The goal of many startup companies is to become a scalable business. Unfortunately, there is some confusion about what it really means to scale up.
Scalability is often confused with rapid expansion. While this is an important factor, it is not the complete story.
There are four key factors to scale up your startup:
- Growth: Many businesses expand in a linear fashion, where costs and revenues grow together. Regardless of what that potential is, it does not represent scalable growth. Potential growth must not only be rapid, it must entail increasing profitability from the revenue generated.
- Demand: The key is significant monetizable demand. While scalable business models have the potential for earning high profits, that potential is only fulfilled when demand actually drives revenues up.
- Costs: Companies that have a very low cost-of-goods-sold have an opportunity to be a scalable model. A scalable business model generates increased profitability without a linear relationship between cost and revenue. In other words, the ratio of cost to revenue decreases as sales increases. Increasing profits margins drive significant profit growth.
- Structure: When a company can quickly “scale up”, it usually means it has the structure, management and business processes to manage its own growth. Many startups hit a ceiling because they are too dependent on the owner or founders. They have not been built to scale up. If the founders cannot be taken out of the picture in the future, the company is simply not scalable.
Scalability is the holy mantra of investors. This only occurs if there is a conscious effort from the beginning of what that will take and a concerted effort to put those building blocks in place. This is the key to getting startup funding.