Scaling is an important issue. Obviously in order to have a successful business, the business has to grow to at least a profitable size. And many entrepreneurs want to keep getting bigger! But many entrepreneurs run aground by trying to scale their business before they have nailed down their processes, their customers, their value proposition, and their delivery ability, in short before they are ready to scale.
Many make a distinction between growth, even rapid growth, and “scaling”. Growth, even rapid growth, includes significant growth in infrastructure and costs while sales also grow. The goal of scaling is to grow revenue with minimal cost growth. Now this idea of infinite profits with little additional costs is the dream of SaaS (Software as a Service) businesses.
However, the concept also applies to many kinds of business. Scaling, when the profits start rolling in and accelerating, requires a company to have everything in place, vetted and verified, which is required to provide the product or service to many, many customers without a hitch.
So what happens when a company tries to scale too soon and isn’t ready? Customers get mad, they get poor quality product or terrible service, and then they don’t come back and they tell their friends not to come back either. In one survey of over 3000 startups, premature scaling was the root cause of failure in about 74% of failed startups. That’s a startling stastistic! Startups that tried to scale prematurely – when they weren’t ready, also grew much more slowly than “proper scalers”.
So, before trying to scale, make very sure that all of the elements of delivering your product or service are nailed down, carefully tested (and stress tested).
In the first phase, you and your startup search for a scalable business model. How do you know that you’ve found one? When you can begin to set goals and then meet them regularly – because you have enough data and experience with the business model to create reasonably accurate forecasts! During this phase, remember that it will be much easier to spend money than to make money – so be very careful about what you spend, and don’t spend on things that make you look big (like offices, furniture, expensive agencies etc). Even if you’ve raised capital (and if you haven’t check our our VentureWrench Guide to Investor Capital!) be extremely frugal during this phase, because if you haven’t found that scalable business model before you run out of cash, it may literally be lights out!
Once you’ve got that scalable business model, then you’ve got to make sure you have enough cash, and cash flow, to invest significantly in the infrastructure your startup will need to actually scale. You’ve got to make sure that the big investment won’t mess up your existing momentum or cause a crisis in the business! When you begin the scaling process, you won’t see results immediately – many startups don’t see scaling results for months.
What kind of investments will you make? Certainly in your IT infrastructure – you need to have a lot of available capacity in all your systems – website, checkout or payment systems, CRM and customer management, inventory management etc. Many experts suggest a business intelligence dashboard system already in place, tuned to the key metrics driving business success. And if you have a physical product, you’ve got to have that rapidly scalable manufacturing capacity, shipping and logistics as well as quality control. And, of course, you’ve got to have the ability to support those new customers – preferably with automation in place, and validated, so it can, yes, scale!
Of course, to be able to scale, you’ve got to get those new customers – so are marketing and sales ready to scale? Word of mouth marketing usually doesn’t scale very quickly, so make sure that you’ve got to have those marketing systems in place to share your message, and then the systems in place to convert those leads into paying customers! Imagine that you need to reach, with very little extra cost, 10X the number of customers can reach – are you ready? Can your team convert 10X leads to customers? If not, don’t try and scale yet!
And of course, customers have to be happy with the product or service they receive from you – or your reputation will go down the tubes and all the marketing in the world won’t matter.
We are Working our Way Through 10 Reasons Startups Die
Destructive corporate culture
Failure of product – market fit
Founder issues and conflict
Staffing and Team problems – poor hiring choices or inability to prune staff appropriately
Can’t raise sufficient capital
Run out of cash after raising capital
Scaling too soon or improperly
Intractable technical problems
Poor strategic environment (customers, suppliers etc)
Regulatory problems (forseen or unforseen)