Infants learn to walk before they run, just as companies need to scale before they expand. Any attempt to rush the process will only result in careless accidents and mistakes. But then the question becomes: how can a business scale responsibly?
Before we can get to that question, we must first define what a scalable business is.
What is scalability in business?
Investopedia defines scalability as “characteristic of a system, model, or function that describes its capability to cope and perform well under an increased or expanding workload or scope.”
So how does this apply to business? A scalable business is one that can grow in revenue or production while cutting or stabilizing operating costs. It can mean achieving economies of scale. Or it can also translate to savings in cost that is proportional to the added level of production.
Seeking to understand what it means to scale vs. grow? Read our previous post, Scaling Your Business.
What does it mean to have a scalable startup?
Let’s explore the implication of scalability on startups and small businesses. We turn to entrepreneur Eric Ries, founder of one of the earliest 3D social networks, IMVU, to guide us. Ries is the author of The Lean Startup, a guide to modern entrepreneurial management. He is also one of the most experienced and authoritative people on this topic.
Ries, along with co-founder Will Harvey, made six important decisions that helped define IMVU as a scalable startup:
1. Their vision for IMVU was transcendent. They pictured 3D avatars and the global availability of virtual goods online. They aspired to build an industry, not just a product or a company.
2. Their goal extended beyond monetary rewards. Rather, it was about achieving growth within their company. And there was never an exit plan to sell the company to make money. They believed their vision and work was either going to be worth a lot more, or worth zero.
3. They envisioned that their tiny startup was to going to be worth $100 million/year. They would achieve this by creating an entirely new market for virtual goods.
4. They used Customer & Agile development to search for a scalable and repeatable business model. It reduced risk while allowing them to aim high.
5. They hired a world-class team, with co-founders and employees who shared their vision.
6. They fervently believed that only they were the ones who could and would make this happen.
Breaking this down even further, we can draw 3 main traits of a scalable startup:
1. A scalable idea will lead to the development of its’ own market, industry, or network.
2. The business model is a repeatable and scalable process.
3. The company has a singular vision that unites a growing team.
Scalable Startup Examples
Some of the best scalable businesses were started with just a vision and a simple prototype. Here are two examples of startups with very different concepts. However, note that they still share the same general spirit.
Even after its acquisition by Facebook, Instagram’s popularity surpasses other social media platforms. And it remains an inspirational example. Kevin Systrom, former Google programmer and Stanford graduate started it all. He first created an app called Burbn, with location-based photos and note-sharing ability.
Soon after, Kevin met Mike Krieger and they decided to hone in on the photo-sharing feature. Since then, the app has gone through several reiterations and prototypes to become what it is today.
Within a few hours, the pair saw the scalable potential of the network. The main costs were the servers and time spent maintaining the app. And costs grew at a steady, proportional rate. Though users continued to sign up for free, ads & sponsorships would eventually generate revenue. Instagram became one of the earliest examples of a scalable social media service.
Consumer DNA tests have become popular in recent years. One of the biggest human genome research companies that serve this need is 23andMe. The company was founded by Linda Avey, Paul Cusenza, and Anne Wojcicki back in 2006. Within a year, they had secured $3.9 million in venture capital.
By 2009, Wojcicki was the only remaining founder. But investor intrigue remained high. In 2012, he raised $50 million, and another $115 million in 2015. With this funding, the company channeled investments into brand marketing. One of their most notable ads was sponsored by the movie Despicable Me and narrated by Warren Buffet.
Last year, a partnership was formed with GlaxoSmithKline. With a funding of $300 million, they’ve started developing new medicine and potential cures using genetics. Today, the company is worth roughly $1.75 billion.
23andMe demonstrates that companies are not always scalable in the first few years. There may still be some hurdles to overcome and reliance on venture capital. For 23andMe, many of the challenges were regulatory. In the early years, the company had a fraught relationship with the FDA. In recent years, this relationship has become much more productive.
Scalable Startup Ideas
We’ve introduced some real-life examples of scalable businesses. Now, here are some scalable business ideas that you may want to explore for your own business.
1. Content and Media
Audiences are always searching for new information to consume. They may look for articles, videos, or podcasts. Ultimately, all examples are the output of content and media. This is part of the scalable process. As you work to build the quality of your blog or YouTube channel, your audience will grow. Continue to create content that increases your authority and helps you stand out.
2. Online courses
If you’re a coach or consultant, one way to make passive revenue is by building out a course on your area of expertise. Benefits to your company are generating revenue and increasing brand equity. Whatever the focus, your users will find tremendous value in quality courses. More people are willing to pay a higher premium for a set of classes than a single ebook.
3. Apps and Software
You can purchase apps or software applications for almost every device. These can include note-taking apps, calendars, organization tools, plugins, and even games. If you’re in the business of app making, continue to leverage this strength. The ROI may continue to support you for years. The cost to create and maintain an app is far more affordable than you may expect.
Amazon and eBay were once unique in that they were the only platforms used to sell online. But entrepreneurs now have a variety of choices. Platforms like Shopify and Magento also allow you to build an online storefront. The best part is that you don’t need to own a warehouse, salespeople, or even a physical store. You save thousands in operating costs. As with the other ideas, expect to see a lot of competition if you plan on entering the e-commerce space.
You want to support a business through growth. But you’re not interested in managing its operations. If this rings true, you may want to consider being an investor. There are various ways for you to do this. You can provide seed funding, manage a portfolio, or trade commodities & currencies. Unlike the other ideas in this post, investing should be thought of as a long term commitment. While profit will take time to generate, the returns will be worth the wait.
How to know if your startup ideas can scale
Perhaps you already have an idea of what you want to do. How can you tell if the idea has the potential to scale?
Above all, your idea must have some basis in truth or data. It provides the foundation for which you can build on. There will always be risks attached to starting and growing a business. But proving the idea, even with few customers, will be an invaluable experience.
Lack of competition
The fewer competitors in your space, the better. Highly scalable businesses tend to be innovators or vanguards in their industry. Because there is not as much competitive pressure, they can price higher. There is also the added benefit of being first to market. Your brand has a greater chance of making an impression. As well, you’ll be at the forefront of customers’ minds.
Strong cash flow
Profitability should not be a metric used to measure scalability. However, cash flow can be used as a determinant of your future performance. It’s essential to gain a solid understanding of the business’ finances. Companies that are built to scale must first master the balance of cost and revenue.
Whether it’s selling a product or putting on an event, you should aim to standardize your process. It not only makes it easier, but it also makes it more cost-effective. Creating this winning formula will carve out your competitive advantage.
Exceeding targets and goals
Every business needs to have a goal — such as reaching one million users or expanding to new markets. If you find that you’ve quickly surpassed these goals, then you may have to reassess your standards. Goals should be hard to achieve. They should push your business to improve and excel.
It’s simple to look at the most famous brands and expect to emulate their process or success within a few years. But the reality is that the competition is as fierce as ever. A stay-at-home parent has as much a chance to succeed as an experienced entrepreneur. Use this as inspiration, and not as an excuse. Scaling a startup requires experimentation, hard work, and above all, patience. Trust in your ideas and your research, and the scalability will come.