From Zero to Scale: What Every Startup Should Know about Scaling
Osita James Uche
Leading Startup Attorney @BlackCrest LP I TEDx Speaker I Startup Coach | Chevening Scholar '22 I Human
Welcome to a new edition of Building Digital Products (BDP).
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Building Digital Product (BDP) by Osita is a monthly newsletter that supports founders, investors and startup enthusiasts with insights and principles to build better products and startups.
This is my 23rd edition and fifth edition for the year.
BDP's theme for 2024 is "Resilience."
Here is a little snapshot of me.
Osita James is a technology entrepreneur and a partner at BlackCrest Legal. The start-up advisory law firm (BlackCrest) has successfully advised start-ups across Africa in investment deals worth over $5 million. He holds an MSc in Innovation Management and Entrepreneurship from the Nottingham Business School, Nottingham Trent University, a bachelor of law from the University of Nigeria, Nsukka and a Diploma in Technology and Innovation from the Nigerian University of Technology and Management. He writes poetry and fiction in his free time.
He supports African founders with professional legal and start-up operations advice and can be reached at [email protected] or here.
Today's edition will focus on the key things every founder that hopes to scale should know. In the quest to explore technology for value, startup founders all over the world leverage different tools and processes to provide value to customers, this edition exposes how such founders can scale their operations.
I'm convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance - Steve Jobs
The goal of every startup is to one day scale its business operations and exit. The timeline between when the startup commences operation and the time it knows it is ready to scale comprises the growth stages. Scale however is not always possible for many startups. Scale requires significant funding and not all startups will access venture capital funding.
According to Forbes:
less than 1% of startups get investment capital.
What is Scale in startup parlance and why does it matter?
Scale is a start stage of growth where the startup is ready to expand its operations to meet up with increasing customer demand for its products and services.
Startups that desire to scale usually have a firm grasp of their operations, expenses and market share. As a founder, you have to measure your startup growth across well-defined KPIs to track when it is time to scale.
Stages of startup growth
According to the Silicon Valley Bank, there are three stages of startup growth. They are:
This can also be categorized according to the type of funding that startups can access at each stage. The startup stages of growth in that sense would be:
The Early Stage
At this stage, the startup is still figuring out its business concept. It may or may not have customers. In this stage, the startup founders may raise small checks from angel investors or bootstrap the startup themselves. In some instances, they may get venture funding. This however usually depends on the industry and market vertical they operate in. Some markets are more profitable than others, and therefore more likely to attract venture funding.
According to the StartupBlink report of 2023
The Software & Data industry maintains its position as the leading industry for startups in 2023, with a staggering 31.95% of all startups operating within this sector.
At this stage, the founders usually own a majority stake in the business. This however changes when they get external funding in exchange for equity in the business.
The Venture-funded (growth) Stage
At this stage, the startup has built a product that customers love and is shipping to thousands of users. When the startup raises venture funds through debt or equity, it uses the funds to improve its distribution channels, employ more top talent, improve cloud security for its software and explore new markets. Startups in this stage who have received venture capital equity funding do not own all their shares. They may still own a majority stake even after raising several rounds if they build significant business traction and systems for scale, as well as get the advice of startup law firms like BlackCrest.
The late-stage growth stage
At this stage, the startup has grown its revenue considerably. It may have operations in several markets and have hundreds of employees. The late-stage startups may raise follow-up funding rounds to further expand. These funding rounds are called series A-D. The check size ranges from $ 5 million to $100 million. The late-stage startups may also acquire smaller startups to improve their operations. At this stage, the startup executives start considering exit options.
Signs that your startup is ready to scale
Ideally, every startup should be working on a problem that can be profitably solved at scale. However, not every startup is ready to scale.
The Startup Genome Report of 2011 which surveyed over 3,200 startups found that:
74% of the startups surveyed failed as a result of premature scaling.
Some signs indicate that your startup is ready to scale. The signs are as follows:
A Large and Growing Market Size
A startup that operates in a market vertical that is big (like software) and is growing may start to consider scaling if all the other factors align. The startup's share of the market vertical it targets can be determined by the industry reports on the total number of customers, its partnership and distribution channels.
Consistent and growing revenue
If the startup's revenue is consistently growing, it may be time to consider scaling the startup's operations. Revenue increase in this context has to be significant and constant in order for the startup founder to consider it a good sign. Revenue is usually tracked by the accounting team and changes in cash flow can be seen clearly from the accounting books month on month.
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Product-Market Fit
A startup founder can consider scaling theor operations once they confirm that the startup has reached product market fit. Product-market fit however, has no clear cut industry standard. Some VC indicate that the startup should have a clear path to 100,000 users but some startups have fewer users who pay top dollars for accessing their product making even more revenue than other startups with thousands of users.
Product market fit is determined by examining the following:
The current sales volume
User's sentiment if the product or service were to be stopped
The rate or reoccuring use
The user testimonials
The percentage of revenue that comes from referrals of current users.
I have discussed how to detemine product market fit in more detail in a previous edition.
A Robust and Scalable Sales Process
Startups have to sell their products or services in order to obtain revenue to keep the value cycle going. The startup becomes ready to scale when the sales process that manages the inflow of leads, optimizes conversion and increases overall revenue is structured in such a way that it is easy to accomodate a higher volume of the same variables. A sales funnel that can accomodate 10,000 leads but cannot accomodate 1 million is not a sales process that can scale. This of course does not mean that you should hire more business development associates on standby, but the platform itself and the process of sales has to be so simplified that it can easilly be replicated as you increase the overall number of leads.
A Scalable Ditribution Channel
The goods and services that a startup provides in exchange for value to its customers are provided through a medium. This medium cabn be digital or physical and is called the distribution channel. Startups that require a physical medium to distribute their products have to ensure that the logistics process is as simple as possible. On the other hands, startups that use a digital medium have to ensure that their applications have scale integrity so as to prevent downtimes when the platform experiences significant traffic.
Where the distribution channel is robust and can easily be scaled to accomodate more volume of services or products, it is a sign that the startup may be ready for scale.
How to Scale a startup
A start can start its process of scaling its business following the key steps below.
Step one
Determining it is time to scale
This is the most important first step because every otehr step relies on this. If your reveiew does not convince you that you have enough market share, revenue, adequate distribution channel and an robust sales process, don't bother.
Step two
Raise funds
Scaling often requires significant funds. Startups can raise Venture Capital (VC) funding to support its scaling activities. VCs tend to have investment philosophies, market verticals of interest and check sizes. Startups should research about then using online resources and leverage founder communities. I have written about raising funds as a startup extensively in a previous edition.
Step three
Invest in talent
After the startup has raised funds, the first thing to invest in is talent. Great talent can solve a lot of problems for a startup. They can advise on improving operations, revenue and product or service quality.
Step four
Invest in technology
The startup has to invest heavily in technology after it has hired great talent. The talent often times will be the ones to advise on what to invest in. in a world of automation, the most efficient companies will come out on top. There is no need hiring thousands of factory workers if robots can work ovenight and get the same job done.
Step five
Streamline operations and revenue
After the startup invests in the technology that will allow it to contiue scaling, it should then work with its team to streamline its operations and revenue with its new scale objectives. This could mean updating the teams on the new machines or software to be used in operations, and ensuring they know how to use it. It coud also mean exploring new products in different markets to bring in a new stream of revenue.
Step six
Become a Ghost
The startup founder should work very hard to ensure that everything can run with very little or no input from him or her. The less the founders input is to the day to day operations of the startup, the more scalable the startup will be.
Common Scaling Challenges
In the process of trying to scale a startup, founders face several challenges that delay or prevent scale entirely. I have highlighted some of the most common ones below:
1. Maintaining efficient operations
2. Maintaining profitability
3. Managing cash flow
4. Talent management
5. Unpredictable Market Conditions
If the operations are not efficient, the founder will face either more cost, lower quality or slower shipping time. Founders have to ensure the operations are as simple as possible on a unit level to allow each time execute without challenges.
The startup must also prioritize profitability over fast growth while exploring ways to stay profitable while growing fast.
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Conclusion
Every startup should aspire for scale and actively review its processes to confirm alignment with its scale vision. Each startup by creating delightful products, improving operations, managing cash flow and delivering great products every single time, can stand a chance of scaling in the long run.
In all you do, keep building.
Remember that you only fail when you stop trying.
I am rooting for you.
If you loved this edition, please share it with another founder.
Keep building,
Osita of BlackCrest.
PS: I am going to be offering a free 30-minute business strategy and clarity session to 10 African founders through July.
How to qualify - Repost this newsletter and comment below I am interested and I will send you my calendar link to schedule a time.
Digital Product Designer | Creating intuitive and accessible designs that make products desirable to users
4 个月Early stage founders should see this. Great insights shared.