Mastering the 4 by 2 Rule for Small Business Success.

In 2007, I moved to London and bought into a two person I.T. support company.

After 8 months, I asked one of my two new business partners to exit the business.

He has ADHD and can’t fill out a timesheet - we tried everything to help him cover this weakness but, alas, we could not fight biology.

I said to him:

“We are about to pile on the juniors in this business - that is where you make your profits in a professional services business - and we can’t have one of the owners not filling out their timesheet, we sell time after all. You are a superb technician, go and find a job in the tech industry where you don’t need to fill out a timesheet.”

He did that, and has never been happier.

My remaining business partner and I grew the business to around 20 FTE by the time I moved back to Australia, a little under four years later.

I really loved my time in London and would go to a conference or networking event most weeks.

At one of the events, I heard a Venture Capitalist tell of the 4 by 2 rule, which he imparts to entrepreneurs hitting him up for funding to grow their businesses.

“It’s either going to take you 4 times as long and cost twice as much, or take you twice as long and cost 4 times as much as you think. The difference is you get to choose which path you walk.”

I outline this rule to guests on the podcast now-and-then, and am surprised none have yet heard of it.

But from their battle worn experience, every one of them agrees with this rule.

Entrepreneurs are unrealistically optimistic, well, early in their growth journey at least.

How to limit the 4 by 2 rule.

An antidote to stop falling for this insidious rule is planning and research.

Before you start running full throttle down the road, make sure you are on the right road - you have the right business model.

To do that, we recommend you start with the numbers, a comprehensive 10 year financial model.

Small business strategic planning starts with the numbers.

When pulling this model together, you will have to back up the handful of critical KPIs that drive your business model, with credible internal or third-party data.

For example, the cost to acquire a new customer has been $100 on average over the last two years, and we make $1,000 gross profit from the average customer for the lifetime they are with us - this makes scaling marketing a no-brainer.

That’s a 10: LTV:CAC ratio, and as we talk about in our “Marketing Funding Flywheel” eBook for small businesses, the ratio should be between 3:1 and 5:1 - greater than 5, and you are leaving money on the table.

By pointing to a credible resource, like our eBook, your 10 year financial model can show that ratio improving over the years, to the optimal 3:1 (as we explain in the eBook).

Have a great small business coach to knock your ego out the door, so you make smarter decisions.

Small business owners need a healthy dose of confidence, otherwise they can’t lead their team and push the business into the realm of success - through all the tough times.

But, be careful not to let this confidence turn into hubris - overbearing pride or arrogance.

If you don’t have a control in place to help keep your ego in check, you may make overly confident decisions with your growth plan, and get yourself and the business in trouble.

In ancient Greek times, orators and heads of state had a role to help them keep their ego in check.

When they got up to speak, this person would crouch behind them, out of sight, and regularly say “that’s wrong, you’re full of shit” or similar - to keep the speaker from getting too confident in what they were saying.

The other part of the 4 by 2 rule a great small business coach should help you get more accurate is the realistic timeline.

As Bill Gates said:

“Most people overestimate what they can do in one year, and underestimate what they can do in ten years.”

You should often hear your coach challenge a key timeline assumption like this, “that’s a critical deadline the business needs to hit, what makes you so confident that that estimate is accurate?”

I wrote last week on how to choose the perfect expert, at each growth stage - get the right small business coaching.

Invest time in your strategic planning, don’t rush it.

Otherwise, you will make unrealistic estimates on the time and funding needed to grow your small business with ease, so you can live the lifestyle you signed up for.

If you don’t invest in quarterly and annual strategic planning sessions, and use a tool like a 10 year financial model, join our ‘Business Transformation Program’ waitlist. It comes with four key strategic documents, including a 10 year financial model for your business. The Program also guides you on how best to structure and run these strategic planning sessions. We only open it to a group of 8 business owners, 3 times a year (March, June and September).

Cheers,

Troy | Founder | Grow A Small Business

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