When to Scale Your Startup and When to Chill Down

January 21, 2016

3:00 pm

In the startup world, scaling is the key indicator of success; a startup that can offer sizable scale in a relatively short period of time often attracts the best and biggest investors. Those companies that fail to grow fast, well, ultimately fail; thus is the inherent nature of the startup. Per the words of  Y Combinator cofounder and partner Paul Graham himself:

“A startup is a company designed to grow fast,” writes Graham. “Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of ‘exit.’ The only essential thing is growth. Everything else we associate with startups follows from growth.”

According to this definition, a “startup” must be constantly growing – in some respect. But, when it comes to scaling your company, how do you know when exactly is the best time? Should you scale only for profitability? Or, can you scale whenever and just make sure that you’re keeping your current momentum? Is fast growth necessarily the best tactic for every startup, or is it sometimes better for a startup to chill down for a bit before taking making any major moves? We reached out to the Tech.Co community to learn what others have to say about when to scale your startup versus when it’s better to ride it out for a bit.

Tech.Co has partnered with Arlington Economic Development to bring you this story.

Take a Good, Hard Look at Revenue and Cash Flow

“In a nutshell, startups need to understand the progression of a stable foundation: 1) predictable revenue, 2) sustainable revenue, and 3) scalable revenue. When startups focus on first understanding when revenue is expected, they can then create a foundation to sustain revenue necessary to stabilize. When they understand how revenue can be predictably generated AND sustain their existence, scaling is now possible.

Startups also forget to take into account proper cash-flow management. Typically costs associated with revenue acquisition / growth occur first – before the realization of that expenditure. The time period between money spent and investment recuperation can be a dangerous place. By managing cash-flow properly, focusing on predictable revenue, then sustaining revenue, companies can be in a position to scale for growth in a stable way.”

Christiano Ferraro, Managing Member of Christiano Ferraro Consultancy

Don’t Stay Put and Wait

“We’ve found that for our business to be successful there is no right time to ‘stay put and wait.’ We must keep moving the proverbial ball forward in order to progress. This helps us to create campaigns to stay relevant with our customers, engage in new customers, and innovate new products.

We feel there may be a point where we’ve saturated the market someday, but with 150 million male Americans in this country who are potential customers we certainly haven’t hit that point yet.”

AJ Fountain, Co-owner and president of Dr. Squatch Soap Co.

First Ensure Product-Market Fit

“The right time to scale is once you’ve achieved product/market fit and have implemented a business model that allows you to acquire customers at a profit while still delivering on the customer benefits and value that got you here in the first place. To achieve product/market fit you need to prove that there is sufficient demand within a target market segment to justify the spending of capital (human and financial) before scaling the company. You should be asking yourself the following questions to measure product/market fit:

  • Are you getting new customers with little to no marketing strictly through word of mouth?
  • Does your sales cycle take too long?
  • Are your conversion rates above/below industry standard?
  • Are you getting exciting press reviews and interviews?
  • Are you struggling with holding sufficient inventory?
  • Do you need additional sales and customer support staff to satisfy new
    customers?”

Tyler Jensen, CEO of The Startup Garage

“The right time to scale up a startup is actually very simple has the product or service offered by the startup been validated? In this case, validation refers to the indication that customers/client want or need the product or service offered and are willing to pay a price for it that covers both cost of production and a sustainable profit. Many startups seek to move too fast and don’t satisfy this critical step. Once validation is proven, then it’s merely a matter of building infrastructure to fulfill the established demand.”

Daryl Gibson, Founder of Innovative X

Wait Until You Have a Sustainable Model That Can Be Replicated

“We’ve actually faced this question many times. We’re currently only servicing NYC restaurants; however, we have received inquiries from restaurants outside of the NYC market. While it’s tempting to pursue those leads, we’re just not ready to dedicate resources to other markets. Growing too quickly could result in spreading ourselves too thin and ultimately failing to build a stable business in one market, which is required for success. In our case, it’s best to focus on NYC until we are confident that the model not only works here, but that we can successfully replicate it in another market.

Generally speaking, there is no ‘perfect’ time to scale as there are almost an infinite number of variables that impact scalability, including human and financial resources, product/service offering, competitive landscape, and geographical and logistical challenges. But as long as management unanimously believes that it can generate a near-term ROI on dedicating resources to scaling – without sacrificing current business – then the company is probably ready to scale.”

Rob Edell, Founder and CEO of Servy

First Get a Firm Understanding of Your Current Market

“When you have proven out on a small population and you have a good understanding of the market, you can then start scaling. Everything is different at scale, so we found best to scale in phases, make adjustments, and then scale again.”

Gregg Weisstein, Cofounder and COO of BloomNation

Ensure You Have the Necessary Infrastructure in Place

“The right time to scale your startup is when you are confident you have the infrastructure in place to rapidly scale. The worst thing an early stage company could do is get get a major publicity boost or spike in volume, and then not be able to deliver. Just as in person, first impressions matter, and you do not want to be the company scrambling to meet customer demand, not conveying the best possible user experience. Put in place a solid foundation, ideally with high variable costs, then you hustle!”

Miriam Diwan, Cofounder and CEO of NowMoveMe

The Cost of Acquiring New Customers Should Be Low

“If you find your cost of acquisition for new customers abnormally high it could very well be a sign that what you are selling isn’t as needed as you may think. Without massive capital to burn on advertising, you will need a product or service that excites your customers and spreads via word of mouth. If you have yet to succeed in evangelizing your current customer base, it may not be time to think about scaling just yet.”

Joe Speiser, Cofounder of LittleThings

“Scaling up is all about repeatability, so nothing matters more than the unit economics of customer acquisition. Simply put, unit economics describe the cost/benefit ratio of adding a new customer. If you have a channel where you can put more money to work and it’s allowing you to earn back more money than you spend, you are justified in scaling up your investment in that channel. However, if you haven’t created a repeatable process yet, you can probably invest more energy in getting that nailed down before you spend money making it grow.”

Robert J. Moore, CEO of RJMetrics

Can You Afford a New Business Model?

“The first question is: can you afford to scale? Scaling up means more income, but it also means bringing on more expense. If you scale up but fail to reach your expectations, scaling down usually means letting employees go. That can be deflating, both internally and externally. Your team will definitely be somewhat demoralized, and clients and business partners might consider your business to be failing, even if you’ve grown compared to where you were one to two years ago. Often, cutting back can hurt your business more than the balance sheet shows.

The second question is: how will your business model function when you scale? Many startups start scaling before taking a serious look at how their business model will work as the company grows. That means asking questions about demand, profit margins, suppliers, and other factors.

Scaling is a great way to make your business more profitable, but often it creates
more problems than it solves.”

Marc Prosser, Cofounder and Managing Partner of Fit Small Business

“It’s never too late to scale, but first you need to justify scale with the right business model. If you are giving away your product you will scale quicker but we ask companies to make money and scale with actual paying customers. There is a lot of risk with growing startups and having scale in the correct business model shows that you are on the right track.

I have seen one of my portfolio companies go to Kickstarter with too high of a price point but once they adjusted they were able to scale accordingly.”

Shaun Arora, Cofounder and General Manager of Make in LA

Deeply Analyze Your Performance

“Startups are ripe with data yet they often fail to investigate trends across data sets. As a result, they miss out on opportunities to learn what they’re doing right and, perhaps more importantly, what they’re doing wrong which can be detrimental when it comes to scaling up. Before any major growth change, here are some things to consider:

  • Revisit your KPIs every month to ensure they’re still a good fit for the long-term success of your business.
  • Get an outside perspective on the inner-workings of your business and data.
  • Establish more specific performance indicators.

By leveraging your data more efficiently, startups will have a better idea as to when they’re in a good position to grow.”

Michael Burdick, CEO of Paro

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Ronald Barba was the previous managing editor of Tech.Co. His primary story interests include industry trends, consumer-facing apps/products, the startup lifestyle, business ethics, diversity in tech, and what-is-this-bullsh*t things. Aside from writing about startups and entrepreneurship, Ronald is interested in 'Doctor Who', Murakami, 'The Mindy Project', and fried chicken. He is currently based in New York because he mistakenly studied philosophy in college and is now a "writer". Tweet @RonaldPBarba.

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