Fly or Die: 4 Questions to Ask Before Your Startup Scales Up
There are four areas you have look into to see if you're ready to scale. If not, you risk losing it all.
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How do you know when you're about to get to startup heaven, scaling up fast and reliably? A company's growth curve can head in a variety of directions, not just the lucky, up-to-the-right hockey stick of explosive growth.
At ScaleVP, it is our business to figure out exactly when a company can use our money to grow to the heavens, or when it's best to keep the burn low. The checklist below is based on insights we've drawn from our due diligence over more than a decade of helping to scale a number of successful startup companies.
1. Product. Do people want to buy what you have to sell? In Silicon Valley speak, that translates into having achieved "product-market fit." At this point, you've tweaked your product (service, solution) and have a standard version, and maybe a few options that are appropriate for the bulk of your market. Signs that you haven't yet achieved this state include products that are customized for each customer, need a lot of customer support, have negative margins, get poor customer reviews or do not get used after purchase/installation.
Related: 4 Ways a Small Business Can Scale to Profitability
Do not confuse having a "minimally-viable product" (MVP) with being ready to scale. Eric Ries of LeanStartup fame coined that phrase. An MVP is used to test-market your product before it is built so you know what to build without wasting precious resources on building the wrong features. You need real products to scale, not a mock-up.
2. Price, packaging and positioning. These three P's are related to your product, and describe the bundle of attributes that you are taking to market. You better have these nailed down before scaling, too.
- Price: This includes not just the number you stick on the pricelist or tag, but the pricing methodology. Pay upfront or subscription? Charged how often? Freemium, premium or free trial? Volume discounts? Lots of add-ons, or all-inclusive? This blog post, from my colleague Stacey Bishop, offers tips for current software pricing strategies.
- Packaging: It's easy to understand when it's physical goods, but many products have packaging, which describes what's included with the product. Does your software come with storage, support services, integration, installation or implementation? What's in the premium versions versus the basic product? If you're selling a physical product, is delivery included?
- Positioning: This is how you describe your offering. It's not your tag line, and you may never utter these words exactly, but it's a single statement that places your offering in its market context and clearly reflects why your product deserves consideration. A popular template reads: "For [target market], the [brand] is the [point of differentiation] among all [frame of reference] because [reason to believe]." This will evolve as your product and market mature, but you need to have a clear picture of who your target customer is and why she or he will select you. Your positioning statement is the foundation of all the messaging you will use to scale: marketing copy, sales scripts and presentations, investor pitches and press releases.
3. Sales channel. You have to figure out a cost-effective way to get your product to customers. Much of the money spent by startups goes towards sales and marketing (see the second chart here). Your people are relatively expensive, the programs cost real money, and oh, by the way, both people and programs interface with your prospects, so if they're not right, you risk doing more harm than good. Scared now? Good! Do not spend a lot here before you have figured out what works.
Related: 4 Tips for Preparing Your Business to Grow
Your "sales channel" is the path to a successful, cost-effective sale. It includes the methodology (telesales, direct sales, retail/distribution, value-added resellers, e-commerce, etc.) and the associated processes (telesales scripts, salespeople's backgrounds, reseller training materials, etc.) that lead your customer to say "yes." You don't need every component to be polished and optimized to begin scaling, but you should have a clear idea what works, what doesn't, and most importantly, what you would do more of if you had additional money.
ScaleVP often sees a pattern with companies on the verge of scaling: They move from the entrepreneur him/herself making initial sales to adding a couple of sales people, then a manager with another small handful of sales people. That point where you have built a small, competent team that executes flawlessly is exactly when you know you have the recipe for success and are ready to scale.
4. People. Sales isn't the only department that needs to prepare for scaling. As the entrepreneur and leader, you need to be ready to scale. This usually means you have hired some top talent to support you in key functions, and the team as a whole has the capacity and clear direction to take on the challenges of extra business. Your company needs to be able to service existing customers consistently and simultaneously attract new customers, and keep all of them happy.
Engineering needs enough leadership to keep driving innovation, while the business team is closing more deals. And if you're making a real-world product, factories, shipping departments, customer service lines and finance departments all have to keep growing efficiently as the business expands. With modern software-as-a-service solutions, many of these functions can be automated inexpensively.
If part of your organization is fragile or broken, you can be in startup hell -- frazzled, inefficient and stalled. You either won't attract needed startup capital, or if you get it, you won't spend it effectively. So ask yourself, "Are we all ready to scale?" using the checklist above. If you are, we could be seeing you soon.