[Edit Notes: How to scale, when to scale and what to scale? These questions that haunt an entrepreneur all the time. While there are no hard and fast rules, here are some pointers from the folks at Commonfloor.]
Starting a new venture is like raising a newborn. The initial stage of the journey is often emotional, challenging and in several cases, chaotic. It requires the founding team to invest a lot in terms of time, resources, emotions and their very future. Therefore, it is obvious that as the start-up surmounts its initial challenges and is all poised to move into a phase of expansion, decisions pertaining to scaling tend to be more emotional than objective.
While at one end the need for expansion is a sign of success, at the other end it is a compulsive requirement necessary to get right for growth and survival. The timing of scaling is the most important factor here. Scaling too soon will result in waste of resources as the market may not see adequate demand for your offering/product yet so investment in infrastructure will not see appropriate returns. While putting off scaling for too long may result in competition taking over markets in other regions and eventually taking over one’s home turf too.
In order to determine the need for scaling, founders needs to look into 3 major aspects of scaling:
1) When to Scale up?
2) What to Scale up? and
3) How to scale up?
When to Scale?
As I mentioned earlier, scaling is a sign that the hardwork put in by the founding team has come through and the venture is all poised to move into the next stage of growth. However, before the founders decide to get into the expansion mode, they should assess their business and ask themselves a few critical questions.
First, are they confident that their product is reasonably well accepted and has received a good response from their target audience?
Second, have they ensured that they have taken the necessary steps to ensure efficiency across all aspects of the offering like pricing, packaging, distribution and renewal? Pricing should be acceptable to the clients, both in the old and the new markets, while still ensuring a reasonable profit margin.
Third, has the founding team ensured a steady pipeline of orders from the home market? Expansion requires heavy expenditure. While one can plan for the basics in advance, it involves quite a bit of unforeseen expenditure as well. Therefore, it is necessary that a certain level of cash flow is ensured every month.
Finally, has the startup reached the break-even point in its home turf? This is necessary as otherwise; expansion will lead to all markets becoming cost centers. This is not a good situation as it can take a toll on the cash flows, seriously limiting a startups’ ability to grow even in the home market. Also, a good conversion rate and 50% renewal rate is imperative to estimate the efficacy of sales efforts.
What to Scale up?
This question is applicable to entities that offer multiple offerings. While choosing which offering to scale up, one should ideally select the offering that sees maximum demand. This must be followed even if this means picking a lower margin offering over a high margin one. Once the product choice is made, at least two new markets should be zeroed in for a launch. One market selected could be similar to the home turf in terms of proximity, size and consumer preferences.
The other market however should be as different as possible from the home market. While one can quickly grow and consolidate presence in the market that is similar to home leading to better cash flows, the market that is new will provide enough opportunity to understand how a product needs to be altered or presented according to local requirements. This learning will go a long way when one charters unknown waters in future again.
How to Scale up?
Before one starts to scale up, it is important to garner strong intelligence on the new market. A whole host of questions need to be asked across all business domains like product, marketing and HR and a strategy needs to be put in place. Is the market buyer or seller dominated? What kind of pricing and packaging is prevalent in the market? Who are the competitors there? What are their strengths and weaknesses? How do they operate in the market?
These are some of the questions that will provide greater clarity. Once this information has been collected and most market attributes have been identified, scaling must begin with bringing in the right talent.
The foremost step is building of the sales force. Apart from laying the foundation for new business, a strong sales team will also give a good indication of market demand and how soon would expansion of other organizational functions be required. In terms of office infrastructure, initially, cost pertaining to office space must be kept as low as possible.
Marketing budgets should follow successful lead generation. While it is fine if the product/service offers a thin margin in the beginning, a plan has to be there to ensure one gradually moves on to a revenue and profit generating model. It is also extremely crucial to have a target/deadline to hit the break-even point. Progress towards achievements of this target must be monitored closely and regularly.
Sustaining the tempo
Bringing in the right sales force with the right experience, dedication and temperament is important. However, many a times, finding the right talent may be tough as professional working with established brands may not want to take up working with a new entity. Despite these hurdles, one must focus on getting the right work force, even if this means offering salaries higher than industry standards or getting established company professionals to relocate to the new region.
Once the sales team is established, it is imperative to monitor the progress of new sales personnel in this new region to ensure that they in sync with the overall company strategy and also in line with the company’s plans for the region. Timely communication with newly hired personnel in new regions is crucial for them to feel connected, motivated and responsible. Also remember that these new sales personnel face a challenging task in front of them. Making them feel responsible for company’s success in the new region is therefore just as important as making them feel trusted, valued and motivated.
While marketing budgets could be given post successful lead generation, the new sales personnel must receive adequate support from the corporate marketing department in terms of guidance, collaterals and branding. In the end, every region has its own challenges. As entrepreneurs, our job is to assess the market well, plan accordingly and execute the plan to the best of our capabilities.
Even after all this, we may come across unforeseen risks and challenges and may to have change our plans midway. But isn’t this risk what makes entrepreneurship worth it?
[Guest article by Vikas Malpani, Co-founder, CommonFloor.com and Head CommonFloor Groups.]