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Fast Growth in the Sensible Lane

Lucas Roh, Founder, President and CEO, Hostway Corp.

In 1996, when I was among a group of four individuals who founded Hostway Corp., a Chicago-based Web hosting company, the rules of entrepreneurial engagement were being turned upside down. Back then, at the dawn of the boom that would become known as the Internet economy, the defining mantra was "growth at all costs." And that mantra was predicated on an equally engaging corollary: "become the biggest first, and profit will follow."

As an Internet services company - Hostway provides Web hosting services and online business tools for small- and medium-sized businesses. We could have easily bought into this prevailing wisdom of the time that fast growth equals fast profits.

Although we joined in the belief that the Internet would revolutionize business (we wouldn't be in the hosting business if we didn't), we didn't accept the lack of common business sense that characterized the modus operandi at many Internet companies. While great companies are built upon sound business models, superior products and services and savvy marketing, a lot of Web-based companies were predicated on business models that didn't add up. Such as: "We will take a loss on each sale, but we will make it up on volume." Or: "An expensive marketing campaign will assure the future of our company" - never mind that it is based on dubious analysis.

In Defense of a Scalable Business

As the so-called "new" economy grew, fledgling companies shifted gears from building a business to be profitable to expanding as quickly as possible. Whatever the cost, going public had become the ultimate goal, rather than just one stage in a company's growth. And all parties - entrepreneurs, investors, venture capitalists and the public at large - were involved in a vicious cycle of ever increasing expectations. All of which led to the ultimate inflated expectation: that a 22-year-old recent graduate had the right, almost, to become a millionaire within a handful of years.

In the crash that followed the boom, a lot of these excesses were laid to rest. But the point, with respect to Hostway, is this: while we agreed that the Internet provided a legitimate business opportunity, we saw the excesses for what they were. And we decided not to embrace them. Instead, we opted to build what we call a "scalable" business, one in which revenue grows faster than costs, one in which a company must expand, but not overextend its operating or capital expenses.

Ground Rules for Great Companies

In short, we understood that entrepreneurial companies that eventually become the giants of the next generation usually take years, if not decades, to develop. A strong corporate culture emerges only after several years, and it does so after much toil and many mistakes along the way.

While a revolutionary product may no doubt blossom overnight despite missteps on the part of those responsible for it, we understood that such a circumstance occurs rarely. In general, moving from startup to IPO to a $10 billion company doesn't happen during the course of just a few years.

And so, since Hostway was in it for the long haul, we reached back to the fundamental principles of company building. Consider demand, for example. During the heyday of the Internet boom, a lot of our competitors, buying into the idea that Internet traffic would continue to double every four months, constructed huge and expensive data centers to serve the expected significant growth in demand. Many even took on debt to do so. At Hostway, by contrast, we chose a more sensible and conservative strategy, shunning debt entirely and using only internal resources to finance expansion.

Tactics for Sensible Growth

Growing sensibly requires tactics grounded in business fundamentals, such as financing, operating efficiencies and rational risk-taking. When it comes to financing, for example, entrepreneurs should understand that debt isn't inherently a negative. In fact, for many early-stage companies, it is a prudent and necessary tool for meeting the demand that ultimately results in increased revenue.

The key to sensible financing is finding the "just right" amount. Taking on too much debt to drive growth could endanger the company's survival over the longer term. While venture capital funding could alleviate this concern, it also comes with baggage: the VCs focus on a strategy for getting profits out of the investment rather than building an enterprise. A smarter alternative is using profit, if possible, to finance growth. But the bottom line is that owners need to tailor the funding, be it internal or external, to business goals.

Leveraging operating efficiencies is another important tactic for realizing growth. One example involves lowering the cost of each additional account that is serviced so that revenue increases faster than operating costs. At Hostway, we devised an internal tool for tracking and categorizing customer queries, which enables us to cut down on the number of customer representatives we employ and also provide better service to our clientele. Such efficiencies must be identified and pursued from the start. A company cannot suddenly decide to become efficient; this tactic needs to be ingrained.

Finally, entrepreneurs must realize that sensible growth doesn't mean slow growth. A fledgling's ultimate survival often depends upon innovating, and that, in turn, involves taking risks. While expanding too rapidly isn't wise, neither is failing to respond quickly to legitimate and intriguing opportunities. Slow growth and missed chances hardly represent safety, let alone sensible company building.

In the 1990s, the twin mantras of how-big-can-we-get and how-fast-can-we-get-there distorted entrepreneurial fundamentals, the most basic being the need for a company to turn a profit. At Hostway, we've never ignored that fundamental, and a 100,000 Web sites hosted and a business that has been profitable every quarter since its inception proves that success can result. By growing your business sensibly and always keeping business fundamentals and your customers in mind, you can help guarantee your company will be around for the long-term.

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