What distinguishes a startup from other kinds of ventures is a credible, already operational plan for very rapid growth. To raise investment at progressively higher valuations, a startup must grow faster than an ordinary business and become scalable. Only when it achieves rapid growth and scales step by step can its valuation rise correspondingly quickly. Early-stage investors can then earn returns by selling their increasingly valuable shares to later investors or larger corporations that may want to acquire the business. Because many early-stage investments fail by the very nature of the activity, a handful of successful investments need to deliver high multiples to make an entire investment portfolio profitable.<\/p>\n\n\n\n
The key point is that investors do not generally seek to make money from the dividends the startup pays as a shareholder. Indeed, a startup is expected to reinvest its earnings in further growth rather than distribute them. If it grows to dominate a worldwide market segment, investors can profit by selling their shares at a higher valuation based on expectations of future returns. That is why investors assess how a startup can grow and scale from the outset. The concept of \u201cscaling\u201d addressed in this article means something more than growth alone.<\/p>\n\n\n\n
First, neither growth nor scaling happens automatically or by chance. A startup needs a set of plans specifying how its chosen business model and managerial decisions will enable it to grow rapidly and scale. Entrepreneurs should explain and discuss those plans with potential investors during fundraising. If founders and investors are not discussing how to expand the company, and investors cannot help accelerate the growth the founders have achieved, then they are merely bargaining over how to divide the pie. Under such circumstances, their interests will inevitably conflict. When founders and investors agree on how to grow the business together, however, both stand to gain more: their interests become aligned, and they are on the same side.<\/p>\n\n\n\n
To assess scalability, investors first examine the size of the market in which the startup operates. Even if the venture captured its entire target market\u2014which is unlikely\u2014it might not become large enough to offer compelling investment returns. A scalable startup needs a market, preferably global, large enough to sustain high growth over an extended period. Its business plan must clearly explain how it intends to reach that market. An experienced investor who understands startups is unlikely to fund a business that cannot meet these conditions. Founders should also be wary of accepting money from investors who do not understand these requirements, because problems are likely to emerge later. Another major factor in scalability is the founding team. Do the founders have the qualifications and experience to generate and manage such growth? What have they accomplished, and have they worked together before? Single-founder startups are often considered less able to achieve and manage rapid growth. Having only one founder, an inadequate management team, or no functioning advisory board may all signal difficulties in scaling.<\/p>\n\n\n\n
As the startup expands, who will look after the market and customers, ensure that its product or service can be delivered properly, manage partners and stakeholders, spend investors’ money on the right priorities, report accurately, attract new capital before cash runs out, and increase valuation so that all investors\u2014including earlier ones\u2014benefit? Even if the entrepreneur arrived at work wearing a red cape with a giant \u201cSuper\u201d on their chest, no one person could sustainably master and perform all these tasks around the clock without damaging their health. Scaling therefore requires a founding team with sufficient experience and commitment to carry the venture through its early stages, preferably with a record of working together. There must be a division of responsibilities aligned with founders’ competencies, an effective team structure, and a founders’ agreement prepared by a competent lawyer and signed by all founders. When professional managers join the company, they must also understand how startups differ from traditional corporations and be able to think beyond established corporate routines. Otherwise, their costly practices and inappropriate habits can end up destroying rather than growing the business.<\/p>\n\n\n\n
These conditions are necessary but not sufficient. As I emphasized at the outset, the business plan must also contain creative strategies for accelerating growth. What sales or marketing infrastructure, and what kind of team, could produce a step change in performance? Could you recruit a sales manager from a global market leader who brings strong customer relationships? Hire a marketing specialist skilled in establishing online sales systems? Acquire a competitor? There must be objective but ambitious plans showing precisely how growth will accelerate and how it can be sustained.<\/p>\n\n\n\n
In entrepreneurial circles, growing a startup through such aggressive actions is often called \u201cburning cash.\u201d The company burns cash as it becomes much bigger. With rising global interest rates, money has become more expensive and burning cash more difficult. Nevertheless, investors still provide funding to founders who know how to spend it intelligently, pursue ambitious goals, and demonstrate results.<\/p>\n\n\n\n
Burning cash without hitting targets is a major problem. But growing without burning cash can also be problematic: perhaps the venture could have grown much faster if it had invested more aggressively. How large are the opportunities missed by avoiding investment, prolonging bootstrapping, or raising less money than necessary? If a startup grows below its potential, competitors may close the gap, prevent it from dominating the market, or overtake it. The venture may thereby lose millions of dollars in potential future valuation, and existing investors may lose out as well. A faster-growing competitor could even acquire the business at a relatively low valuation, forcing the startup into premature retirement.<\/p>\n\n\n\n
Suppose a startup has grown. Has it also scaled? Not if unit production costs have failed to decline substantially as the business expands. Achieving economies of scale\u2014reducing unit costs through the advantages of increasing scale\u2014is critical to valuation and competition. Scalability allows startups to create barriers to entry for potential competitors and build important competitive advantages. In short, scaling requires three things: (1) The venture must control the core technology that determines its principal costs and be capable of improving it. (2) As it expands, it must consolidate scale advantages and increase efficiency across procurement and operations. (3) It must establish effective management while recruiting many employees every month, creating a shared culture, and maintaining a work environment that encourages learning and development without excessive turnover. A venture that accomplishes this becomes truly scalable\u2014one that investors will be eager to fund, increasing its valuation.<\/p>\n\n\n\n
What distinguishes a startup from other kinds of ventures is a credible, already operational plan for very rapid growth. To raise investment at progressively higher valuations, a startup must grow faster than an ordinary business and become scalable. Only when it achieves rapid growth and scales step by step can its valuation rise correspondingly quickly. […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-5717","post","type-post","status-publish","format-standard","hentry","category-general"],"yoast_head":"\n