Start-ups that took the slow road to making millions

Maggie Overfelt, special to CNBC.com
Vstock | Getty Images

The market has come down from a venture capital–funding manic high. The year of the billion-dollar-plus valuation in 2015 has given way to the lowest level of VC funding in two years in the third quarter 2016, according to CB Insights and KPMG. Still, start-up founders are advised to pursue growth at any cost.

"Everyone has Andreessen Horowitz-itis — if you're $5 million in revenue now, you have to be $25 million in the next three years and have to sell," said Ben Rudman, director at M&A advisory firm SDR Ventures in Denver.

But some small companies have spurned the "grow or die" mantra of Silicon Valley that prioritizes expansion above all else. These owners and founders don't think rapid expansion is a sustainable or even preferable way to run a business. Not every entrepreneur wants to answer to investors and be attractive to the highest bidder.

"Not everyone has to be an Airbnb — you can still be something incredible for your family, business and employees … even if you're not an ultra-rapid-growth unicorn," Rudman said.

Here are six small businesses that found multimillion-dollar success by taking a slower, more thoughtful approach to growth and by staying away from venture capital.

Bear Mattress — Hoboken, New Jersey

Founder Scott Paladini forwent venture capital funding in growing his bed-in-a-box company
Source: Bear Mattress

Scott Paladini launched Bear Mattress in 2014 with $50,000 of personal savings and family contributions and a notion to not take any venture funding. An injection of money invested into sales and marketing would undoubtedly help grow Bear, which targets active millennials with a mattress whose cover helps recycle body heat as infrared energy. But Paladini said, "I'm cognizant about growing sales smartly in the sense that we're not getting overrun with sales and then overrun with returns."

Selling a few hundred mattresses a month, Bear Mattress sees a pretty low return rate; annual revenue hit $2 million in 2015.

Bear competes in the bed-in-a-box market, selling an all-foam mattress that's compressed into a box the size of a mini fridge and shipped via UPS. Growth comes from lots of digital marketing, athlete endorsements — soccer player Mix Diskerud of the U.S. national team and pro club NYC FC; triathlete and Ironman champ Sarah Piampiano; and gymnast Brandon Wynn of the U.S. national team — and online reviews. Staying lean helps, too.

Paladini doesn't yet have any full-time employees — and manufacturing is contracted out to other U.S.-based firms (most mattress brands use third-party manufacturers due to expense.) He set up a web-based call center, using salespeople in his father's New Jersey brick-and-mortar stores to answer Bear Mattress customer service calls.

As Paladini closes in on $3 million in revenue for 2016, he is looking to make a couple of hires. "We're trying to grow our brand with the idea that this company can be around in five, 10, 15 years," he said.

(Pictured: Bear Mattress founder Scott Paladini)

FlexProfessionals — Fairfax City, Virginia

FlexProfessionals founders Ellen Grealish, Gwenn Rosener, and Sheila Murphy run a company that matches small businesses up with flexible, part-time employees.
Source: Evelyn Hockstein

A highlight in the six-and-a-half-year tenure of the D.C. metro area start-up FlexProfessionals was making Inc. magazine's 5,000 fastest-growing companies list this year. As a small-business hub, Washington, D.C., was No. 3 on the inaugural CNBC Metro 20: Best Places to Start a Business list.

But what makes the three FlexProfessionals founders really proud, said partner Ellen Grealish, is that the company made it even though 100 percent of its 12-person workforce solely works part-time. "We want to prove to our clients that it's a model that works," said Grealish. Her firm, which brings in $3.2 million in annual revenue, specializes in matching up small businesses with part-time worker and recently expanded into Boston.

After taking a few years off from the workforce to raise their kids, the trio found it difficult to find meaningful jobs that allowed them to meet the demands of their personal lives. So Grealish and her business partners each invested $8,000 and founded FlexProfessionals.

Grealish concedes the company's growth rate would be much more impressive if she worked more than 20 to 30 hours a week (which she and her salespeople do on occasion) and if she acquiesced to the requests to place people in more traditional, full-time roles. (Clients pay the firm based on the number of hours a candidate works or they can do a direct hire, for which FlexProfessionals gets a one-time flat fee that's based on the worker's annual salary.)

"The same amount of blood, sweat and tears goes into placing someone for 10 hours a week as it does for 40 hours, and it's only a quarter of the revenue," said Grealish, who for over two years held meetings at places like Panera and Starbucks before the company rented its first office. "But [full-time] really isn't what we're good at … and it doesn't align with our mission."

(Pictured: FlexProfessionals founders Ellen Grealish, Gwenn Rosener and Sheila Murphy)

Your Pie — Athens, Georgia

YourPie executive management poses in one of the firm's pizza joints.
Source: Your Pie

Right next to Atlanta (No. 17 on the CNBC Metro 20 list) is another Georgia metro area adding small-business success stories.

With lots of competition deploying aggressive unit-growth strategies to capitalize on the $45 billion U.S. pizza market, Athens, Georgia-based Your Pie is expanding more methodically.

Founder Drew French said the slow-growth approach was chosen to "make sure we're going to be able to compete over the long term." French, inspired by the brick-oven pizza practices of Ischia, Italy, where he honeymooned, opened his first shop in 2008 as one of the first build-your-own pizza franchises where customers point out their own toppings as they walk down the line. It's not easy to resist the temptation to expand like crazy in a pizza niche that is now one of the biggest booms going in the fast-casual restaurant sector.

In fact, three or four years after launch, as French started to see an influx of competitors, he sold a minority stake in Your Pie to a private-equity firm. Instead of putting the cash toward selling more franchises, Your Pie made some executive-level hires and invested heavily in R&D, figuring out where in the kitchen his staff could work faster while still churning out quality pies. For example, Your Pie figured out that having a supply of hand-tossed dough ready to go, rather than tossing it after a customer orders, saves about 15 to 30 seconds per order.

CEO Bucky Cook said that since the changes were made, same-store sales volume is up roughly 15 percent; new stores that have opened since Your Pie made the changes are seeing roughly 35 percent more sales volume than old stores. "We'd like to grow more aggressively, but we're not doing it at the expense of watering down our culture," Cook said. Your Pie, whose system-wide sales are expected to reach $24 million this year, currently has 35 locations, with plans to add five more this year and 25 to 30 more by the end of 2017.

(Pictured: Your Pie executive management team (left to right): Bucky Cook and Drew French, with Drew's father Allen French, at the grand opening of their Buckhead location, near Atlanta.)


ShortStack — Reno, Nevada

ShortStack co-founder Jim Belosic and a few of his employees take their "rides" to lunch.
Source: Lea Heckley

Las Vegas was No. 19 on the CNBC Metro 20 list, but the Nevada small-business success story is broader.

When it comes time to hire someone at his Reno-based software company, ShortStack CEO and co-founder Jim Belosic thinks of the advice his father gave him when he was mowing lawns in high school. "If I wanted a new mower, he told me to wait until I had the money to get one," said Belosic, whose company has never taken any venture capital.

This logic seems simplistic for a tech firm today — we're in an age where venture capital deals and dollars are healthy relative to historic levels, according to new research from CB Insights and KPMG International — but ShortStack, with $5 million in annual revenue, has been profitable each year since inception in 2011.

ShortStack makes marketing software that companies use to make landing pages, contests and promotions; it has half a million users in 182 countries. With 17 employees, ShortStack doesn't have any middle managers or salespeople to chase leads; instead, three staffers work on content marketing, writing tech how-to's and posting best-practices videos to its blog, e-mail list and social media.

Belosic and his employees eat out once a week and meet at least one afternoon for a beer after work. "When I notice that we're playing less, that's usually a good indication that it's time to hire," he said.

(Pictured: ShortStack co-founder Jim Belosic and a few of his employees take their rides to lunch.)


Daylight Design — San Francisco

The employee count at design firm Daylight Design fit ideally will fit inside a bus, according to the founders' ideals.
Source:

Even as other cities around the United States spur small-business success, the San Francisco Bay Area is always going to be in the discussion. Notably, there are some small businesses in the heart of the venture capital world that haven't needed VC money to grow.

A big part of why the three founders of design firm Daylight Design keep their nine-year-old company small in terms of employees (15) and number of projects at a given time (four to five) is because they want to have a hand in the work. All hail from large companies, like IDEO, where "we were managers; we weren't involved in content and design," said co-founder Brett Newman. He said 50 percent of his time at Daylight is spent on project work and designing content, while the other half is spent doing business development and administrative things. "By being small, we're able to maintain a ratio of work that works for us."

They're also loathe to "have the monster of overhead chasing you — a lot of the decisions you make for business are driven by the need to feed it," said Newman, who doesn't employ any administrative staff. The company hires people less for specific skills than for how they fit into the company culture. And with eight workers in San Francisco, five in Seoul and two in Munich, the firm is diversified enough "to have a steady depth of work," he said.

Daylight, with annual revenues of around $3 million, regularly passes up projects it thinks it won't enjoy working on — for example, a request to design a sexier water bottle. Recent jobs include branding and user experience for a Korean music-streaming service and designing a collection of travel products for Hyundai Motors.

(Pictured: The employee count at Daylight Design ideally will fit inside a bus, according to the founders' ideals. They "road-tested" that model.)

Salt and Honey — Berkeley, California

After completing a contract to provide multiple meals a day for a professional sports team, Olivia Colt deliberately slowed growth down for her food service company, Salt and Honey Catering
Source: Cynthia Traina

San Francisco's across-the-bay neighbor Berkeley is known for the restaurant Chez Panisse and its chef, Alice Waters. But there's a new Berkeley gastro-success.

Olivia Colt, founder of Salt and Honey, launched her catering business in 2010 by providing on-site lunches to tech start-ups where her friends were employed. It doubled overnight in terms of employees, infrastructure and sales. Her halt-the-growth moment came after finishing a job with a dream client. Toward the end of 2015, after a months-long vetting process, Salt and Honey won a contract to provide multiple meals a day for an entire season to a well-known professional sports team in the San Francisco Bay Area. (She won't disclose which one.)

Along with her staff of 37, she was working 16- to 18-hour days, six to seven days a week, to serve the team as well as her regular clients, which have included Disney, Google, Facebook and Levi's. "I'm very thankful I had the experience — it changed me as a business owner — but they were very demanding, and it's high-volume [work]," said Colt, whose annual revenues are more than $2 million. "It was overwhelmingly too much all at once."

When the contract ended, Colt decided to not say yes to every opportunity. She also refocused on what her firm specializes in — one type of fare, California rustic — rather than trying to prepare every type of food customers want. That meant shedding some overhead, whittling her workforce down (she has 24 employees today) and investing more in training her staff. Future growth will come from a new model; the company is branching out from just catering to providing event planning and managing.

(Pictured: Salt and Honey founder, Olivia Colt)


make it

Stay in the loop

Sign Up

About Us

Learn More

Follow Us

CNBC.COM