey with you. Talk about your failures, and celebrate the message in your mess. But most importantly, tell a truthful story. Be honest and transparent.

Delivery: it’s all in how you tell it. Grip the audience until they can’t tear themselves away until you’ve reached the end. Build tension and suspense toward a climax, and don’t rush through. You can be creative, and stay close to what suits your personality best. Maybe drop the audience right in the middle and into the action. Or start from the end. Use your voice, and your body, as an instrument to forge intimacy and trust. Keep the arc of tension high throughout, and make your point clear as you bring it to a strong end. And as any master will tell you, practice is the key. Practice, practice, practice.

*          *          *

In ancient times, storytelling was a true profession. Today, thanks to Hollywood and media advertising, storytelling has been further perfected and refined. But it is not as easy as it seems – it takes talent and the proverbial 10,000 hours to become a highly effective storyteller. As a business leader, storytelling must become part of your skillset and repertoire. Engaging in storytelling occasionally is not enough – you are not going to get it right and refined on the first try. The process of solidifying and polishing your story takes trial and error, and time. But the more you try it out, the better you will become.

PHYSEE’s Scale-up DNA

PHYSEE’s Scale-up DNA

As we gear up for the seventh class to join our Runway program this March, we take a deep dive into the ventures that have gone through the program and are on their way to mastering the art of scaling.

“We want to make sustainable windows, without compromise.” This is how Runway Class 6 alum and PHYSEE CEO Ferdinand Grapperhaus, Jr., explains the vision for the company he co-founded in 2014 with CFO Willem Kesteloo. What began at TU Delft as a master’s thesis project in physics on luminescent materials (the name PHYSEE is a combination of physics and seeing) has scaled into an award-winning, multi-product enterprise devoted a simple idea: solar-powered windows.

Co-founders Ferdinand Grapperhaus Jr. and Willem Kesteloo

Over the years, Grapperhaus and Kesteloo perfected the PowerWindow, a normal looking sheet of glass that can generate electricity from the sun. They joined our Runway program during their third year of existence, as they became a company deep in the scaling phase. Hungry to learn and excited to grow, they stand out for devotion to their product and its benefactors, as well as their expanding team. During Runway, they were engaged and devoted to learning from the ScaleUpNation sessions. The ScaleUpNation team was equally taken with their potential to grow, recognizing in them the essential qualities of ScaleUpDNA.

The ScaleUpDNA is made up of the intrinsic qualities that provide scale-up potential. Our research on hundreds of fast-growing companies has given us an implicit understanding of which ones will go beyond the first valley of death thanks to five fundamental elements that make up the company at its inception: a compelling vision, a great business, a scalable model, competitive edge, delighted customers.

Compelling vision

By 2050, 70% of the population will live in urban areas and spend large portions of their days indoors, from home to work, in buildings that have shown to contribute to 40% of global energy consumption. The urgency for sustainable living solutions motivates PHYSEE at its core. Their design absorbs all sunlight thanks to special coating on the outside windowpane that transports it to the edges, and converts it thanks to solar cell strips bordering the window frame. Their vision is to change the perspective of glass into one of living skin, working with real-estate developers to not have to trade traditional glass windows or rooftop designs for solar panels. “We want to become the norm,” they tell us.

Their passion for happiness is equally felt within the organization, whom they devote as much attention toward improvement. In conversation, both co-founders emphasized how important it is for the team to grow together with the company. They have set out to prove that each team member can scale as the company scales, and have created a business beat within their company and its internal teams.

Great Business

PHYSEE plays in the field with a unique, but very active market – real estate development. “The scaling challenge we face is that we are still small compared the big players of global commercial real estate. We come in and have to show how important it is for buildings to be energy neutral,” says Willem. They now invest in developing relationships within the conservative environment of commercial real estate, and their dedication is showing results. In 2016, they won the Postcode Lottery Green Challenge and were awarded 500.000 euro and the window provider of the Goede Doelen building in Amsterdam Zuid (image), which opened late 2017 and whose façade now features over 100m2 of PowerWindows. The residents of the upcoming BOLD Tower in Amsterdam Noord will be the first in the world to have a transparent electricity-generating windows; the Binck Kade in The Hague is soon to come. They predict their impact will be to make buildings 20% more economical.

Scalable Model

A quick look at their website’s product page shows how much scaling potential is found between sunlight and windows. “Glass is huge, trend-wise, all over the world,” Willem tells us, “and so are energy efficient buildings.” Riding the wave, they developed their first product, the PowerWindow to feature a double-pane (like an airplane window) that transports the sunlight into a solar cell strip that line the frame. The following product, the SmartWindow, is added to optimize climate control for each room based in individual preferences and geographical layout, and consumers can add smart thermostats, smart blinds, and ventilation pockets to further optimize their preferences. They envision the possibility to expand into car windows, greenhouses, even reading glasses.

Within the team, scale is also a pressing matter. The team has grown considerably in the last two years and the challenge this poses to young first-time founders can be daunting, but they are optimists. “We invest heavily in developing our team, and put quite some money into their learning goals. The people we hire always come to mean so much more to us than we would think beforehand,” Ferdinand says.

Competitive Edge

Our ScaleUpDNA research found that 85% of scale-ups have their own intellectual property, and PHYSEE boasts two: both their windows are patented. They also run two labs in their Delft, one on Research in collaboration with TU Delft, and a Living Lab, which allows for short rounds of testing and manufacturing, faster than any competitor out there. “Currently a lot of solutions are developed to go around or on top of the building, but none are found within the shell or frame, which makes us unique in our niche,” Willem explains. Being so heavily involved in your product creates an extremely tight margin for error, but they believe knowledge is at the heart of it. “The market needs to be educated, but we have the opportunity to get builders to think about improving energy sustainability in a building’s shell, too, which we can help them with. By 2020, we aim to be the no-brainer solution for developers around the world.”

Delighted Users

The passion is not only about windows and construction – user happiness is at the heart of their product. The comfort and happiness of its residents will do its part in creating a better world. “Happy people are 10-20% more productive,” Ferdinand explains. The Happiness Mode is inspired for people living and working indoors for large parts of our days, as it self-regulates light and warmth to personal preferences. It will keep track of what you do at certain times, and learn to do it for you automatically.  “I think the days of single-purpose materials are gone,” says Willem. They are doing their part in scaling a company that will take the world beyond its dependence on carbon, and into the light of the future.

Interested in learning more about Scale-up DNA? Apply to our ScaleUpNation Runway Program. More information here.

Top Scale-up Reads of 2018

Our favorite reads of 2018

Ready to curl up near the fire and increase your learning velocity? Merry Christmas and Happy New Year from ScaleUpNation. Looking forward to an enlightening 2019, full of growth. Please find below our Christmas gift to you: the top scale-up relevant reads of 2018.

Skin in the Game by Nassim Nicholas Taleb

Can you make significant change in the world without putting some skin in the game? No radical innovation happens without an inspiring leader, and these are often the ones that shoulder the biggest risks.

In this year’s release from economist-turned-philosopher Nicholas Nassim Taleb, he challenges the hypocrisy of advising, selling, or participating in any endeavour without being directly involved. Some would say that only those people should be heeded or trusted if they have a personal stake in the outcome, especially if they also partake in the consequences. For instance, if you do not pay your cobbler upfront, he will take care in repairing your shoes knowing that if he screws up, you will not pay him. In a more brutal and honorable past, men were executed if the building they had constructed fell down.

But what if we expect our agents of change to take serious risk? Should we punish an army general that devices and executes a high-risk strategy aimed to significantly shorten the war, that becomes a disaster costing many young lives? Should a political leader be sued when her innovative policies proved highly counter-productive? Should an entrepreneur that wants to bring a new medicine to the market, fails and goes bankrupt, lose his life’s savings?

Ideally the potential personal loss should be designed to align with the amount of risk we want the change agent to take. So, for us as mission-driven entrepreneurs the consequences of putting our skin in the game should not be career ending or resulting in personal bankruptcy. If that were the case, we would act too conservatively. We want to remember heroes for their attempts, not just their results.

“If you don’t take risks for your opinions, you are nothing. People want to have their soul in the game.”

Building on Bedrock by Derek Lidow

More than 30% of the USA population is currently or at some point engaged in or related to someone in entrepreneurship. Some economists argue that we are all entrepreneurs, so long as we can make decisions for ourselves – for whom will we work, what will we buy, how do we spend our time? All of it is entrepreneurial, and is recognized as such.

In this book, the author and Princeton professor Derek Lidow asks whether you are ready to be an entrepreneur, and if it is the right thing for you. It asks you to explore your skills as a founder, co-founder, investor; it answers the who, what, when, where, how, how much, and why of founding. He divides entrepreneurs in two separate groups: the high-risk entrepreneurs, helped by VCs to create fast-growing companies, and bedrock entrepreneurs, who act with patience, low-risk and build a company with steady vision. It explores motivations, creativity, balancing life with entrepreneurship, and whether or not this is the path for you. The final, daunting statistic? 70% of people who actually become full-time entrepreneurs in a typical year abandon their efforts, or do not make their money back whatsoever, losing time and risking relationships.

 “Contrary to popular opinion, ideas cannot generate a passion required to lead successful and self-sustaining companies – not even great ideas. Passion for an idea, inevitably, fades when you realize customers want something different, or during the hardships to making it happen. Setting up a company is easy, but growing it into something valuable and self-sustaining is extremely hard.”

Powerful by Patty McCord

Netflix chief talent office Patty McCord writes the book on how to build a strong culture. In her book, subtitled Building a Culture of Freedom and Responsibility, she outlines how a world-renowned company like Netflix was able to develop and restructure its team as it went from mail-order DVDs to leading streaming platform, now to an entertainment empire.

The most important takeaway from Powerful is to abandon the idea that the people with whom we work are family, when they are a team. Like all teams, changes and rotations to the roster as crucial to the success, sometimes at the cost of trusted and loyal employees, or preferred ways of working. While weaving stories of culture building using discipline, self-efficacy, trust and freedom, a company’s culture begins to form thanks to “stunning colleagues with excellent skills”. As business grows, bring in high-performing people and minimize rules, McCord advises. An outstanding team and culture can solve almost any challenge together, while ensuring the best chance of success for the mission and dream at a given stage.

Just as great sports teams are constantly scouting for new players and culling others from their lineups, our team leaders would need to continually look for talent and reconfigure team makeup. We set the mandate that their decisions about whom to bring in and who might have to go must be made purely on the basis of the performance their teams needed to produce in order for the company to succeed.” 

The Essential Product Roadmap

A well-crafted product roadmap can a be startup’s key step toward scale. Once the product hits square market fit, it needs to get to work toward launching the next product fast, or risk death. How to build a solid product roadmap? Read for tips and watch-outs based on company size.

Product Line vs. Roadmap

Take a look at the history of Apple’s product line: what started as a few unique products began to accumulate over the decades, peaking in 1993 with a total of 47 products and bleeding money.

Three years later, Steve Jobs returned to Apple and gutted the overstuffed product line. With a team and a vision aiming at changing the way people used computers, they built a product roadmap with significant stops along the way: first came the iMac G3, followed by the iPod, iPhone and iPad.

Apple achieved market dominance thanks to its ability to revolutionize new markets, while outpacing any competitors. iPod’s boom inspired other companies to create similar devices, but before the competition could reach similar level of quality, out came the iPhone. Apple bulldozed through product segments before they had time to turn stale, and erected entirely new goalposts for others to chase. Each new product brought in a flood of new users, while loyal customers rode one high after the other.

A product market map provides a clear development path for launching your products into new market segments. Traditionally, companies launched a product in the market and continued to maintain a cycle of upkeep and bug-fixing, but this method proved outdated as technology advanced. Cell phones companies in the 1990s and 2000s were so focused on making their latest release the smallest and thinnest, they never saw the iPhone coming.

At the same time, roadmaps have their features and issues, depending on the sizes of the enterprises. Keep in mind that all size is irrelevant to these three issues: priority setting, managing expectations, and how to use the data you continue to gather.

A Tailored Fit

Roadmaps have unique features and issues depending on the sizes of the enterprises. Keep in mind that all size is irrelevant when it comes to three main matters: priority setting, managing expectations, and how to extract information from usage data.

Small Start-ups


  • Being hyper-ambitious and driven risk complicating what should stay clear and simple.
  • Intense focus on the details might prohibits what could be welcome change.


  • Stay flexible and agile in the early stage level.
  • Keep the roadmap clear of hard dates, while still making objectives and key results.
  • Focus first on how to best approach the innovators you want using your product and process all the information that are produced in these first contacts.

Small to Medium Enterprise


  • Expansion generates complexity and the risk is to want to simplify what is naturally becoming complex.
  • Experts working in a silo can create confusion and misunderstandings.


  • As your company becomes more mature and aimed toward processes, the roadmap becomes a hybrid of customer demands, team efficiency, and overall flow.
  • Dates and times are set, but instead of being fixed in stone they can be divided in a framework similar to the three horizons – current, midterm, future.
  • What this provides is a comprehensive view of the company and how all its elements work together toward the shared goal.

Established Enterprise


  • Focusing only doing more of what works can become stagnant.
  • Internal disruption in growth guarantees external combustion.


  • Your company is now at a higher level and things are become far more complex.
  • At this level, creating goals centered on dates makes sure targets are met. With so many departments working in synch, a timed roadmap guarantees everyone is held accountable.
  • There are many moving parts in the overall operation concurrently, and added stakeholders will have entered your process, so the more universal clarity the project can enjoy, the more each player can know what the others are doing and collaborate clearly.

Beyond Product-Market Fit

Product launches are exhilarating – the team is ready to go, aligned, partly terrified, but thrilled to hit the market. The reality is that the real uphill climb comes afterwards.

In a formulation made by Marc Andreessen more than ten years  ago, companies test prototypes of products that scale as soon as they find their market fit and it looks something like this:

The reality is that the market is much more complex. B2B are a medley of customers, product use cases, purchasing processes and geographic oddities. Fitting your product into its market is only the start of a long process.

Once a company scales inside its market, the speed picks up. Customers are buying the product as quickly as it can be made, and word of mouth is spreading. You are in tune with your team and customers, and are now attracting attention, and competition. Someone is behind you ready to take your idea and benefit from your errors, and customers are interested in their own benefits. What will happen once the relationship between market and product is saturated? Did you measure the size of your market accurately? Answers to these questions will prevent your existing products and relationships from stagnating into repetition.

CEOs and their teams should reassess and evolve their product/market portfolio to maintain growth. How will you regenerate yourself? How will you keep yourself on an improvement curve that matches your skills with the learnings from the first product-market fit experience? Design a model that looks like the graph below: a sequence of new channels, products and geographies that together add up to a scaling revenue.

To go deeper, check out Marc Andreessen’s original blog post, thanks to the wayback machine.

Dare to choose

Saying no to potential customers can seem counter-intuitive especially for companies in the start-up phase, but it could be the key to scale.

A young entrepreneur came to us with a challenge. His product was market-ready and business booming, and yet he had put too much energy into creating a product that matched his incredibly high sustainability requirement. He hadn’t given enough attention about the best market fit. With growing demand coming from everywhere, he no longer felt confident about the next step. How would he manage between growth and mounting new opportunities for expansion?

In this case, the entrepreneur had designed a housing unit built entirely with sustainable materials, and its low-cost model was buyers from everywhere. From student housing, hotels, vacation parks, disaster relief sites, and hospitals, the potential seemed unlimited.

The focus became focus itself. By concentrating on each potential customer, you can design a journey and define your primary market based on size (specify the size, and go for biggest) and what feels most natural (who is closest to your mission?) Forget giving your attention to anyone, and really understand who will help you get to where you want to go. What are your goals, and what are the non-negotiables for who will get you there?  Who is the client best matches your customer needs and market segment? Who feels the most natural?

A shrewd move is to find the market segment that will get you to break even first, and leverage that revenue and momentum into the next segments.

Whether you go with your gut or with market data, the important thing is to choose. Not choosing is the worst option of all.

The Laws of Scale

Geoffrey West’s latest book Scaling looks at system behavior in organisms, cities and companies, whose behavior emerges from continuous iteration of often very simple rules operating between individual agents. These systems are often significantly di!erent from the sum of the parts and seem to take on a life of its own. This is called emergent behavior. Even if we understood how the individual constituents interact with each other, predicting the behavior of the whole is usually not possible. In this respect companies are not pure complex systems- there is some sense of overall design, direction or enterprise, while at the same time the individual employees, customers and other actors do “their own thing” from which the whole emerges.
In the book Geoffrey West zooms in on scaling. Scaling refers to what happens to a system if its size is increased.

Laws of scale

Scaling is represented mathematically by simple power curves: y=a xc , with “a” being a constant “y” being the dependent variable, “x” being the size of the system and “c” the scaling exponent. When one draws these power curves logarithmically, meaning that the scales on both axes increase by successive factors of ten, one gets a straight line with the scaling exponent being the coe”cient (after all log y= log (xc )=c log x).

West presents Compustat data of all 28,853 companies that were traded on US markets in the sixty years between 1950 and 2009, which results in the following amazing power curve:

Let’s zoom in on the blue dot points (net income) and first look at the dot points to the right of 102 employees, i.e. companies with more than 100 employees. Note that the x-as ranges all the way to 106 employees, i.e. companies with a million employees, so a huge range of scale. The vertical axis presents net income, i.e. the net profit of the company calculated by taking revenues and subtracting all costs, depreciation, interest and tax. The exponent equals 0.79, which means that as the company increases in number of employees by a factor 10 the net income increases only by a factor 10 0.79 which is approximately a factor 6. This is quite disappointing as you would expect large companies to reap benefits of scale, resulting in higher, not lower profitability per employee.

In the book, Geo!rey provides power curves for sales, gross profit and net income. Gross profitis defined as sales minus cost of sales (the sum of cost of direct material, direct labour and factory overhead). Net income is defined a gross profit minus SG&ADIT (the cost of sales, general and administration, depreciation and amortization, interest and tax). Using data from Stern University of the average gross profit margin and the net income margin as a percentage of sales, one can also calculate the power exponent of Cost of Sales and of SG&ADIT:

So, if a company increases its number of employees by a factor 10, sales go up by 9.5; cost of sales by 10; gross profit by 8.3; SG&ADIT by 8.8 and net income by 6.2. This a scale independent increase, i.e., it does not matter if the companies scales from 100 to 1000 employees or from 10,000 to 100,000.

In conclusion, companies with more employees realize less sales per employee, whereas cost of sales per employee remain the same, resulting in a lower gross profit per employee. Even though larger companies do incur economies in scale in their indirect costs, these are not su”cient; also net income per employee decreases with scale.

Survival rates

Geo!rey concludes: “the sublinear scaling suggests that companies also eventually stop growing and ultimately die”, drawing the analogy with organisms and the implications of sublinear scaling for their mortality.

“the sublinear scaling suggests that companies also eventually stop growing and ultimately die”

I would propose an alternative analogy with di!erent implications: that of animals of prey. Very few animals of prey die of old age, and instead most die because they get eaten while in some occasions suddenly many perish because of harsh external conditions, e.g., famine.
Similarly, companies rarely cease to exist because of obsolete equipment or skills while their market is still thriving – in these cases it always makes sense to invest in renewal. Most cease to exist because they are being acquired or because the market “turns again them” – the consequence of worsening market conditions, changing customer needs, technology disruption or competitor’s inroads. As a result, there is not a particular age for companies at which time they typically die. The risk of a company dying does not depend on its age or size. It remains a constant struggle for survival.


Scaling refers to what happens to a system if its size is increased. Scaling also means growing in scale. Individual animals do not scale; after a rapid development phase to maturity they remain of mostly constant size for all of their live. Groups of organisms, like herds or coral reefs, however, can grow in scale and so can cities and companies.

“the sublinear scaling suggests that companies also eventually stop growing and ultimately die”

Like trees trying to reach the canopy, companies want to scale in size because they are incentivized to do so. Companies who scale provide more customers the benefit of their products and services. Also, companies that scale find it easier to attract investment and talent. And growth drives the share price to which the remuneration of top management is often linked.

Why do cities experience open ended growth, while the growth of companies eventually stalls?It is not because cities are more social, unruly places, or have less top down planning. Geo!rey west point outs that the di!erence is that the output of cities (their social- economic capital) scales superlinear, whereas the output of companies (their sales) scales sublinear. My explanation for this is: fierce price competition between firms which keeps forcing their sales back to the level of their costs. Cities compete for resources, but do not force each other’s output down to marginal cost levels. If enterprises have no price competition on their output – like for instance publically funded universities or the church– their growth might be open ended. Note that both examples are not known for their unruliness, or lack of top down planning, and still have been scaling for centuries.

Employees are attracted to companies because of the mission, position and performance of the company, because of the opportunity to do attractive and meaningful work, to get opportunities, to learn, to have freedom and control, to work with nice colleagues and to get an attractive remuneration.

For companies the sublinear scaling of their net income impedes their growth. As the corporation adds more and more people, the resulting additional sales generate less and less additional net income. They operate in competitive markets where additional sales are typically contested, also when the overall market grows. At a certain moment, the company just runs out of profit generating growth opportunities. The petering out of growth when companies become large also can be explained by seeing a company as a self-organized system. Companies scale when more employees start working there. Employees are attracted to companies because of the mission, position and
performance of the company, because of the opportunity to do attractive and meaningful work, to get opportunities, to learn, to have freedom and control, to work with nice colleagues and to get an attractive remuneration. Large companies score lower on these than smaller companies. Reasons often quoted why most large companies fail at job satisfaction: too much bureaucracy, too much rigor, lack of innovation, no career development, too risk averse, management problems (the Peter principle), bad people aren’t fired, frequent, unproductive meetings, and feeling like a small cog in a big machine.

Small companies grow faster than large ones. Still to move up the scale from a small firm to a large one is truly against the odds. Research at THNK conducted together with Deloitte showed that the chances of a new enterprise to ascend as a scale- up (a company that grows above $10 million by its 5th year of revenue) are around 0.5%. And as Geo!rey West states: “After growing rapidly in their youth, almost all companies with sales over about $10 million end up floating”.

As the average sales per employee in the US amounts to approximately $200k, sales of $10 million equals an organization of approximately 50 people employed. The power curve presented at the beginning of the article and shown here again marks this size of organization as a transition point below which the (blue) curve of net income versus number of employees is almost flat, while above it the curve is almost linear. This implies that below this transition point costs grow much faster than sales, while above it both scale more or less at the same rate.

The transition point could be marked as a stepping up of sales productivity. Stepping up sale productivity means that the organization sees new higher value-added opportunities by adding additional employees. In our recent survey among young innovative enterprises (all less than 10 years old), we found that those that grow beyond this transition point are significantly more new opportunity oriented and keep launching new products, while does who stall are much more performance (e”ciency) oriented and focus on existing product o!ering.