In the initial stages of a start-up, the primary goals are around defining the market problem, defining the value proposition and coming up with the disruptive innovation that creates a defensible basis around which to build a business. Eventually, and often very quickly, the objective then turns to a start-up’s ability to execute the business plan and having the right tools to scale.
An injection of growth capital is crucial for a start-up and venture capital investors’ eyes light up when they see start-ups with clear scaling potential. If you are looking to take on equity funding then at some point you are going to have to make a mind shift and be able to show your potential investors that you can scale fast and effectively.
It is the great start-ups of the world that know when and how to scale. Being the first to market with a new innovative product or business model just won’t cut it anymore. It is those start-ups who master the art of rapid scaling that outlast the mediocre ones.
Okay, so you know you should look at scaling your business; but how do you know when and how to scale? Timing is very important. Too early and too fast could hurt your business’ cashflow and create unmanageable liquidity problems. Leaving it too late, could open the door for competitors to gain that hard-to-recover market share
A reputed website geared towards entrepreneurs, Start-up Secrets, developed a framework they call the “Deliberator’s Dozen”. The framework is a questionnaire to help take out some of the guesswork, and I think it’s really effective.
According to Startup Secrets, a business that is ready to scale can be characterised by the following:
You can package your product or service and sell it repeatedly without major modification.
Your marginal cost of customer acquisition is reducing.
Time and cost for customers to adopt and deploy your product or service is lessening, and the engagement from your customers is increasing toward a long life-cycle value.
The servicing costs for your customers are reducing.
The upgrade cycle for your customer is shortening and the money generated from upselling is increasing.
Your ability to meet market needs, innovate and create differentiated IP is validated by customers and partners who are themselves building on your products and services and investing in your ecosystem.
You can develop disruptive and defensible business capabilities in things such as your go-to-market model.
Your business model is showing real leverage and a potential path to profitability that will attract the funding necessary for continual growth.
The time and cost involved to attract and get people on board in all major areas of the company to support productivity and growth (e.g. sales, services, R&D etc.) is coming down.
Your management team is successfully developing and promoting people, resulting in a cohesive culture. They have the ability to effectively manage both obstacles and successes, and is respected as such inside and outside the company.
Your market opportunity is continuously validated as large enough and is considered to be growing at such a rate that you will be able to meet stakeholders’ expectations for years to come, as you scale successfully.
Even if you are “changing the world for the better”, you have learned not to “drink your own Kool-Aid” and instead validate your metrics from the outside in. Furthermore, you’re still excited to get up every morning and do it all again – faster, better, cheaper!
Once you have established that you’re ready to scale and have the funds available to launch your big market attack, you need to start thinking about exactly how you will do it.
Here are a few pointers to help you on your way:
Specialisation: hire and appoint experts
Typically, start-up founders are “jack-of-all-trade” entrepreneurs and usually try to do everything themselves at the start. This is fine for the beginning stages, however as the company develops and matures, the new levels of complexity require the founders to define and assign tasks more formally.
Founders need to be able to trust the individuals they delegate and cede tasks to, and employ and appoint specialist agents and employees to ensure effective scaling of the business.
It is pivotal to cultivate a healthy, formalised relationship between the company and its employees and agents (i.e. sales agents, franchisees, resellers and distributors). This entails the proper negotiating and signing of employment agreements and the appropriate SLAs (Service Level Agreements). As these agreements generally also protects the company’s IP, you can’t afford to not have them in place.
Effective management structures
Again, start-up founders cannot possibly run every aspect of every department within a growing company. Founders need to carefully balance their desire to maintain control with the risk of being a bottleneck for effective information flow, decision making and execution.
A couple of people at top management can’t effectively supervise everyone’s increasingly specialized and complex day-to-day work; in such a system, accountability around specific goals become a challenge and employees find it hard to remain focused and engaged when they don’t have managerial guidance and processes in place.
Having the appropriate management structures and reporting lines in place, will relieve pressure from the founders and allow them to focus on more important high-level issues.
Company culture is key
The culture of a start-up is what keeps the employees motivated and on course. Company culture is not just about the game room in your building, free snacks or casual Friday. It is the unique way in which your team works together. It’s what your team believes in and what they value the most.
Make sure you have clearly defined your culture and that you regularly drip-feed it into everyday conversations and team moments.
A strong, growing company culture is especially important in the area of effective collaboration between departments, as well as the relationship with your agents.
In conclusion, the process of scaling a business is an art. Ben Horowits, well known venture capitalist, described it as ‘black art’, that needs a lot of challenging work and attention to get right. Scalability is not just implementing the right management tools and processes, but also having the right mind set. It is a shift from a short-term focus, to a long term, bigger-picture vision. Be clear on what you want to achieve and always think big. Set periodic goals, push towards meeting them and keep your employees motivated for the future you have envisioned them for.
Author: Jack O’Reilly
Dommisse Attorneys Inc. – a fully specialised corporate finance and commercial law firm, with a strong focus on providing start-ups with the legal support they need to achieve their business aspiration and vision. Jack O’Reilly is a commercial law associate at Dommisse Attorneys and forms part of the Start-up law team.
