Can You Scale It?

David Schonthal and I teach an entrepreneurship class at Kellogg called New Venture Discovery. We have ten themes in the class, one of which is: “What Works in the Lab Must Also Work at Scale.” On that note, we thought it would be useful to share some considerations to keep in mind when scaling your start-up. The information below was pulled together for a growth company CEO who asked to meet to discuss the challenges he was facing in scaling his (extremely) high growth company. In the meeting, we referred loosely to this “punch list” of topics/questions, focusing on the ones most relevant to his business. While the content is full of opinions and isn’t exhaustive, it may be worth examining as your businesses gains traction…

The Market

Is your market big enough to accommodate your mid-range (~3-5 year) growth plans? Is the addressable market big enough (VCs often state they’re looking for +$1 billion markets) and can you make the case for how you might garner at least 10% of it?

Do you have a good understanding of the key market risks that might impede your ability to scale? Often there are one or two lethal blind spots for a venture. (For more on this, see our Fast Failure Is a Success blog entry, paragraphs three and four). Try hard to determine what yours are and how to mitigate them.

Direction

Do you know where you want to take your company?

Is the visionaspirational, memorable and believable? Is the mission, the hill to take, clearly defined? Does your team know where you want to go and do they believe in it? If we walked around your office and randomly sampled employees, would they consistently play back the vision and mission?

Your Value Proposition

Is your positional advantage clear, real, distinct and compelling to your target market?

Are your company’s resources (people and money) focused on reinforcing and expanding that value proposition? If you listed all the activities your team was working on, what percent of the activities directly further your value proposition? For the activities that do not, is there a compelling reason you’re working on them?

The Growth Phase of Your Company

Are you in the “start-up” phase? What resources are needed to get the flywheel really spinning and prove your business case?

Are you in the “early growth” phase? How much can you afford to invest in order to gain presence, generate trial and establish positional advantage?

Are you in the “scale phase”? Have you developed clear and agreed-upon growth strategies that will allow you grab more market share and to realize quantified efficiencies (scale economies)?

Your Organizational Capabilities & Gaps

Do you know where you are most vulnerable from a people standpoint? Where are your biggest talent gaps? Where are your current organizational “governors”—the key choke points, where work is most impeded due to lack of talent?

In hiring, beware of the very real danger of “settling.” Unfortunately, A’s hire A’s more slowly than B’s hire C’s. It just takes longer to find those gems. So you must resist the urge, especially when you’re in that scale-up stage and need people fast, of hiring warm bodies…

Be ready to open up your checkbook when you find a really talented prospective employee who maps well to one of your key competitive points of differentiation. Don’t be penny wise and pound foolish…

Do you have the right reward structure to recruit and retain top talent? (And it’s not just about the money—it’s also about providing them the autonomy to create and acknowledging a job well done.)

How Fast Should You Go?

Can you truly realize a first mover advantage by investing capital in rapid growth (e.g. the network effect realized by businesses like Apple with their closed music system, Open Table’s platform, eBay’s buyer/seller community, etc.)? Or does a more balanced and deliberate growth rate make more sense?

Have you really identified your growth barriers? Are they around consumer/customer awareness and adoption? Improving customer repeat rates? Gaining access to a key channel of business? Operational through-put issues? Or perhaps human or financial capital needs?

What You Measure

Do you have the right business intelligence tools in place to track measure progress? Areas such as:

• Your Dashboard / KPIs / Metrics that Matter
• Do you know your unit economics? Can you effectively measure variable contribution margin?
• Do you know your customer acquisition cost and your customer’s lifetime value?
• Do you have the right operational performance metrics in place (especially on service delivery–Net Promoter Score, etc.)
• Do you have a good understanding of your conversion funnel (and where it leaks)?

Marketing & Selling Strategy

Are you creating powerful selling tools/materials to aid your sales force in their selling efforts? Is the marketing department helping the sales team at the top of the funnel, supplying them with quality lead generation opportunities? Is your sales force incented properly (not just on closing accounts, but on the quality & profitability of their accounts)?

By the way, in our experience, probably the most powerful marketing department is the “customer support department”. We’ve found that it pays to invest in this team, from the quality of your hires to providing them with software tools, effective training, development and performance incentives. See it as a selling/revenue center vs. a cost center.

Keeping the Innovation Wheel Spinning

Have you created an environment conducive to exploring new ideas and taking risks? Is innovation truly valued? Do you have avenues for good employee ideas to receive consideration? How are you creating a “growth mindset” attitude (see Dweck’s Mindset book) in your organization?

It’s awfully hard to work on the future while addressing all the issues you face in the present. This is especially true during the “hot” scale phase. To ensure you don’t ignore the future, you might want to structure your technology development teams around:

1. Product “antes” (current bugs, core functionality, etc.),
2. Product “drivers” (important new features and functionality, etc.)
3. “Testing” (i.e. future differentiators). Be careful—it’s easy to be so focused on executing the core business that test development resources get cut and/or redeployed. The “urgent” often steals resources from the important/not urgent…

Alignment with Investors

Are you aligned with your investors/board on where you need to make investments? Have you brought them along on your key business priorities and where you will be placing your spending bets? Do they understand and agree with your KPI’s / success metrics? Are you diligent about communicating your burn rate?

The answer to all of these questions needs to be “yes”.

A Final Biggie:

The scaling phase is a lot of fun, but it’s also a very stressful time. Be real with yourself on your own vulnerabilities (e.g. do you know your blind spots and allergic reactions?) and how you’re showing up at work. Make sure you have a personal board of directors/mentors you can turn to when you’re under stress and need help.