What gets an early stage company, a start-up, to become a multi-billion dollar company (A Unicorn) is its potential ability to scale in a span of a few years.
Peter Thiel has often said “A good start-up should have the potential for great scale built into its first design”. What makes this topic important to understand is the visibly hidden statistic of 74% of start-ups failing due to premature scaling.
But before all that.
What is scale?
To put it simply scale or scaling up is the process of accelerating growth without the utilisation of substantial incremental resources (basically, make more money than what you burn), your bottom line grows a lot faster than your top line. Software companies are by their very nature scalable because the marginal cost of producing another unit of software is close to zero (Example – MS Office by Microsoft).
I have often wondered If these companies are built to scale then why are they failing to scale?
The answer is actually simple
Timing and Preparation.
A start-up stops being a start-up once it hits its early-mid commercialisation stage, this is when the start-up can take a bigger workload without compromising on performance making it a ‘scale up’. If the company does not have the following points addressed their attempt at scaling up is statistically proven to fail.
Defined Roles & Hierarchy: having this enables to reduce the cognitive load on each person and create accountability with the scale up. The start-up has hierarchical layers in which each person has a maximum of 3-5 people directly under them. Think about additional layers of corporate hierarchy and the technical skills necessary for each role.
Product Market Fit: Using a feedback loop from the end users and targeting different market segments, the company has met its ideal consumers. They have come to understand their true value proposition that also serves a defined market with a fully developed product.
Found Channels of Distribution with the Highest ROI: By identifying key metrics and allocating an experimental budget, the start-up also understands the channels of distribution that have the highest ROI. The resources being used to scale up must be utilised primarily towards acquiring as much of this market as possible. Consider all possibilities of licensing and franchising. The company must limit its budget on adding features to the service that do not meet this target’s needs during the scale up stage.
Accurate Financial Forecasts: The beginning of the start-up’s journey poses great uncertainty with respect to approval and acquisition of consumers. Which makes financial forecasts vastly inaccurate, but once the previous two points are addressed, they start becoming more accurate because of data on consumer acquisition patterns within that defined market space, so scaling up can be structured well after considering the funding available and the costs to execute the strategy.
Scalable Marketing Strategies: The start-up has also identified scalable marketing strategies while also considering the customer acquisition costs associated with each of them. E.g. Direct Selling is not scalable
Outsourced Unessential Activities: In the beginning of the start-up’s journey the co-founders handle activities that are not deemed essential, as the start-up’s grows and the company has the funds required to outsource them, it would be prudent to do so and focus on the core activities that affect its end consumer. E.g. A SaaS company should outsource its finance division.
Tech Stack is Scalable: The start-up has minimum viable tech stack integrated to scale well. The IT systems are especially important for the organisation and as the start-up grows, the employees must also be well versed with the tech before the start-up starts the scaling process or this will be a huge hindrance during the volatile scaling stage.
Automate Processes: Automation of processes can take many forms including the new hire on-boarding process, expense policies, payroll, etc. This combined with having defined roles and hierarchies brings you steps closer to having an organisation that can work without their co-founders being completely hands on.
If the company has considered the above features and has implemented strong controls to ensure that they can be executed well whilst considering all plausible extraneous variables it might just be ready to scale.
