In my last post I shared my experience with what I call a flameout. We hit the wall at 100 miles an hour and went poof.

In contrast, there’s the idea that small may be a better approach. Great. What does that mean? This post is to answer that and offer guidance to entrepreneurs who are taking this down-market opportunity to start or grow their businesses.

Being small may mean something different to others, but to me it’s a way of operating that relies on simplicity, clear strategy and shrewd decisions.

The following may sound like a VC’s perspective. I can guarantee you I am not a VC. A few of my heroes are VC’s* and I have ultimate awe and respect for them but I am an operating person at heart. So I look at things a little differently. (*Definition – Gerry’s heroes include people who build networks of strong relationships and facilitate great products while making lots of money)

Why should you listen to me? I’ve built profitable businesses, invest, have been in corporations and led the acquisition of several companies and have helped sell a few companies. I have occasionally failed and learned, too. I am intimately familiar with all sides of the transaction.

So, small is a philosophy. It’s an approach that permeates your business. To remain small you need to have sharp focus on your goals and the critical factors for achieving them. Ultimately, that sense of clarity is expressed to all of your constituents – investors, customers, partners and family.

This philosophical approach shows up in several ways:

Clarity of value proposition – What is the problem? How many have it? How does your company solve it? These are critical questions. If you can’t answer these with simplicity and in a single sentence that passes the obviousness test, you probably have more work to do.

For example – Summize searches Twitter’s public timeline so every Twitter contributor and lurker can instantly sort through the overwhelming mass of updates for things that are interesting to them.

Another example – Outside.in assembles hyperlocal information in all major US markets order to tell you what is happening not in your zipcode, but within 1000 feet of you.

Third Example – 88% of all consumer travel is by car. Cost2drive.com can tell, by car make model and year, how much gas will cost per trip so drivers can budget accordingly or select an alternate car.

If you think this applies to only early stage companies, think again:

Apple makes computer and entertainment products that everyone wants to have because they are simple, reliable and elegant – Three things the competition does not have.

Market Traction – Ideas don’t find support in tough markets, working products that can demonstrate customer acceptance do. In fact, even in good markets ideas don’t seem to get much play.

It’s critical that a product can show increasing usage and/or a growing customer base, without artificial buoyancy from advertising (e.g. SEM).

Otherwise, to an investor it’s like buying a car that doesn’t run. You may know it just needs a little gas, but it really could be anything from gas to a bum engine. A huge number of problems are sorted out through successful market trial. The other point is that, as an entrepreneur, you are in a much stronger position when you have that momentum.

If you have a clear value proposition without market traction, get busy. Get the product out there. Find the users who like your product and enlist them to help you make it better. Also, look for some distribution partnerships or API deals that will put your product in front of more people. In addition to having partnerships to bolster you, you’ll be getting invaluable feedback on improvement. If at all possible do this before seeking funding.

Revenue model – Have one. That goes without saying. Aggregating users as a primary business driver has gone away for the second time now. There’s more though. At this point in time, especially with the softening of advertising markets, advertising is not a strong foot to put forward. Unless you happen to have a new ad network – but then that’s a different discussion/challenge.

Tim Chang of Norwest Venture Partners has a particularly dim view: “Advertising is the lazy entrepreneur’s answer to a poorly, thought-out business plan.”

What are the alternatives? Licensing, subscriptions and revenue generating partnerships, primarily.

Licensing fits best for distribution (B-to-B) or for software sales (B-to-C).

B-to-B licensing: A partner company or network will pay you some sort of committed fee to distribute your product to its users/customers. This is a good model in some ways because, with the right partnerships, a broad audience can be reached. It’s limiting as these deals can be hard to find and execute.

B-to-C licensing: End users pay to get your software and updates. There is a lot of psychology around how to get people hooked before committing to buy.

Subscriptions work where there is recurring value – e.g. new content, ongoing service or operational support, incremental usage… lots of variations here. The challenge is that users are very slow to commit to subscriptions. If you want to sell content, you should probably forget it. Even the biggest players have to give that away now. There is, however, a very positive emergence in subscriptions. Users are willing to pay to enhance their presence. Similar to the way sellers can embellish listings on eBay, Photolog has enabled a sort of paid decoration that is creating real value. There’s an opportunity for other subscriptions, too. Room for creativity.

Revenue generating partnerships – sounds like advertising, huh? Not really. If, for instance, you have a site that’s all about travel and you have an integrated partnership for selling hotel rooms and prepaid attractions, that’s not advertising. That’s a transactions business and it’s very appealing at scale. Again, room for creativity.

Scenario planning – Always have plan “A” and “B.” It seems to me that usually this comes out to “A” = go it alone and conquer the market and “B” = target an ideal acquiring partner. It helps as decisions are made about the strategy and future of the business. More about this another time.

Clean funding – this one is tricky. A company with several rounds of investors, all at different valuations with different interests/motivations is the definition of hairy. As in a hairy deal. Not easy for investors to join in because there can be many voices and many conflicting agendas. The result is that the company loses the ability to be nimble – the single most appealing feature of smallness. A company in this condition is far more difficult to acquire, too. I have some war stories…

It’s tricky because no company ever sets out with the intention of being hirsute. Many have it thrust upon them by market conditions, delayed market trials, extended time to revenue generation. It happens.

This is where a good entrepreneur can make all of the difference. The ability to grow a company’s activities while timing capital needs is a true art.

There are a few ideas that might help: 1) Bootstrap as long as you can – get your product as close to revenue generation as possible before accepting (more) money 2) Don’t underestimate future product development time 3) Plan in the time to explore revenue model implementations, and prepare data/business intelligence tools to do so systematically 4) When looking for money, make sure the amount will get you to the next phase of growth. Looking for money mid-phase is the root of many hairs.

You may be thinking “I though this post was all about being small. There’s more here than small-ness…”

Yes and no. Follow me on this… If you can cover the five points above, you have a very simple, clean and small conversation. It might go like this:

“I have a company with product (X) that appeals to (Y%) of the people online today, all of whom can’t get (Z) done without my product. We’ve already got (M) thousand users, growing at a rate of (O%) per month organically. As soon as we get to (P) thousand users we will launch our licensing and subscription model which should allow us to break even in (Q) quarters. At that point we will have a good market position, but might entertain offers. We’ve bootstrapped to this point with a seed round and I’m currently looking for a round of ($A) which will see us through revenue trials. Do you want in?”

It seems like a lot, but the above paragraph includes all of the key strategic, product, operating and funding information anyone needs for cursory evaluation. It’s the elevator pitch – 100 powerpoint slides in a single breath.

Maybe a long breath… but the point stands. If you can talk confidently about your business in those terms, your likelihood of achieving the support you want is greatly improved.