How Will You Scale Your Business (Or Not)?
Part 1
We took a brief foray back into the world of the elevator pitch in my last post, in order to celebrate our contest winners as well as to recognize each of you who took the time to craft pitches. So let's re-set our ongoing context before we talk about how to scale your business. We're walking step by step through the Master Funding Equation.
Here is that equation:
- a Trustworthy CEO +
- a Viral Vision Statement/Elevator Pitch +
- a Powerful Pitch Method +
- the Correct Pitch Content +
- a Winning Business Strategy +
- a Balanced Team +
- Understanding the Mind of the Investor
We've been working on what it means to have a winning business strategy. Within that, we have explored five questions that most investors want a clear, succinct, confident answer about. Here again are those five questions:
- What is your product or service?
- Who is your customer?
- What need does it fulfill (or what problem does it solve) for customers?
- How do you sell your product or service to them?
- How will you scale?
We are now exploring the last of those questions, how will you scale the business?
Let's define what we mean by scaling. I like this definition from Investopedia:
"Scalability is a characteristic of a system, model or function that describes its capability to cope and perform well under an increased or expanding workload or scope. A system that scales well will be able to maintain or even increase its level of performance or efficiency even as it is tested by larger and larger operational demands. A scalable company is one that can maintain or improve profit margins while sales volume increases."
Suppose you want to be a weightlifter. You begin by testing your strength, learning that you can clean jerk 100 pounds ten times in one minute. But you see yourself standing on an Olympic podium, hoisting a gold medal. You have a long way to go. Somehow, you've got to be able to massively increase your ability to "cope and perform well under an increased or expanding workload" as our definition states.
Let's add in three more variables:
- Time
- Competition
- Limited resources
Your plan to go from weakling to Olympic champion would be challenging even with the stresses of time, competition, and limited resources. With those additional factors, your challenge is incredibly daunting. To win the gold, you will have to scale up in four years or less, knowing that plenty of others who are already stronger than you or who have greater resources than you, or possess better natural ability than you are all striving for that same gold medal.
That's the task you undertake when you decide to build a company for the long haul; one that decides from the beginning that it will become an industry leader, perhaps employing thousands of people, requiring tens of millions of dollars, needing to effectively serve millions of customers, making pivots as conditions change, finding key talent along the way, all while churning out consistent profits.
This is one of the most difficult challenges you could ever choose to undertake.
Investors know this. So they want to know how you plan to do it, whether you plan to do it, or whether you and your team could ever possibly achieve it.
Why specifically, is it devilishly difficult to scale your business?
One of the many reasons it is devilishly hard to scale is that visibility into the future is getting shorter and shorter as technological change accelerates exponentially. Can you accurately foresee markets, competition, technology even five years from now? Really? Yet the time it takes to a liquidity event (selling a company or IPO), remains the same, on average about 9 years. So it's virtually impossible to make a strategic plan that will get you all the way to a liquidity event. One or more major pivots is virtually certain. You can't plan for that except by having the right people.
Another reason is that scaling up often requires major team change-over as you "cross the chasm" from early adopters to the majority (See Geoffrey A. Moore's classic Crossing the Chasm.) The type of team it takes to take a start-up to, say, $5 million in revenue is rarely the team it takes to scale up to $100 million or a $1 billion because the type of customer/client changes. This transition is where many companies die (falling into the chasm.)
You, the Vision Master/CEO, are captaining your ship through dense fog on a very long journey. It will be so very easy to lose your way, for the above reasons. You will increasingly have to rely on your team, especially that Execution Master/COO that I've written extensively about in this space and in my book "Born to Star." But even the best Execution Master is going to struggle to keep you on course at times because the fog is so dense. You'll need to change course, perhaps several times, effectively managing one or more pivots. When the fog eventually clears, you may be far from your intended port, with insufficient resources to ever get there safely. Even if you found your way to the right destination, chances are you are no longer the Captain.
Even if you navigate all the pitfalls to make it to IPO or acquisition, you'll have spent a decade of your life to get there. It will be a decade of long hours, constant demands, increasingly difficult choices, growing reliance on the decision-making capabilities of your team, increasing public and governmental scrutiny, criticism, regulation. Don't count on being the next Instagram. It's about as likely as winning the lottery.
Perhaps now you can take a cold hard look at what it might take to scale your business to that level.
Consider that there is about four million business in the U.S. alone, but just 500 on the Fortune big board. That's .000125% or about one in 8,000. Your investor knows this as well. So, when you start talking about how you're planning to scale up, he or she will be listening for something demonstrating that you, your team, your idea are a one-in-eight thousand opportunity.
But it's worse than that. Investors know that most companies never even make it at all, much less grow to a major liquidity event such as IPO or acquisition. About 90% of well-funded innovative businesses don't make it to a liquidity event. So, of the million or so other start-ups taking place each year in the U.S., the investor knows your company even if funded has a 10% chance of ever really getting into the game.
So, how do you communicate to investors that you represent a one-in-ten opportunity even if funded? How do you communicate that you know how to scale your business?
I'm going to walk you through an innovative method for exactly that in my next post. Here's a little teaser -- it has a lot more to do with two equally important mindsets you'll communicate than it does with your business plans and financial projections. Remember, almost no company ever gets to a liquidity event with the same business plan it had at formation. More on this in the next post.
So, have I communicated that scaling is a brutally difficult task?
I hope so because it is. No reason to sugar coat this.
But there is hope!
You do not have to scale up massively to be a success or to produce a nice return for investors.
Massive scaling isn't the only way to return investment value.
Two great options are:
- Scale just enough to prove the concept by selling to early adopters, then sell quickly (early exit)
- Scale the company into early majority stage, by establishing a solid market footprint, then sell the company
As we walk through the scaling mindset, based on the work we do at the Entrepreneur$ Bootcamp, derived in part from the work of Verne Harnish in his system "Scaling Up," keep in mind that these smaller-scaling options may be a far more realistic (read: less risky) goal in the eyes of investors.
Finally, more good news . . .
You don't have to scale up at all.
Many innovative businesses come to an early realization that the team they have and what they are really good at doing (and love doing) is product development. The team it takes to develop innovative products usually is not the kind of team it takes to scale up massively to a major corporation. Again, investors absolutely know this. Yet, a great product development house, with a good business model for development, then licensing of technology, can be a big winner for investors, with far more manageable risks.
Key Takeaway: Scaling up massively is brutally difficult. Your chances of success are slim. The journey will be long, arduous and perilous. Investors absolutely know this. The team you have now is likely not going to be the team in place after a massive scale-up. Investors know this, too. Fortunately, there are two smaller scaling options that involve less risk, generally speaking: scaling until you've gotten early adapters' buy-in, then selling, or scaling up until you develop a market footprint, then selling. Each can provide a good exit event for you and your investors. If you're primarily a product development house, consider simply honing that model, staying lean and licensing the technology out to others. That can also produce excellent returns over time, without the perils of a scaling-up process. If you're bound and determined to scale big, there is a formula that will impress investors. We'll cover this next time.