So, you think you have a SCALABLE startup idea? The reality is that most startups don't... at least at first. And that's okay as you build something that customers want to buy. If you can't find a scalable model, then you're really building a small business, not a rapidly growing, scalable startup.
Small Biz or Startup?
Now, there's nothing wrong with building a small business. They make up 95 percent of our economy and create the vast majority of new jobs. Most small businesses are funded by the founders' savings, credit card debt, and maybe a Small Business Administration loan. There is an expectation of steady growth and the employee size will stay closer to 20 than 200.
But scalable startups are different. They require an innovative (even disruptive) mindset and a high risk tolerance. Funding for scalable startups comes from angel and venture capital, not banks. "Hockey stick growth" is expected with returns of 10 times or greater on investment in a five to seven year period. A rapid pace to exponential growth or quick failure is the goal because startup investing is a game of numbers.
Even if you have a great idea, the likelihood of your startup failing is about 75 percent. And lack of scalability is one of the key startup killers. According to SalesForce.com, 70% of startups struggle with scalability.
In a Forbes article, Martin Zwilling notes that scalability means "your business has the potential to multiply revenue with minimal incremental cost." Your business is ready to scale when you have a proven product and business model. Also, if you are ready to expand into new markets or new geographies, then you have the opportunity to scale.
Key Scalability Attributes
There are 10 signs that your startup idea is ready to scale, including:
- A working product with multiple customers paying full price.
- Product requires little customer support.
- The strong minimum viable team is able to stay "lean" even as the customer base grows exponentially.
- The revenue per employee is high (e.g., $250,000 or more per employee).
- The price of the product generates high margins of 50 percent or greater.
- Most processes are automated and don't require any manual effort.
- The founders are working "on the business", not "in the business".
- The business is open-ended and continuously innovating as technology and the times change.
- It's possible to white label, franchise, or license the product.
- The founders are willing to give up some control to investors in order to fund the business beyond revenue.
People and Processes
Technology issues should not solely take the blame for a startup that struggles to scale. In reality, people and processes also affect the scalability of a startup. The founders and early team members are the ones that overlook opportunities to scale in a cost-effective manner. They are also the ones that develop the repeatable processes that make it possible to scale. According to an article by Marty Abbott and Michael Fisher of AKF Partners published in Gigaom,
"Experience and culture are critically important to designing systems that scale."
The Right Mindset is Key
The Bottom Line: scalability is a mindset. Startup founders who build their cultures without that mindset quickly find themselves looking for their next startup. If a founding team is only thinking about customers, users, and headcount, then they won't be prepared for the challenges thrown at them during a growth phase.
“The hallmark of successful scaling is knowing when to hit the brakes so you can scale faster later... And if anyone ever tells you they have solved all your scaling problems, they are lying to you, and you need to send them out the door immediately.” -- Bob Sutton, organizational behavior expert at Stanford's School of Engineering
Scaling a startup is tough. Not everyone can do it. But those who can have the opportunity to build great companies that solve real problems and reward their founders and their investors with a strong return on investment.
What's worked to scale your startup? Please share your experience by commenting on the blog or tweeting @SparkLabKC.