Ask any investor (whether it be an angel or an institution) and they will tell you that in order for an investment to be sound, it must be scalable. To determine whether an investment is scalable or not is an exercise in identifying the expected growth of key parts of the business. For most internet companies, the key growth metric is in number of users/viewers/clicks and so on.
As the number of users increases, the sum of the whole becomes drastically more valuable at key points of critical mass. If you are starting a social network the number of users you need in order to reach your first point of critical mass is a whole lot higher than say for a SaaS or product-based business that can potentially make a sale with its first user. These are just two examples of many ways to structure a business model, but it illustrates just how different one must view a potential venture and its ability to scale.
If a business can vary in its need and ability to scale, can a person also find optimal scalability?
This is a question that I've been pondering for months and truly gets to the core of capitalism. The unspoken assumption is that people with specialized skills can exchange their time for money and can make more money the harder they work. Doctors, lawyers, engineers, and other skilled people generally have a clear cap on the amount of time they can work and thus the amount of money they can make.
Most people probably haven't thought about this at all or perhaps not in mechanical terms. What I can say for certain is that all businesspeople understand this intrinsically. Anyone who wants to be an entrepreneur needs to understand that their fundamental role is as the gatekeeper between capital and labor.
A further distinction should be made between the role of an entrepreneur and the role of an investor. Whereas the role of the entrepreneur is to make decisions about how capital can create maximum value through labor, the job of the investor is to maximize value through return on their investments. This can be done simply by investing in as many disparate companies as possible (diversification), by investing in two or more competitors (hedging), and many other strategies.
An interesting trend in tech investment is the increased emergence of incubators. These operations are popping up wherever innovation or rampant greed is happening. The corporate mechanism by which these operate is pretty simple: they are simply holding companies. A holding company is one that owns (controlling or non-controlling) shares in other companies.
These incubators are essentially a group of angel and institutional investors who buy shares in (and are then part owners of) the holding company, which provides the holding company with cash. The holding company then turns around and invests that money (small amounts, usually $5,000 - $50,000) into as many tech startups as they can, in exchange for equity in each of the newly formed companies. In other words, they want to create a diverse portfolio of early-stage investments.
Whether it is a good idea to take the incubator bait is something I am not entirely sure about. On one hand, it is nice to be able to eat food while you write software, but on the other hand, it is solving a short-term financial issue with a potentially long-term shareholder arrangement. Is $5,000, $10,000, or even $50,000 worth 10% of your incredible idea?
Besides the issue of equity, I have two other bones to pick with the incubator phenomenon. First of all, it is an artificial environment. Steve Jobs started Apple in a garage, not a lavish Santa Monica office with free red bull. Secondly, the line between entrepreneur and investor becomes very blurry when the investors are actively involved in the decisions of the rookie entrepreneurs.
It is my belief that once you take on the title of investor, you must relinquish the title of entrepreneur. If you drive a Porsche to your incubator where a bunch of 20-somethings are working for $5 an hour, you no longer get to call yourself an entrepreneur. Or have I just uncovered the grand ploy?