Wharton@Work

September 2019 | 

How to Scale a Business: What Facebook Got Right and Webvan Got Wrong

How to Scale a Business: What Facebook Got Right and Webvan Got Wrong

Social media giant Facebook is a household name. Webvan, an early e-grocer, is not — in fact it’s defunct. The way these startups scaled their business had a big impact on their life or death in the marketplace, according to Wharton professor Gad Allon, academic director of Scaling Ventures: Developing the Playbook for Profitable Growth.

Allon says Webvan tried to expand quickly from one operation in California to 26 U.S. cities. As a result, “they managed to burn $800 million within a year because they needed to chase more customers; the cost of acquisition increased significantly.” The firm soon went bankrupt. Facebook, on the other hand, had what Allon calls a “very disciplined growth plan.” The company started university by university, providing excellent service and building a cohesive network before moving to the next one.

Another thing Facebook did right was change its culture, which started out as “move fast, break stuff.” The company realized that wouldn’t work at scale, and developed a stable organizational infrastructure. Facebook understood, says Allon, that “what got them to where they are” could quickly become “the next obstacle when they needed to grow to the next level.”

Two-thirds of the fastest-growing startups fail, according to a study by the Kauffman Foundation and Inc. Clearly, scaling is a big stumbling block. When and how should startups scale? Should they even scale at all? How can they achieve it sustainably? Allon and his Wharton colleagues help entrepreneurs find solutions in the Scaling Ventures program, which launched in December 2018.

“We begin the program with a very simple question: what is the difference between scaling and growth?” Allon says. This is a key distinction. He describes the mind shifts that must occur to scale successfully: the company’s approach must move from opportunistic to strategic, short term to long term, and local to global.

Allon also helps participants understand the main drivers of scaling, such as “the economies of scale; the network effects that you can enjoy, that drive firms to grow so they can actually scale and increase their topline at a faster rate than… their number of resources or costs.” Ultimately, participants will leave with “a playbook and a specific set of tools they can use immediately when they go back to their firms,” he says.

The inaugural program garnered enthusiastic reviews. Davis Smith, CEO of outdoor gear retailer Cotopaxi, calls it “really impactful” and notes that he shared highlights from the program with his executive team. Using that knowledge, the team “looked more critically at areas where we’re getting the best return on capital, and we’ve made some changes.”

An important takeaway for Smith involves “hard growth versus easy growth”: “For example, instead of opening up a bunch of new stores — a relatively easy way to grow revenues but not very capital-efficient — figure out ways to make your existing stores more profitable. That goes straight to the bottom line as profit.”

CEO Ken Smerz of Eco3d in Phoenix, a startup that makes 3D computer models for engineers, says that the program inspired him to make changes to his three- and five-year strategic plans. “It altered the direction of how I plan to grow my business — that’s a pretty big impact!”

For serial entrepreneur Dr. Brian Hass, who says he’s often “jumped into opportunities with both feet,” the program’s emphasis on mitigating risk was key. Of two businesses currently within his purview, he decided not to scale one at all, and to take “a more measured approach” to the other.

Several participants appreciated sessions on how to scale your staff, including Jennifer Cable, who does strategy and business development for family-owned firm Thorlabs. “In fact,” she says, “I’ve been talking with our HR director about using the interviewing and recruiting tactics from the program.” Ted Thurmond, president of Chemline in St. Louis, says he “especially valued the personnel component of the course,” which helped him implement a new interviewing process. And Timothy Bonacci, president and CEO of Navian Capital in Cincinnati, realized he needed to avoid hiring “too many ‘joats’” (jack-of-all-trades) and re-focused his efforts on “recruiting A-listers with strong connections in the industry.”