The First Thing That Breaks

One distinguishing factor between inexperienced and senior software developers is their ability to answer the following question about an application they've built: "As usage increases, what's the first point of failure?"

Knowing which query or resource will need to be rewritten or replaced soonest is a meaningful -- albeit simplistic -- indicator that an engineer understands what he or she has built.

I like to apply the same heuristic to entrepreneurs. Experienced founders can be differentiated from novices by their ability to answer the following:

"As the business grows, what's the first bottleneck you'll encounter?"

Or stated another way, what problems will be need to be solved at each stage of the business's growth? Let's take a child's lemonade stand. In this example, we have a particularly enterprising child who notices that the local supermarket can only supply 100 lemons per day, which equates to approximately 200 glasses of lemonade. At $1 per glass, that's only $200 per day! The child thinks, "If I want to grow my business beyond that size, I need to buy wholesale" and begins spending time researching suppliers. But in this case, supply may not be the primary bottleneck. If only 100 cars come down the stand's street every day -- and only a percentage of those buy lemonade -- s/he doesn't need to find a wholesale supplier before finding a new location, or perhaps training an employee and opening a second stand.

It's useful for an entrepreneur to think about their job less as growth and more as de-risking -- identifying and working through the primary risks of the business. This is especially true if the entrepreneur wants to raise money. For the lemonade stand, the ability to buy wholesale isn't a major risk -- many small businesses do that with ease. Growing the customer base and scaling to multiple locations, on the other hand, is a problem worth tackling.

"Scaling prematurely", "hiring ahead of the curve", and "capital inefficient" are all phrases that VCs use to describe companies that tackle the wrong issues in their business's growth. Entrepreneurs rarely err by implementing poor solutions to the right problems but rather by solving the wrong problems.