‘The only way is up’ – Yazz (1988)
If you are running a startup, working in one, or you just follow the industry news, you will not have been able to avoid all the craze about scalability. „Does it scale?“ will be a regular question in VC meetings, „that doesn’t scale“ a common feedback in pitch contests. But why is everyone so obsessed with scale?
So let’s look at this question and some learnings from around 40 companies: why, how and when to scale.
The Why is largely linked to the nature of high growth, tech startups, and is contingent with the requirements of VC investors; many well-known investors have weighed in on the topic:
„A startup is a temporary organization used to search for a repeatable and scalable business model.“ – Steve Blank
„A startup is a company designed to grow fast.“ – Paul Graham
The most obvious reason to scale is that most business models need at least a certain size to work at all (called the Break Even Point) and a certain scale makes running a company much more fun (Just think of running a coffee shop with just 1 client per day. Pretty dull, right?).
But the requirement to reach a large scale is also the basic assumption of a lot of business models in this industry. VCs need to build businesses of a certain scale to create the value they need to satisfy investors. And the digital economy is generally very beneficial at scale (because transparency and global economies lower prices, thus cost efficiency is a big topic. Also an additional user or client will result in very low additional costs, making it attractive to go for size).
Your personal goal might simply be fame and fortune, and, generally, humanity seems to be obsessed with phenomena at scale. If Facebook were a local player in Germany with 40 million registered users, media wouldn’t care that much.
Or, you scale because you can: it is much easier than it ever was to scale using all the mechanisms and tools available in 2016.
Answering this question is already much harder than the Why. There is no one size fits all, but we learned that Startups follow a pattern of Scaling that might have some scientific evidence (which is carefully omitted here). Let’s look at some of the parameters that we have seen, focusing on the Founders and their responsibility, the challenges, possible risks, common strategies, the number of employees and the learnings on what to do between phases:
Phase 1: Make something people want
Founders: Know the product inside out, because they most likely built it, encountered the problem that they want to solve themselves and/or are experts in the field
Challenge: Find a market aka Product/Market Fit.Build something people want, meaning that not only do you create a product but find out who to sell it to, at what price and how
Risk: Premature Scaling. Being so in love with your product and overestimating the fit on the market is quite common. That leads to bloated organisations, misaligned business plans, constant bridge funding rounds and eventual demise.
Strategy: Hire good people (instead of cheap people) and be brutally honest with yourself. Why good people? Because if you built the product with the cheapest guys / girls available you will find yourself rewriting it in the next stage. And honesty helps in self-assessment, in addition to figuring out when you actually failed in product / market fit (which is very likely to happen).
Employees: at this phase, typically below 10: short communication cycles, no overhead, small and agile team. Everybody runs in the same direction. Sometimes uncoordinated, but with high energy.
So you mastered it? Congratulations. Learnings on the way to the next stage:
- The oldest / longest / closest employees are not always the best Team leaders.
- Always be hiring. Even if you are not. The one person that just steps into your office, might change the course of the company.
- The sooner you accept that you will handover responsibility, the easier for everyone. Otherwise scaling is impossible.
Phase 2: Keep that engine going!
Founders: concentrate on hiring and fundraising. Your job is to find the best people, fire those that don’t perform and make sure that the fundraising story works.
Challenge: accepting that you need to hand over that precious product of yours to someone else, you can’t know every client personally and leadership can be quite a lonely place. Growing on a personal level and accepting that others now do the work (differently from how you would do it) is the most important lesson here.
Risk: Ant death spiral (see video). Clarity on direction, goals and purpose are key. Otherwise your team (including yourself) will just die in the trenches. Organisations breathe: they are organisms. Breathe in, breathe out.
Strategy: have just enough processes. It’s not about bureaucracy but about guidance and clarity. With an organisation that is twice or three times bigger as your Phase 1 team, you will need to define some basic rules that previously would have been negotiated on the spot in the team.
Employees: roughly between 10 and 40. (The specific number is probably one of the oldest debates in academia. Anything between 7 and 11 seems to be a magic boundary, 25 is usually the time where some kind of hierarchy or delegation system is introduced).
Learnings on how to get to the next stage nicely:
- This is where Leadership becomes a full-time job. Founders should start working on the system instead of in the system. Your thought should be „how can I make this organisation more effective“. You are taking care of a living being here. Respect, nurture, develop it.
- Try, learn, fail, repeat. There are tons of processes that you can leverage and learn from.
- Culture eats strategy for breakfast.
- Your personality determines the culture like nothing else. Develop.
Phase 3: Get out of the way.
Founders: usually by this point fundraising is no longer a problem. Hiring has been taken over by someone who has tons of experience in HR. Now, your job is to have a vision, constantly develop it and tell it to everyone. Find the best way of doing so. Without a long-term plan, companies are stuck.
Challenge: becoming a company without losing your agility, your soul and spirit. Growing up, but still keeping that child-like enthusiasm, the „can do“ attitude that originally got you here.
Risk: Losing the soul.
Strategy: preserve the core values that built this organisation. Whether it is relentless design focus, constant innovation or an aggressive sales engine.
Employees: Anything over 40. The moment you got 50, 80, 100 employees you as a founder won’t know all of them by name anymore. Accept that.
Learnings on how to master this:
- There are people who have done it before. Hire them. Learn.
- Even the biggest Egos on the planet have managed to hand over the CEO role. Larry Page!
- If you want to scale, spend!
- Ride the train and have fun. Millions in revenue create opportunities you never had.
Uff. Arriving at the hardest part. There is no hard evidence on when, just gut feeling, some observations and some checkpoints. Probably the When is governed by Heisenberg’s Uncertainty Principle: either you know where you are or you know how fast you are moving. Startups usually focus on the latter, only figuring out where they are when they don’t move anymore.
- Some things we learned (the hard way) over the years:
- Product/Market Fit is further away than you think. Nobody ever really scaled too late. So be patient.
- When you constantly hit your Business Plan, it might be here.
- Unit Economics point the direction. If they are good, good. Otherwise you have a product, but not a business.
- Startups are ‘options games’. Never run out of options. Especially in fundraising. Always have a Plan B.
One of the most important qualities of a startup CEO is to be self-aware, and to be able to adapt and to change roles quickly. You might be the CEO through phase 1 and phase 2, but find that you need to bring in a professional to manage a mature organization. That is OK! Founders need to know themselves, know their limits, and be brutally honest about the requirements of scaling at each phase.
Consider bringing onboard a professional coach early to help you identify your own challenges, and to prepare yourself to adapt effectively before you might even realize you have to!
What are your learnings on scaling organisations?