Your dream project is no longer just an idea. It’s a reality now. You’ve successfully launched your product and it is gradually growing. Now you might be questioning yourself: How to scale a startup?
But there’s another crucial question to consider: Is your project ready to scale?
According to the Startup Genome Report, up to 90% of all startups fail when they try to scale too fast. If you make a mistake and start to scale a business when you’re not ready, you risk a lot.
This isn’t easy, but you can avoid those risks. In this blog post, we are going to tell you how to recognize whether your startup is ready for scale, or if it’s not, how to get prepared. We’ve also provided some tips and strategies for the whole process.
What’s the difference between growing and scaling a startup or business?
What is startup growth?
Startup growth – increasing revenue as a result of gradually increasing expenses and resources. Basically, a startup invests more, spends more, and proportionately (in the best cases) earns more revenue. That’s linear growth.
As a result, you are growing your business and making more money. But at the same time, you’re spending a lot. At some point, customer acquisition costs may appear to be too high to remain a profitable project.
What is the startup scale?
Startup scale – the process of growing exponentially and getting a maximum profit with more or less the same investments.
Usually, a scaling startup has already passed through the growth stage and is ready to increase your number of customers and revenue without significant additional expenses.
For example, you have a shop that serves 10 customers daily. But if you are ready to scale a startup business, you can handle 1000 customers tomorrow without making a large effort. If you aren’t ready, 1000 customers will probably overload your business – you need to grow such a shop first.
When to think about scaling up your startup?
Scaling is definitely alluring: fewer resources, more profit.
But premature scaling can cause financial distress and bankruptcy.
70% of startups scale too early. And 93% of those startups never get revenue over 100k/month.
Before you start scaling up a business, make sure your business is ready for it. Below are the 5 crucial checkpoints before starting the scaling process.
Good customer base
A large number of customers and a solid market share prove that the product idea is valid and provides your business with some market stability.
Another value brought to you by customers is, of course, revenue. The more sales you have, the easier your project will grow.
One more thing to notice: if you are sure your customers are loyal and likely to buy more, don’t start to scale your business until you have enough inventory and employees to serve these customers. Otherwise, you risk not only failing the scaling itself but also losing your existing customer base.
Reaching previous goals
Or not. It may be simple to check the results of previous planning when creating a new and massive strategy, but it is still often forgotten or simply not considered.
So how do things stand with your previous plans?
In case your projects didn’t meet their previous goals, it is better to analyze your pain points before you stake your whole company.
Remember that as you prepare to scale your startup, you shouldn’t set goals that are impossible or too difficult to reach. Set high goals, but remember to establish the proper resources before you start scaling.
Positive cash flow
Positive cash flow indicates the business is generating more money than is required to support the business. Therefore, with the positive cash flow, you can be sure you have extra money to reinvest into the business.
Some business owners may confuse their business’ profit with cash flow. While your profit can show whether your business idea is valuable and successful, the positive cash flow helps to keep your business workable on a daily basis.
How to improve cash flow when scaling up your startup:
- Accelerating cash conversion. This approach will help you to reduce operating costs. You’ll have to make sure you don’t have any inefficient resources. Then confirm your business model works as needed – or, if not, improve it according to your business needs and current market situation.
- Advance payments. By taking payments in advance, you are ensuring the strong cash flow as it covers the sales and marketing costs as fast as possible.
- Invoice as fast as possible. We recommend you invoice just after the product’s delivery, or at least within one week after the invoice issued.
- Reduce your sales cycle. For sure, the optimal cycle length depends on the industry and on the product type. Analyze how long it takes to get a lead and try to find some ways to speed up the process.
Working concept and reliable infrastructure
Your business should work as a clock if you don’t want to fail your product scaling.
Answers these questions:
- Does your business concept prove itself and work as it is required to?
- Or maybe it needs some upgrades to gain you more sales and profit?
- What about your internal business infrastructure and processes inside your company?
Obviously, if everything above is in good condition, you’re more likely to scale your business successfully.
Don’t rush into scaling just because you’d like to or you’ve been already 2 or 3 years on the market.
Analyze your current situation first.
Do you have enough money? Do you have qualified staff to cover your customers’ needs? Or enough offices to serve them when the number of your visitors will start to grow?
If some answers are “no” to you, make a pause and think. Don’t create unnecessary risks for your business.
As a well-known banker Mark Hoppe said, “Scaling up is important for businesses but it does come with serious risks so it’s essential to plan for these.”
Top 5 risks when scaling your startup:
- Negative cash flow
- Scaling up too fast
- Staff burnout due to high workload
- Failing compliance and legal obligations
- Failing to attract new customers
The danger of premature scaling
What is premature scaling?
Premature scaling happens when the startup is expanded too early or too fast that the product is not able to handle the growth.
For example, your scaling is premature when you hire too many people, attract new customers, but can’t manage the demand or even invest in product development without validating the market fit.
Too early scaling is one of the most common reasons of startup failure.
According to the research by Startup Genome Report, up to 70% of startups are scaled prematurely. At the same time, the average rate of startup failure is 90%. These numbers’ correlation can tell that a premature startup scale can be one of the common reasons for online businesses’ closure.
The risks of premature scaling
Premature scaling may be a part of the different dimensions of your business. As usual, premature scaling can be caused by inconsistencies inside your product, team, or finance and business parts. To be more particular, let’s discuss them one by one.
For example, your business may fail if you start scaling before thinking through your product/market fit, or, put simply, what customers problems you want to solve.
From our experience in startup development, we do not recommend investing in the fully-featured product before validating the market with a minimally viable version of the product. You can save a lot on avoiding the excessive features that you don’t really need at this stage.
Don’t start to scale your startup by hiring too many people or by hiring only the management team. Scaling is always a challenge, and you should remember that at the beginning you should focus mostly on quality and hire more doers that are capable of bringing your business to success.
It is enough to hire a one-level hierarchy to start to scale your startup. Later, you would definitely expand and hire more employees.
When your business is young and promising founders are excited to grow it further in a short time. Some common mistakes startuppers do comprise overplanning, attempts to maximize profit before time, ignoring feedback, and not adapting to the rapidly changing market. Therefore, make sure you have a rather simple plan at the beginning and focus on creating a thorough business model for your product.
11 tips for preparing your startup or business to scale up
Automate What You Can
Automation helps you to expand your business activities and still save many resources. Some ideas on what you can automate:
- Chatbots. Various types of NLP chatbots can be useful in various types of business. They can help to automate your customer support, teach them how to use your product, book tickets, or even products’ suggestions for your customers.
- Payments. Automate company payments and employee payroll.
- Martech. Martech is what you get when you mix marketing and technology. It helps to automate data gathering, customer profiling, targeting and analysis
- Invoicing. There is a big number of reasons to automate your billing processes. Thus you can gradually improve the customer experience and get paid faster. For example, our team automated the invoicing for clients, cleaners, and managers for the leading Scandinavian cleaning marketplace and helped to decrease time and money spendings.
Invest in technologies
When your business transitions to a new level, make sure the technologies you use and your software system is scalable enough to handle much higher loads, quick updates, and expanding the functionality.
It would be much more cost and time effective to conduct a quick check-up before you invest in expanding your business and risks become too high.
Besides, we recommend you to verify if your system is secure enough not to suffer from the data leakage.
In Sloboda Studio, developing startups we like working with such effective and scalable technologies as Ruby on Rails and PHP: they allow the developers to write and read code faster, make rapid changes to a ready-made product or extend the existing features in an agile way Plus these technologies take web security very seriously. They include features to protect applications from common issues.
Know your customers’ expectations
When you’re focusing on your customer’s needs, you understand what your product needs to offer and how you should adapt your product to make your customers happy.
Knowing your ideal customer may take some time. But this research will reward you with a much-focused market proposition, so we wouldn’t recommend skipping this step.
3 tips that help to understand your customers:
- Pick a niche. It’s much more productive and easier to work with a market niche or group of customers. A niche market allows the creation of more effective, repeatable, and scalable sales propositions. Moreover, it is much easier to track the results of your marketing campaigns and business scale in general.
- Use Customers’ Feedback. After your first launch, you’ve probably gathered lots of feedback. You can use this data to understand what your customers need to be added or upgraded to create a perfect product for them.
- Study Competitors’ TA. You’ve probably been there studying your competitors at the very beginning of your startup development. Go back now to check how the most successful of them interact with their customers. Such research will help to recognize some details that will help to scale your business by attracting new customers.
Use marketing techniques
Though marketing is the core struggle of young companies, it is basically the only way to represent your product and get rich out to your target audience.
Depending on the niche, industry, and target audience, there might be dozens of marketing strategies, approaches, and channels for promotion. Let’s look at the most common marketing strategies.
- Direct marketing is an advertising strategy that includes only the individual promotion of your product, for instance, by reaching out to potential clients via email or texting. Though, this strategy is good only for the smallest startups and should be performed before scaling.
- Content marketing is a form of marketing focused on creating, publishing, and distributing content for a targeted audience online. This strategy is perfect when your company has a blog, social media platform to share news and posts about your industry, company, product, and activities.
- SEO optimization. SEO or Search Engine Optimization allows you to grow your website traffic and increase its visibility in the web search engine results. SEO optimization is usually used together with content marketing as lots of customers can look for products via the Internet – this is where quality content marketing and correct SEO keywords will be your competitive advantage.
- Advertisement. It is a paid promotion that helps to promote your product and attract customers’ interest and engagement.
- Branding. Helps to represent your product and helps your customers to remember not only your product and name but also the design and features that differ you from the market competitors.
- Social media. Using social media, you can stay in touch with your customers, promote your business, share news, and receive feedback about your product.
Hire the Right Team
Scaling a startup requires fast and proactive solutions. That’s why we also recommend hiring people who aren’t only excellent specialists but also are interested in working namely with your business.
Here are some must-have qualities for your scale team members:
- Communicative. Startups require rapid reactions and fast solutions, so your goal is to hire a team that can collaborate with each other effectively.
- Business-Oriented & Responsible. Well, we’re making business here, aren’t we? Your ideal co-workers are not just great technical, management, or marketing specialists – they’re business-oriented specialists that understand the result of each of their actions.
- Skilled. It’s nice when an employee is multitasking and has more than one skill. For startups, it can become even a must-have. But be careful: sometimes it’s better to hire a professional with particular expertise than someone who knows everything but a little.
- Motivated. Startups are different. Sometimes scaling a startup is blood, sweat, and tears. Anв only highly motivated people can still do their work with double speed just because they are sincerely interested in it.
- Proactive & Open to New Ideas. Good employees just do their job. Proactively think about how they can make it better and offer you fresh ideas that may be useful and profitable for your business.
At Sloboda Studio, we focus on startup development. Therefore, we noticed that even good specialists sometimes cannot work in the context of creating and growing startups. That’s why we pay great attention to soft skills during the hiring process and conduct 5-stage interviews.
Large companies are capable of hiring people for almost every job they could even offer. For a startup, it may be not reasonable to invest time and resources in recruitment. Especially when it comes to one-time or non-essential tasks. But outsourcing has its perks for permanent projects too.
4 core benefits of outsourcing in startups:
- Time. While in-house development requires a lot of preparation (like looking for a suitable office and hiring) and freelance isn’t very reliable, outsourcing allows you to jump to work once you choose the right team. At the end of the day, such an approach helps to save more time and deliver the project faster.
- Rates. Outsourcing can be both pricey and very cheap – the rates usually depend on the location of your team. But be careful and don’t choose the cheapest locations, which may result in poor quality. Choose something in the middle – for example, Europe, where average development rates vary from $25 to $50.
- Labor & administrative costs. When you work with an outsourced team, you’ll never need to spend extra costs on such things as labor taxes or office rentals.
- The pool of talents. When you hire an in-house team, you are restricted by your geolocation. When you outsource your tasks, you can choose employees from all over the world. Therefore, the pool of your potential colleagues extends significantly so you can choose the best people for your project.
You can learn more about Outsourcing vs In-House development in our recent blog post.
When you scale up your startup, the world starts watching you. And you can’t make a mistake to risk your reputation.
While large companies are capable of surviving in arguable situations and various types of conflicts, you may not be ready for it.
That’s why you need to think your PR campaign through very carefully, avoid controversial situations, and create a clear representation of your business in the media.
Arrange the processes inside the company
When you start scaling, remember that the number of your resources shouldn’t be too large – it is more reasonable to use fewer, but more effective resources.
3 tips on setting up the processes when scaling your startup:
- Start documenting. When you are a small startup, documentation seems to be a little bit unnecessary. However, when you start to scale, documenting becomes a must as it helps to fix the issues faster, share your experience and knowledge with the team, and maintain the business’s stability.
- Keep It Simple. The bigger your business, the more problems it causes. When you start to scale, you need to focus on such things as your customers, hiring, technologies, and new processes. Make sure you work only with essentials and don’t add too many variables at once so you won’t get new problems like technical issues or team misunderstandings.
- Add Enough Structure by arranging all the necessary processes and hierarchy, so the team can perform their tasks fast and efficiently. Even if you’re not around to control what is going on. All team members should know who’s their manager and what they are personally responsible for to know, and what they should do with the arising issues.
Make Your Business Workable Without You
It’s much easier to run your startup when it is still very young. At the very beginning, it’s common for founders to be managers, marketers, recruiters, office managers, or take any other needed roles in the team.
But as your project grows and scales, the pool of tasks and responsibilities grows significantly. You’re might still want to take control of everything, but it becomes physically impossible.
Scaling up business tips to make your startup independent from you:
- Identify Your True Goals in the project
- Hire managers to regulate the day-to-day work and the company’s departments
- Build the right hierarchy so your employees know their managers
- Create fundamental rules of work so that everyone can understand the processes inside your business
- Get rid of the processes that tie you to the company
- Let some failures happen
Following those rules, you can shift some responsibility and find some time for developing new ideas.
Secure Funding and Generate a Steady Revenue Stream
The startups are often associated with a lack of money and funding seekings. And it’s mostly true: rarely you can find a startup that has stable finances.
3 tips to generate a steady revenue stream:
- Crowdfunding is the practice when lots of people donate small amounts of money to fund a particular project. The most common way to crowdfund a project is via the Internet, with the help of such platforms as Kickstarter or Indiegogo.
- Angel Investors. Angel investors provide small businesses and startups with an initial capital. However, an exchange for such capital may be, for example, ownership equity of your product.
- Venture Capital is another type of financing for small businesses. As usual, such capital can be provided by individual investors, banks, or other investment institutions.