The inevitable mess of scaling

Once you start scaling be ready for an even bigger mess than you had before. Startups are sporadic, unpredictable and messy by definition; in the beginning they are focused on existential issues of survival and have no time to polish things in a nice and shiny way. However, once things take off, the real stuff hits the fan, and sometimes with incredible speed, frequency as well as breadth and depth of the resulting coverage. In the beginning it’s not that big a deal – after all it’s a quality problem to have, especially compared to the previous goal of not ending up dead…. But as things grow, they tend to get harder to control and fix. I myself have never died within inches of the top of mount Everest, but I would imagine it comes with certain degree of frustration…

So, at some point you are better off addressing the problems that surround scaling en masse. This will not be the most exciting post with a lot of mundane stuff. But – you wanted to scale, right? Well, that means things become more detailed and more mundane in most cases. Deal with it or hire someone else to do that.

Unit economics. I hold a sometimes-unpopular view that scaling a revenue stream that costs more than it brings is not a smart thing. You wouldn’t do this at home, would you? So, you need to either make money on each unit sold or you need to see a path to that with increased volume. Otherwise, you are scaling giving money away – which is hard to finance (or will become so later). There is one exception to this rule – “winner takes all” industries, where leading position in the market vastly changes unit economics for the leader, while those in positions 3, 4, etc can´t survive. Hence in those industries there is an arms race to outspend competition and buy market share to become number one or two. They get rewarded (and often increase prices after the arms race is over to improve unit economics). But this is a dangerous race since in some cases “the wonderful future” is erroneously painted in place of reality and some (and sometimes all) participants never live to see that future.

Changes at the top. More often than not people who started the company and got it to its first sales are not the types to enjoy turning the handle in a predictable way and squeezing 5% of additional efficiency. And more often than not they, to put it politely, suck at it. Depending on circumstances and personalities this could result in a bloodbath or an orderly transition.

I believe that your startup should at some point be able to function without you, only then it is truly scalable. As much as it pains you to let go, that’s the only way to build a big and sustainable company. Raising children is a good comparison.

Organisational changes. There are only so many hours in a day and so many people one can manage effectively. So, at this point a management layer is typically built. That brings a whole lot of questions – from personal fit, to company culture, to having to delegate. Not easy in most cases.

Culture. No matter what you do the culture of the company will change. You will probably be nostalgic of the early days when all five of you spent a night in the office to finish something to a deadline. As the number of people grows, different characters come in, some will enjoy night rushes to deadlines, but some (weirdly) will prefer to put their children to bed. There is a huge risk of people not fitting, clans forming, blame thrown around and a lot of similar niceties developing. The trick is to evolve the culture to keep the original core, but accommodate for different personalities and working styles.  

Marketing and sales machine. You need to know where to direct your marketing dollars and efforts of the sales team. Which means you need to know what works and what doesn´t. You can and should experiment with this, not everything would work, but there must be a core direction that you understand and control. Otherwise, you are burning money for nothing.

Metrics. The company should shift much more towards being managed by metrics. It’s hard to understand and grow bigger volume without them. And it’s even harder to catch underlying trends – which may be life-threatening, both in good and bad ways. Sales slowdown with continued hiring or working capital problems from faster growth could be pretty hard to manage.

Cash flow. You need to be in control of your cash flow – at least to a large degree. Things like controlling costs, being able to predict cash flow with relative accuracy will help to focus on scaling - and most importantly not run out of cash unexpectedly. If you need more money, it will probably be available. But if you run out of cash unexpectedly it may come with “an offer you can’t refuse” and results of many years significantly diluted. Note, that I am not talking about “low cash burn” (or “high cash burn” for that matter). It can be both. I am talking about controlling and forecasting cash at whatever level of cash burn you have.

Communication. Depending on the size, this could be already in place, but even then, it’s likely to need some attention. It never stops amazing me how much communication employees need – it’s never enough.

Processes. The company is bigger and does different things - rinse and repeat rather than creative search for “believers with buying power”. Hence, it needs different structures and processes. In some cases – first formal processes, first growth of the backoffice, first systems. Somewhat obvious, but often forgotten. So, you are likely to either put in place first formal processes or have to redesign the ones you have. Booooring, I know.

Competition. You are more noticeable, so you will be treated differently. Toughen up.

Product. Vision and inspiration are great, but with a growing customer base, someone needs to both listen to it and manage the product with that input and vision in mind. Ideally you want to keep both vision and methodical product management. Damn, another process…

Funding. Different investors come into the picture. Growth investors are as different from seed investors as founders are from the public company executives. Plus, different ways of financing (less and less dilutive) become available.

Overall, you won’t get all of these nicely in place. It’s impossible. Even if things work, you don’t yet have the resources, time, understanding of how they should function. But if you get most of these points to function to some degree, you are doing well. 80-20 rule is as useful here as anywhere else.

Checklist

• Have you achieved previously set goals? Or, rephrased, do you have PMF?
• Are you in control of the product and the channel through which you plan to scale, can you steer and predict them?
• Do you have the people and the orgchart needed for growth?
• Can you delegate (i.e. are you capable of doing it) and do you have people to delegate to?
• Do you have the metrics to monitor nailed down?
• Do you have the systems and processes for a larger company with higher velocity of everything?
• Do you have enough cash or can you get more when needed?

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