Starting a business is no easy feat, and for many entrepreneurs, the ultimate goal is to grow and scale their startup with the hopes of turning it into a unicorn. But how do you know whether your business is ready to take that next step and scale? Scaling too quickly can lead to a host of problems, from inefficient operations to customer churn, while scaling too slowly can mean missed opportunities for growth. In this post, we'll review some considerations for what it takes to successfully scale your startup and how to determine if the timing is right for your business.
A key question
As a startup founder, one of the key questions you must think about is whether your company is ready to scale. Whether you are done with the more exploratory stage of trying to identify the problem, the solution, the market, and whether you are ready to actually start accelerating - raising cash, and investing heavily in acquiring customers
Essentially, asking yourself: “Are we done with moving from zero to one? Done with the stage of taking an idea to product, and are ready to move from 1 to N?”
As part of asking this question to oneself, it’s worth distinguishing the early phases of a startup to identify at which stage this question becomes critical.
There are three general phases of an early stage startup:
1. Discovery Stage
This is the phase where we are typically:
- Talking to people and prospective customers
- Conducting user research
- Conducting market research
- Sizing the market
Ultimately determining if this opportunity is worth pursuing.
2. Validation Stage
In the validation stage, we are typically:
- Building a proof of concept
- Building an MVP
- Running evaluative research
The role of this stage is to ensure that we have a product-market fit; that indeed the product we have solves the identified problem and that we know how to solve it.
3. Efficiency Stage
When I refer to efficiency in this case, I’m not referring to general operational efficiency but rather the targeted aspect encapsulated in these scenarios:
- We know how to get the customer, but do we know how to get them efficiently?
- We know how to serve the client, but do we know how to do it efficiently?
Are we able to serve our users/customers in a repeatable, predictable manner? If so, then we are ready to scale.
The inflection point
Let’s dive deeper into the later two phases to help one determine whether they are in that sweet spot - the moment one knows all the work has been done and that now is the time to scale. And I will do so by reviewing the following quotes:
To me, product-market fit is when you have proven the value hypothesis. So, the value hypothesis is the what, the who, and how. What are you going to build? For whom is it relevant? How is the business model? First, you have to prove a value hypothesis, and only once you’ve proven the value hypothesis should you test the growth hypothesis.
- Andy Rachleff, founder of Wealthfront and co-founder of Benchmark
Andy Rachleff famously created and defined the term Product-Market Fit. He clearly states that “First you have to prove the value hypothesis, and only then should you test the growth hypothesis”
The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product. In short, customers are knocking down your door to get the product; the main goal is to actually answer the phone and respond to all the emails from people who want to buy
- Marc Andreessen, co-founder and general partner at the venture capital firm Andreessen Horowitz
Both are essentially saying the same thing: The market dictates the terms. The market is what you need to respond to. Most firms fail because the product they have doesn’t really solve a problem in the market.
You may be asking yourself, what if I scale without having product-market fit?
I understand that the process of determining the moment that you have product-market fit is quite serendipitous. You don’t know how long it’s going to take so you may try to accelerate to get customers.
Andrew Chen, a Partner at Andreessen Horowitz, has an article about why premature scaling fails,and refers to this trap as the “traction treadmill”
You will waste money trying to service customers before product-market fit is achieved You will get customers and lose them immediately
I do think you need to understand where your product stands relative to other successes (and failures in the market). The benchmarking is important. And if you try to scale and fix at the same time, be prepared for the treadmill to show up. By then, your nimble speedboat of a product will have grown into an aircraft carrier, and it’ll be hard to turn things around. This is when scale becomes the enemy to iteration.
- Andrew Chen, Partner at Andreessen Horowitz
So you want to avoid scaling at all costs until you have product-market fit.
But hold on. That’s still not enough.
On top of having product-market fit, you also need to be efficient. What I mean by “efficient” in this case is articulated in a quote by Steve Blank - one of the main founders of the lean startup
A start-up is an organization formed to search for a repeatable and scalable business model
- Steve Blank, American entrepreneur, educator, author and speaker
The point I am making here is when we think about the risk of efficiency we are thinking about the risk of premature scaling: putting the cart before the proverbial horse.
Premature scaling is putting the cart before the proverbial horse, and in the case of startups, this can potentially relate to both engineering and operations. Getting venture money can be like putting a rocket engine on the back of a car. Scaling comes down to making sure the machine is ready to handle the speed before hitting the accelerator.
- Michael A. Jackson, Serial Entrepreneur
The Startup Genome Project reports that the primary cause of failure is premature scaling. They further say this can explain up to 90% of failed startups.
As mentioned earlier, determining whether you have product-market fit can be quite serendipitous. Ask yourself the following questions to help you determine if your business is at that inflection point and to test your efficiency
Do you know how to make money in a repeatable and predictable way? What are the metrics that demonstrate this? Am I convinced enough so I can take money now and take this idea and blow it up and scale - will my car handle the rocket engine?
Ultimately, makesure your product serves the market, and your business model is repeatable and scalable. If this is the case, then you are absolutely ready to scale.
We love to take on values-driven clients looking to assess their readiness and scale their startups - reach out to our New Biz team at Potato!