Armchair Biology and the Business Life Cycle
There’s a basic life cycle that seems to underlie most of the natural world. Consider a human: It’s born, it grows exponentially fast, its growth slows down, it enters decline, then it dies. This constitutes a lifecycle that applies to all known organisms: a dog, a tortoise, a yeast cell. It also extends to the macro level – the population of deer on an island, or the population of redwoods in a forest, or the population of yeast cells in a fermenting tank of beer, for example. Even non-living natural constructs, like planets, galaxies, and hurricanes seem to follow this lifecycle, in spite of not actually being alive. And then there’s the social and manmade constructs: Technology adoption, trends in music and fashion, art movements, religions, cults, book and movie sales, civilizations, industries, and, alas, businesses.
Hence, we have what’s taught in B-schools: The Business Life Cycle (sometimes called the Product Life Cycle).
This is something we all know without thinking about it. If your friend just started a business, and you want her to be successful, you want to know that her business is growing fast. You want to know that it’s proceeding along the life cycle as a business should. On the other hand, you might go to that old hamburger store in town on occasion partly for the novelty, partly for the burgers, and partly to do your civic duty to keep it alive. It’s in the maturity phase and probably facing decline. You don’t bother asking the owner if he has expansion plans.
Growth, at one point, was key to that burger joint’s survival, but more of its life is actually spent in the maturity phase – this is how the lifecycle works for healthy humans and healthy businesses. However, growth is fashionable and sexy. Today’s most lauded, successful companies are Apple, Amazon, Google, and Facebook, and they’re all experiencing a seemingly endless growth phase. But, in addition to being the 1% of the 1% of the 1%, these are global, scalable companies competing in winner-take-all industries. Their potential customer base is 7 billion people. And because their services and products are extremely scalable, ceding market share to a competitor could quickly put them at a cost disadvantage.
Beer is not tech
But this is not the case in craft beer. Firstly, beer is a product rather than a service. To produce more beer, you need more, or bigger, tanks. You need more space, you need more personnel. Of course, larger brewers enjoy a scale advantage in manufacturing, but not the same one Google enjoys on all the smaller search engines it has vanquished. (Remember Alta Vista?)
And beer – especially unpasteurized and unfiltered beer (the most delicious kind) – does not store or travel well. Occasionally, Pilsner Urquell air-mails unfiltered, unpasteurized kegs of its beer across the Atlantic to the U.S., and it’s a completely different (better) beer than their bottles in the store that are made to ride the shelf. If you’ve had the chance to go to Pilsen and drink that beer in that city, it’s even better still. Same story with Guinness in Dublin and Heineken in Amsterdam. Thus, even if you could build a craft brewery large enough to satisfy the world’s 2 billion alcohol drinkers, 99.999% of them could probably find a tastier beer in closer proximity due to freshness, alone.
Lastly, local is a virtue today, especially in craft beer. In a recent survey, 60% of drinking adults said “local” is important in making craft beer purchasing decisions1. Personally, when I know the folks who benefit from my purchase, I’m more inclined to buy it. That doesn’t mean local gets a free pass: Bad local beer is not better than good beer, especially when it’s priced at a premium. But luckily, with 45 breweries in the Houston area and 251 in Texas (Dec ’17), it’s not hard to find local beer that rivals outside beer in quality. Add to that the prospect that it’s fresher, and I feel a personal connection to the brewery, my purchasing decision is easy.
There are Startups and then there are Small Businesses
We still often think of small breweries as close relatives of tech startups – where entrepreneurs take huge risks to strike it big. Dogfish Head is a great example – Sam Calagione brewed hundreds of 15 gallon batches on his little homebrew kit with wacky techniques and ingredients, eventually revolutionizing craft beer and propelling his company to the same fate that many tech startups desire (not really: he kept his company rather than IPO-ing it).
But our business, along with most of the 6300+ U.S. breweries in operation today, has a different risk/reward profile than a tech startup or a 1995 Dogfish Head brewery. Its scalability is limited. Its upside is limited. In this respect, our business is more like a dentist’s office than a tech company.
This comparison is not as self-deprecating as it may seem. Dentist’s offices provide a service that people need, the proceeds are enough to feed several mouths, and their lifecycle appears to outlast that of most tech companies. And, while tech companies last by rapidly growing indefinitely, a dentist’s office lasts by reaching maturity quickly and efficiently, and staying there for a long time. They stay personally connected to their customers. They keep their products / services relevant. They don’t make bad investments or overshoot growth. They recognize their limited upside, and they limit their downside accordingly.
Hence, I hypothesize that there’s a distinction between a Startup (tech company, ’95 Dogfish Head) and a Small Business (dentist’s office, ’40 hamburger store, Holler Brewing). The distinction can be described by the shape of their life cycles:
Why we’re glad to be done with growth
We have already completed our growth phase, and this is a source of pride rather than shame. The growth phase, and the introduction phase, are expensive. During those phases, sacrifices are made on the altar of growth. Small, inevitable mistakes have an amplified impact as they require urgent attention to avoid suspending growth or delaying start-up:
- We mis-specified our temp sensors. They’re not compatible with our tanks. Order replacements with next-day shipping. Forget about negotiating with the supplier. $$
- Turns out that our seat benches will tip if they’re not anchored to the floor. This must be done before we open tomorrow and we don’t have the tools or materials. Time for an urgent handyman call. $$
- This additional chiller is overloading our circuit. The beer is going to spoil (ok, it won’t spoil, but it will be less tasty) if we don’t get an electrician out today. $$
These activities, and the general focus on “get this [brewery/new tank] up and running at any cost” also distract us from finding ways to improve our operation. Hence, companies typically wait until the maturity phase to focus on “optimizations”. Once the growth slows, they find ways to do more with less, shedding light on just how inefficient they were being during their growth phase.
These “growing pains” are experienced by both startups and small businesses, but they’re significantly more dangerous to a small business. For a startup with virtually unlimited upside and huge risk of failure, the impact of these up-front costs is negligible – if the startup is successful, it will grow to such a size that all of these costs will be paid back 100 times over in short order; and with the risk of failure looming large anyway, most likely these costs will be someone else’s problem in bankruptcy proceedings.
For a small business, however, the chance of success is higher and that success case is more modest than a 50 million dollar, 100 employee operation (see the above chart for what a “successful small business” looks like). Odds are that we will be around to confront the costs we incurred during our introduction and growth phases, and that their sum will be material relative to our future cash flows. More time spent in that expensive growth phase threatens the prospect of a financially independent operation.
Worst of all, we might be forced to grow our way out of the problem. Exhaust resources and take on long-term obligations (payroll, leased equipment) by chasing growth, and perhaps we run up quite a bill to pay. How can we afford it? We must now increase our sales by, say, 50%. That’s not to make better beer or better serve our community or reduce our operating risk or even to make more profit! It’s just to satisfy financial obligations. Of course, that means we must embark on another growth phase to reach this target, further enslaving ourselves to the tyranny of our finances. No thanks!
Life in the maturity phase
So, we’ve followed the path of a Small Business, and are now in the maturity phase, where we hope to stay a while. This means we’re no longer in the midst of exponential growth, and we’re totes cool with that. For one, we are still growing. It’s not rapid growth from doubling the tank farm, opening a satellite pub, or entering multi-territory distribution agreements. Rather, it’s a slower, organic form of growth that comes with a fraction of the growing pains – optimizing the brew schedule, increasing tank utilization, steadily increasing tap room sales, etc.
We’re spending more time figuring out better ways to make better beer. We’re tinkering, organizing, optimizing, honing our craft – things that craftsmen should be doing. But at the same time, (I keep reminding myself) we must keep our eyes open to the market environment, our ears open to what our customers are saying, and our minds open to the possibility (fact) that we’re currently doing it wrong (i.e. we can do better). With this mindset, and a lot of luck, a long life awaits us in this phase. Maybe we’ll even outlast a dentist’s office or two.
1Getting Inside the Mind of the Craft Beer Consumer; study commissioned by the Brewers Association and reported in June 2017