Many leaders confuse growth with scaling — scaling your business is very different from growing your business. Growing your business means adding revenue at the same pace you are adding resources; scaling your business means adding revenue at a much greater rate than your expenses. Being able to quickly multiply your company’s successes is not the same as building for sustainable, scalable growth.
Nearly all businesses want to know how to scale a business. However, most will statistically fail, some will grow and fewer still will truly scale. You can change those odds in your favor with the right support.
Tony Robbins famously said, “Success leaves clues,” and that’s certainly the case with scaling companies. While this particular subject normally fills volumes of books and MBA-level courses, here are four tips to point you and your team in the right direction.
1: Assemble Your Advisory Board
A well-constructed advisory board is worth its weight in gold to a scaling company. An advisory board is a team of specialists selected by you and your team for the primary purpose of helping your company succeed. Having a strong advisory board can get you near instant credibility in your industry and is very attractive to prospective investors, customers and strategic partners. Jason Posel, founder of Greenlight.ai said, “For platforms, advisors depend on stage and task. Early-stage startups need to augment their expertise. If you can build a platform but don’t really know the space, get advisors who can accelerate your learning curve and introduce you to other important contacts and colleagues.”
Ideal advisors know their worth, take advising seriously and are very selective in choosing which companies to establish a relationship with. In some cases, complex situations can be solved with one call or meeting because of their depth of experiences. Choose specialists that can augment areas in which your business lacks or drive space between you and your competitors. Do what you can to secure those advisors who already have the results you want. Work with your trusted partners, mentors and strategic funding sources to identify potential new matches.
2: Find Multiple Money Sources
Scaling requires money. And even if you bootstrapped your startup to this point it’s smart to set up funding sources as ready reserves, because as Mark Twain once said: “a banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” Twain, himself, was a serial entrepreneur and realized firsthand the pain of not having enough runway capital. Here are two effective funding alternatives to conventional banking and angels:
Invoice funding
Accounts receivable funding, also called factoring and “AR” funding is one of the oldest forms of funding in the world. Factoring has been around in one form or another for centuries and potentially originated in ancient Mesopotamian culture with rules of factoring preserved in the Code of Hammurabi. AR financing is not normally thought of for scale-up funding, but can be very advantageous. It can maximize and stabilize cash flow, allow you faster access to incoming funds, improve profits and allow you to focus on core strengths. For example, if your startup has an MVP (Minimum Viable Product) that a larger, established customer purchases, you can get AR funding quickly (within a week or two on average) because the funding criteria is based on your customer, is not a loan and does not report to credit bureaus.
Revenue-based financing
Revenue-based funding is an innovative mix of debt and equity. This type of capital can be very beneficial for many growth-oriented companies. It’s non-dilutive so there’s no requirement to relinquish ownership or have decisions influenced externally. There’s no collateral or personal guarantee. In contrast, most scaling companies have difficulty meeting collateral requirements for conventional debt-financing.
Funding can happen quickly. Raising traditional venture capital or securing bank financing can take months. Effective RBF sources can make data-driven decisions in days, if not hours. Additionally, instead of a fixed payment every month, a fixed percentage of sales is used to repay the funding. Repayment periods are often based on your previous sales and high-conviction projections.
3: Strong Product Design
According to a report by McKinsey the best design performers increase their revenues and shareholder returns at nearly twice the rate of their industry counterparts:
- McKinsey found a strong correlation between high MDI (McKinsey Design Index) scores and superior business performance. Top-quartile MDI scorers increased their revenues and total returns substantially faster than their industry counterparts did over a five-year period 32 percentage points higher revenue growth and 56 percentage points higher growth for the period as a whole.
- The results held true in all three of the industries measured: medical technology, consumer goods and retail banking. This suggests good design matters whether your company focuses on physical goods, digital products, services or some combination thereof.
Strong design is more than attractive packaging. It’s analytical leadership, cross-functional talent, continuous iteration and powerful user experience. Work with your advisors and apex customers to refine your product design.
4: Strong Infrastructure Design
Take the time to design your organization so it can scale. Good infrastructure design is not just replication. For simplicity, here’s a working litmus test to run anytime you want to evaluate whether your startup is in the growth or scale mode:
- Scale Mode. If your business is truly scaling, then as your company increases the volume of its sales your efficiency (production time, distribution, etc.) and overall costs should stabilize.
- Growth Mode. If your expenses, fficiency and net costs increase at a similar rate as your business increases the sales volume, then you’re growing but not scaling.
Specific tips to consider when designing your scale infrastructure:
Anticipate your apex customers’ needs
Your very best customers are your apex customers. Often, they will happily buy your product or service at 2 or 3 times your baseline price. Design around this customer subset predominantly — before addressing the rest of your customers.
Cultivate your superstars
“There’s no business plan without a talent plan,” says Steve Schwarzman, founder of the behemoth Blackstone Group with roughly $619 Billion AUM (assets under management). Nurture your top talent: about 2 percent of employees make outsized contributions in every business. Great talent isn’t always motivated around big bonuses alone. Consider their job-alignment in relation to your company’s greater mission, their autonomy and strong top-level support from you.
As with most things in life, the time to implement your design-for-scaling is yesterday. The very next best time is right now. Scaling is critical to your long-term growth. Only after you’ve designed your scale infrastructure should you start automating and replicating.
Collaborate with your key channel partners, flexible capital funders and apex customers. “57 percent of organizations confirm they use partnerships to acquire new customers,” according to a report from Drexel University’s School of Entrepreneurship. Of the $135 billion invested by U.S. VC firms in 2018, 63 percent of that was deployed to enable successful startups to scale their product or service. Make scaling, like success, a daily habit that’s part of your company’s culture. It’s a journey, not a destination.
Marty Aquino has been a passionate writer on venture capital, technology, forecasting, risk mitigation, wealth and entrepreneurial topics since 2009. He is the founder of Carbonwolf Energy, a venture-capital firm specializing in world-changing and status-quo-defying technologies and people.
Sources:
Entrepreneur – The True Failure Rate of Small Businesses
Tony Robbins – Modeling Psychology: Definition, Examples & More
Forbes – Startup Leaders, Here’s How To Build A Successful Advisory Board
Forbes – The Benefits Of An Advisory Board For Success
Time – How Mark Twain Lost a Fortune in 19th-Century Start-Up Fails
AmeriFactors – Accounts Receivable Financing
Wikipedia – Factoring (finance)
McKinsey – The business value of design
McKinsey – Putting talent at the top of the CEO agenda
Blackstone – The Firm
Drexel University – Scaling & Growth – 6 Ways To Take Your Business To The Next Level
McKinsey – How incumbents scale up their new businesses