(As appeared on Forbes) Editor’s Note : Moira Vetter is founder and CEO of Modo Modo Agency, a full-service B2B Agency headquartered in Atlanta, Georgia. She was the 2014 American Marketing Association Agency Marketer of the year and is a 2015 Enterprising Women Entrepreneur award winner. She licenses The Tech Portal exclusively, for some of her more amazing articles to be re-published from Forbes.
One of the most difficult things for entrepreneurs to do is scale a business. It takes one kind of vision and capital to identify a market need and create an offering. It takes another kind of planning, discipline and consistency to scale ateam on top of that vision. If you have the gift of being able to scale the size of an organization quickly and consistently, you possess the asset entrepreneurs need most besides capital. And you can take that talent to the bank or the closing table.
Should you build it or buy it – the clock is ticking
In the technology space, people have always struggled over whether they should build or buy…whether it is a solution or a team. Building a team is difficult because you need far more than capital to do it. It takes planning, time and flexibility to right size a team based on a market opportunity.
And while you are modifying your plan based on market and economic realities, you must keep individuals motivated and growing to stay on board. This is the reason why, when industry has a market window of a year or two, they often choose to acquire someone who has already assembled a team or solution because there are many more unknowns in the mix for those ‘still building.’
Can you really build it at a lower cost than buying it ?
In the dotcom era many people assembled teams working at reduced or discounted wages in exchange for ‘prospective shares.’ I call them prospective because they don’t always pay out…and teams have gotten smarter about that. In high demand markets with high demand skills, it is increasingly harder to cost-effectively scale a start up team on the promise of what the company may eventually become.
Tomasz Tunguz, a venture capitalist at redpoint has done an analysis of the rising costs of scaling, including the cost of human capital. According to him, in San Francisco the compound annual growth rate (CAGR) for median startup salaries rose 15% from 2009 to 2014 with technology workers going from $90k annually in 2009 to $180k annually in 2014.
Boy am I glad I’m not trying to scale a technology business in San Francisco right now. But the true cost of scaling is about much more than wage negotiation. Growing an organization takes time, takes patience and takes management prowess that some startups struggle to find. So what if you have that management prowess?
Scaling organizations of high demand skills is lucrative
In the late 90s when call centers hit a tipping point, many millionaires were made from people that quickly assembled and scaled hundreds of call center workers. Those teams were ripe for the picking by large retailers and others that needed a ready to go team of a hundred or more professionals.
For organizations that would have spent years in time and turnover costs shaping the perfect team, it was more advantageous to spend tens, even hundreds, of millions to acquire a ready team. Those same opportunities exist today because there are always skills that are in short supply if you pay attention to the market.
Valuation & Exit Time – Do you sell a service or do you have a team ?
Some entrepreneurs tackled a market and built a team delivering a service only to find that the profitability on their service wasn’t what they hoped it would be. The potential for many multiples on an exit for a service-based business may not be in the cards at the present time.
That’s when it pays to look at all your assets—not just the IP from your services and your revenue pipeline, but the rarity of the team you’ve built. Many professions from specialized development skills, coding skills that support healthcare initiatives, specialty nursing and more are in high demand and short supply.
You may find that your team of domestic managers combined with offshore producers is a worth only a few million in revenue to you, but worth $10 million as a team to another company. Similarly, if you have built a large U.S. sales team, you may be struggling to promote a product that isn’t in high demand but you may be extremely attractive to an international firm that needs to establish a U.S. presence and doesn’t know how sales management is handled here. Consider an exercise where you take your current revenue streams off the table when you consider what you have that is of value to potential acquirers.
Scaling successful teams could be an industry unto itself
If you are one of the rare entrepreneurs that can quickly resource and assemble a team, you may have more than a successful company in your future. You could create a steady stream of teams that are ready for acquisition. That’s not to say that the teams don’t need to be productive and generate revenue while you are growing them. But, if you are able to profitably grow a team rapidly and prepare it for integration into a larger company you may have found a silver bullet to valuations that others only dream of. There is a reason that so many articles and so much education is spent on how to scale successfully. For many service businesses 90% of their investment goes to their people…and a proportional share of waste if they can’t scale effectively.
As you plan your growth, make sure you are properly assessing the value of your team and your ability to manage it. Take time to consider the value of your people’s skills outside of your market offering. Successful serial entrepreneurship comes from being able to objectively assess and value all of your assets, so when exit opportunities present themselves you maximize what you’ve built. If you build teams as well as—or better than—you build a market offering, that’s an asset you may be able to take to the closing table for far greater valuation than you’ve considered.