When Should Startups Prepare for Scalability?

Most startup founders dream of growing their small two-person venture into a $100 million business extending across three continents. While staying afloat may be the current challenge, startups see the importance of scalability.

Martin Zwilling, a veteran startup mentor, explains that scalability means “your business has the potential to multiply revenue with minimal incremental cost.” A scalable startup possesses a proven product and business model. If your business has the capacity to develop into new markets or geographies, then the time is ripe to begin expanding.

However, a major issue haunting startups is “premature scaling.” Surveying more than 3,200 startups in 2011, Startup Genome found that 70 percent failed because they tried to scale too early.

So, how do you know when it’s the right time to begin scaling? Here are four business indicators to keep you on the path to success:

  1. Solid Revenue Model

Are you generating revenue? Is every dollar accounted for? If you’re unsure, it’s time to look at the numbers and create a predictive model.

Match each activity, expense, or metric to a dollar amount. Based on your startup’s constants, you should be able to predict your revenue. You want to establish a relationship between inputs and outputs.

For example, making 200 outbound sales calls yields one new customer on average. Or, for every 500 unique visitors to your site, your business gains five customers. It’s critical to zero in on the activities or metrics that lead to revenue.

Moreover, are you receiving a steady flow of customers from unexpected sources? It’s always a good sign when people are actively seeking your product or services without much effort by your teams.

Be sure to track your orders and ask customers how they heard of you. Gauge your reach with software platforms, like CoolaData. It’s vital to your startup’s success.

  1. Positive Cash Flow

If your business scales to quickly, you can dry up your cash without even thinking. You won’t have the wiggle room to learn from your mistakes and evaluate past actions to chart a new path.

Therefore, it’s smart to save cash whenever possible. More cash means more possibilities to learn about your customers’ needs and how your products and services fit into the market.

In a gist, your business needs a steady flow of cash. You need to pay recurring bills, employees’ salaries and benefits, and services to keep your brand alive. Make a list of your startup’s one-time and ongoing expenses, and then figure out how much it will cost to run the daily operations.

Check out the SCORE’s break-even chart. It will help you track your profits and identify opportunities of potential growth. When times get rough, save at least three to six months worth of cash to keep your business moving forward.

  1. Presence of a Core Team

Have you built a tight-knitted, trustworthy team? Beyond our society’s fascination with technology, people are the real reasons how and why startups become successful.

It can be difficult to find the right people with the right skills at the right time. Work your network and ask for referrals. Aim to hire smart people who believe in your business’s mission. Great teams work fast, predict future trends, and achieve results within a fun environment.

The lean approach is the best model to follow. Entrepreneur and angel investor Neil Patel suggests that startups outsource all non-essential roles. You don’t need a legal department within your graphic design firm. Focus on nailing your core competencies and outsource the rest.

As your business grows, your core team will become the first managers and ambassadors of your brand. So, it’s up to you to develop their skills and retain them.

  1. Growth Mindset

Scalability is a mindset. As a startup founder, it’s important to build a culture around innovation, challenges, and results. Individuals who fail to instill a growth mindset into their team find themselves struggling to gain buy-in from their employees.

While focusing on the daily operations of the business, it’s also important to think about the growth phase. Former United States President Bill Clinton said it best: “The price of doing the same old thing is far higher than the price of change.”

When considering the future of your startup, calculate for future trends and the development of new technology in your industry. Don’t get flustered by the data. Instead, take advantage of behavioral analytics infrastructure, like CoolaData.

You can’t prepare for everything, but a solid plan can keep you advancing if disaster strikes. Build a strategy that centers around progress.

 

Final Thoughts

Most entrepreneurs are eager to reach the growth phase. Scalability can be both exciting and terrifying. However, even if you desire expansion, you must understand the risks associated with growing too quickly.

Carefully evaluate the factors involved before taking your startup to the next level. Then, leap into action!

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