Scalable is a word that gets thrown around in business conversations. But what does it mean? Some take it to mean that the company has barely penetrated the large market for its product. But for me, it means something more specific -- as your business grows, its costs will go down so much that it will change from a burner to a producer of cash.
That depends on the definition of scaling. I think scaling means that the company is adding customers and employees -- so it is either scaling or collapsing right from the start. As I wrote in my book, Scaling Your Startup, there are four stages of scaling and what changes at each of the four stages is the rate at which the company is adding customers and employees.
On March 5, I wrote in greater detail about the four stages of scaling which are:
- Winning the first customers
- Building a scalable business model
- Sprinting to liquidity
- Running the marathon
The unique focus of this article is getting the second stage right. Many CEOs I've interviewed talk about scaling as though it means growing revenues faster than 100 percent each year. But they seem to miss what I think is an important point. If you grow rapidly without lowering your costs, you will never be able to create a profitable business.
CEOs should do this in the second stage of scaling. But the majority of startups skip that stage on go right on to the third one. This means that the startup keeps growing fast by cutting prices below its costs and spending heavily on marketing to bring in new customers.
By skipping that second stage, these startups become totally dependent on investors to keep them afloat. As they did in 2015, Investors can change their minds about your company -- which would then make your company vulnerable.
To complete stage two properly, founders should develop repeatable processes that lower the startup's costs and increase the company's value to customers as the startup grows.
An excellent example of this is JFrog, a maker of software that boosts the productivity of software developers, growing at over 500 percent, which I wrote about last October.
Refine the company's growth trajectory.
You must develop a more specific growth trajectory -- making clear choices about your company's revenue and market share goals; which customer groups to target, how it will make, sell, and service its product, how it will identify and manage supply and marketing partnerships; and how much capital the startup will need to achieve its goals.
Since the company will begin hiring many new employees, you must articulate the culture and communicate it more formally so that new employees will embrace the startup's values.
Define specialist jobs.
Most importantly, you must define all jobs more specifically -- recognizing that the company is transitioning from mostly generalists to more specialists. This will also mean hiring vice presidents in key functions who have prior experience making processes more efficient.
Set and monitor goals.
You should define, measure and meet specific goals each week, or month - the achievement of which will help the company grow. Key metrics include customer retention rates, revenue per customer, customer acquisition cost, and net promoter score.
Introduce coordinating processes.
Finally, you must coordinate the work of functions -- such as product development, marketing, selling, service, and order fulfillment -- to boost efficiency and improve customers' perception of the value of the startup's products.
There are plenty of fast-growing, cash burning startups out there that are probably hoping to go public in the next few years. But if the IPO market sours on such companies, they could be vulnerable. If you follow these steps to make your business model scalable, you will be more in control of your company's destiny.