To Scale or Not To Scale?

Scale

The magic S word that every entrepreneur wants to achieve.

The ultimate stage that any investors want its’ portfolio companies to reach.

SCALE – stage: A stage where consistent significant growth is not combined with a significant increase in cost which indicates there is efficiency in marketing and growth efforts.

This fundamentally means that the company understands what buttons it needs to push to drive more sales in an efficient and sustainable way.

The era of throwing more coupons to drive more sales is no more.

Nasty Gal

Every time I talk about scaling, I think of the amazing journey of Nasty Gal. A cult brand and e-commerce empire built by amazing entrepreneur Sophia Amoruso, initially as an e-bay store in 2006 but gradually and consistently grew to a massive fashion empire.

Nasty Gal’s annual sales trajectory:

2009: $1.1 million

2010: $6.5 million

2011: $28 million

Just to be clear, this explosion in sales is without any vc funding and without any marketing cost.

CAC what?

In 2012 Nasty Gal raised a $40 million round from Index Ventures and then the bar was raised high….maybe a bit too high.

Sales target 2012: $128 million

After the funding came in, cracks started to show in the business slowly. Hundred people were hired almost instantly and the marketing cost catapulted to amazeballs proportion. The business became less soul-driven and more ROI driven.

It pushed the business to unnatural proportion in a very limited amount of time.

Too fast.

Too soon.

In November 2016 Nasty Gal filed for Chapter 11 bankruptcy and eventually was sold for $20 million.

Takeaways

Did Nasty Gal scale too fast? Did they scale too big?

It’s always easy to analyze in hindsight but I have a few takeaways regarding scaling and growth based on Nasty Gal’s journey:

1. Not every business is scalable to become a $100 million+ business. Just like not every business can become a unicorn, and that’s totally fine. If you’re in a niche, dominate your niche.
2. A business is not just a financial model. At the end of the day, it’s a people’s game. People are building the product, people are buying the product. This needs soul, emotion, structure, and guidance, not just money. Don’t just attract money, attract smart money, and always always always have a P&L that makes sense.
3. Let the need of the customer always drive your business. Targets are great, we need targets to communicate to the business and achieve milestones. But don’t let the target be the bigger part of the growth plan, instead, get a better understanding of how you can serve your customers better and add more value along the way.