In honour of Scale Up Week, Simon Philips, CEO of ScaleUp Capital shares his tips with Business Leader on how to grow your digital business.
Start-ups are creating and developing a new, often unproven, product or service, sometimes even creating a new market. It is an exciting and creative process but high risk due to the number of uncertainties. Scale-ups are at the next stage, where the main measure of success is accelerating and sustaining a high level of profitable revenue growth until the business has enough critical mass to be sustainable and defensible.
At the end of the start-up phase, the product and market are proven but the business is not yet fully formed to make the most of the opportunity. By this point most of the invention risk has gone; instead the risk lies in trying to scale the business.
Scaling a business is not easy. These are the adolescent years when a business will go through more change than at any other time. At the end of the scale-up phase, you will have a business that is robust and resilient, growing fast enough to reach escape velocity and with enough critical mass to be profitable.
The name we give to businesses that are entering this scale-up phase is “Scalers”. Our experience has been with digital B2B businesses, but many of these lessons are applicable to businesses in other sectors.
Qualities of a role model Scaler
A role model Scaler has a simple pitch that convinces large numbers of customers to buy their killer product or service which solves a big and painful problem and keeps these customers for the long term.
Role model Scalers will have the metrics to prove it. They will have attractive unit economics with a Customer Lifetime Value (LTV)/Customer Acquisition Cost (CAC) well in excess of 3x. The very best are >10, and some real stars can be >25 or even >100. They will have a scalable model for both customer acquisition and product/service deployment, meaning they can readily crank the handle to do both of these in much higher volumes. There will be enough customers in their addressable market (TAM) to enable them to build a big business. Enough of these target customers will be greenfield, meaning they will not have a comparable competitive solution already. Preferably comparable competitors will be few and far between, or at least not too far ahead. In ideal situations, the TAM is way larger than the actual current market size, indicating that current market penetration is very low, and the bulk of the market is unaddressed greenfield.
The scale-up phase is a window of opportunity to shape your business to be as close as possible to this role model while you are still small enough to be agile and nimble. Once the business infrastructure is in place, it is much harder and more costly to pivot and reshape it so it’s important to get this right early on.
How to go about scaling up?
- Ensure you have a deep and accurate understanding of customers and the market because you will be making your big bets and investments on the back of it. Start-ups are often characterized by a trial-and-error exploratory hunt for business and you may have stumbled across different target customers and user cases. List these out and profile them very clearly and specifically. If you don’t have all the information, then conduct customer and market research to plug the gaps.
- Focus on the best user cases where you are solving big and painful problems that deliver outcomes for customers that are far more valuable than the cost. Check there are enough customers out there with these user cases for you to build a large enough business. Ensure the market isn’t overcrowded with competitors and has sufficient greenfield opportunity. This is the sweet spot to laser in on.
- Develop and build out your product or service to be the best in the market, at least in a few crucial ways that enough of these target customers really care about.
- Shape the packaging, pricing, delivery and sale of the product or service so that the revenues are recurring by nature – subscription, SAAS, managed services, long-term contracts, high switching costs. Otherwise, ensure it is an ad-hoc purchase which is inherently designed to encourage customers to come back time and time again.
- Refine the elevator pitch until it is simple to the point where anyone can pitch it and immediately understand it.
- Build a small customer acquisition machine to make the pitch in large enough volumes to people with the right user cases. You are unlikely to get this right first time so prepare for trial-and-error, focusing on pace and rigour. Measure the effectiveness of each iteration of the machine by calculating the LTV and the CAC and the underlying KPIs which drive these. Be scientific. Keep refining until it is optimized. This will avoid wasted time and money further down the track.
- Once optimized, build up the customer acquisition machine. Hire more salespeople. Add more partners. Spend more on lead generation. Build the machine and keep measuring your metrics to ensure they remain strong. If you haven’t successfully completed earlier steps, then you may see a drop in the LTV/CAC as you try to scale things up. If it drops too far then you will need to circle back to repeat some of those initial steps before going any further. If not, then keep cranking up the handle and enjoy the ride as you accelerate towards escape velocity!
- Beyond customer acquisition, increasing the lifetime value of a customer is the holy grail. You want to charge more year-on-year, increasing the average order value and customer retention rates. Get into a virtuous circle by reinvesting enough cash flows into targeted improvements to your product or service so that you get better as you become bigger and more valuable to your customer.
At the start of the scale-up phase, founders or a few key managers are usually pulling all the levers, doing many jobs at once. This isn’t scalable. New skills and new people are needed to build out the management team which can implement the systems, processes and governance to enable the business to change gear.
Don’t undercook the management team to save a few pounds. Strong talent makes all the difference. Equally, don’t overcook the team or recruit too far ahead of the curve. Bringing in big guns from big companies too early on usually fails. Founders often hold the magic sauce so keep them at the heart of things even if they aren’t running the business during the scale-up phase.
At the end of the scale-up phase, you want to have a strong, skilled management team and the right people in the right roles doing the right things across the business. You want everyone to know what they are doing and why, individually and collectively.
Few businesses entering their scale-up phase will have all the attributes of a role-model Scaler, but as long they have enough of the fundamental qualities, there is potential for growth. With the right raw material and underlying quality, the rest is all about execution. There is method to scaling a business. It can be boiled down to systematic phases and workstreams with a relentless focus on product-market fit, customer acquisition, customer lifetime value and talent, all governed with a KPI and data-driven approach. Underpinning this execution should be a culture where your people are highly-focused, driven by a common purpose and a desire to the be the best.
This is how you scale-up.