Deciding when to scale: 3 big questions every tech startup needs to ask
- January 22, 2016
- Posted by: admin
- Category: Funding trends, Uncategorized
Every tech company CEO has a vision at the outset. “By year three, we want to have this many users. By year five, we will have reached our target profit margin.”
And with the resources available today, startups have never been better positioned to reach these goals. According to CB Insights, the cost to launch a tech startup was $5 million in 2000. But now, with the help of cloud-based tools and open-source software, it can cost as little as $5,000. And thanks to the wide adoption of social networks and the acceptance of global e-commerce, historically common barriers to scaling a young tech business have been broken down.
But how do you know when the time is ripe to grow your business? In my experience, the answer lies within three very important questions.
1. How stable is your business?
Say you want to go into five new international markets. You need cashflow, access to capital or at least a cash cushion to make that happen. To reach a level of predictable income, you may find that before setting goals for increased profit margins or the growth of your client base, you need to focus on customer retention. Bear in mind that depending on what industry you’re in, acquiring a new customer can cost anywhere from 5 to 25 times more than retaining an existing one. A new investment can carry a great deal of risk without the certainty your current client base and the dependable cash flow that comes with it.
It’s equally important to remember that stability isn’t just about money: it’s also about people. Do your employees have the talent, knowledge and bandwidth to take on new business? Do you have high employee churn or a lot of newbies on the job? If so, this may not be the best time to introduce the chaos that often accompanies rapid growth. Make sure you’ve got the people and the processes in place to keep your ship on course, whatever comes your way.
2. What’s the market outlook?
After taking a good hard look internally, it’s time to take a pulse on the market. To be successful in this exercise, you need to truly understand the pain points that your solution addresses. Is it a systemic issue? Something that happens seasonally? If these pain points have staying power — and you’re addressing them more effectively than your competitors — then that’s a good sign.
Next, you need to step back and look at the big picture. The last few years have had their share of economic uncertainty. If there appears to be some global instability, certain sectors are crashing or economic signals don’t look promising, it may be counterintuitive, but ask yourself, “Is this an opportunity?” For instance, if your company serves the pharmaceutical sector and you’re seeing a pattern of mergers, and subsequent downsizing, then tech solutions like yours may be needed to help fill resource gaps, integrate systems or facilitate operational harmonization. Remember, where you see fault lines in your market, it’s possible that your solution is the glue needed to fill the cracks.
3. How efficient are you?
When I ask this question, I’m not only talking about how streamlined your operations are but also how cost-efficient your business is. If you are operating efficiently but have terrible margins, then throwing more money into the mix won’t help. And if you have the margins but are maxed out on capacity, then how can you possibly scale up?
Before you plan to jack up your prices or schedule a job fair, consider the technologies being brought to bear in your industry. According to a joint survey by Tech City UK and Stripe, there are a set of around 200 cloud-based tools — which they call the “startup stack” — helping transform operations across sectors. Eighty-nine percent of survey respondents said these tools, which include everything from Slack to Hubspot, made establishing and scaling their business easier, and 85 percent said they made it cheaper.
So, review your SOPs in R&D, sales and production. What areas could use improvement? Then, consider which technologies could help you run more efficiently — today, tomorrow and when you are four times this size.
The unscientific method
These are the big questions that are going to give you the objective data you need to make an informed decision. But there’s also going to be a less calculated factor to consider: your gut.
You know your company best, and only you can know whether your business is truly poised to take your next big leap. Underneath the assurances of cash flow summaries and projected income graphs, is the unpredictability that comes with scaling. In the end, you need to be both confident in your people, operations and product — and simultaneously willing to change what you are doing, how you are doing it and the people who are doing it for you. So, be sure of what you’re starting with but invest in what’s needed to remain nimble, because what got you here today may not be what helps you reach the greater successes of tomorrow.