Growing from a startup to a scale-up
In this article - the last in this series - I am going to look at scaling your business and the fact that growth is often the hardest part of the startup journey.
Over the previous articles in the Mentor series I have covered many of the topics that I as a mentor get asked and early stage businesses often want assistance with, or areas that I try to suggest that they should consider.
By the time that you have considered many of those areas, and acted on at least the majority, then your startup business should have become an early stage business and will be growing. But growing brings its own problems and rapid growth potentially brings bigger problems, so it is important to make sure that any potential problems are identified in advance, thus making them known challenges with known strategies and solutions. And scaling a manufacturing business is often more problematic than scaling a service business.
Typical areas that will need to be addressed are:
- Hiring Staff: when / what level / what remuneration? As a startup the founder often does everything but with growth comes the need to delegate and find other capable assistance
- Production: how far can you increase production before having to make a step change such as move offices / production and make further investment into fixed costs?
- The higher your fixed costs are the higher your risks of a downturn in sales are, so how much can you scale whilst not committing to fixed costs, i.e. can you lease or hire rather than buy?
- Expansion often means a wider product or service offering so more complicated supply chains. How do you control these and can your suppliers cope with the increase?
- Procedures, accounting and all back office systems need to be improved as well as making sure that VAT and all other tax and similar aspects keep pace with expansion
- Do you need to raise another round of funding to fund the expansion? Inevitably investment will be required and you will incur more trade debtors so squeezing cash flow. Can this be financed from internal cash flow or not?
As the company grows, you as the founder will need more high level and / or specialist support to assist with some of the bigger issues and it is often a good idea to get some Non-Executive Directors (NED) on board (that is, they do not play a day to day role in the company but are there when required and maybe a few days a month, to help drive the company forward). These are often best if you know them and their background, and they know you and believe in the long term future of your business. In this position it can often be sensible to agree some form of shareholding or share options in lieu of payment as this helps to preserve the company’s cash and at the same time ensures that the NED is locked in to ensuring the growth and success of your business.
Over the years I have seen many good startups fail because the founder has refused to either delegate or listen to advice, or, even more commonly, to sell any equity that will inject funds in order to allow the company to grow properly. The best and most forward thinking founders are those that accept that they may not necessarily be the best person to make all the decisions once the company grows. Retaining 100% of a small company, or worse still a failed one, is of course much less rewarding in every way than holding a smaller percentage in a larger, thriving business.
With some businesses, or in some sectors, scaling a business is critical. This is typically where barriers to entry are lower and the threat of meaningful competition grows quickly – if you do not exploit the market opportunity then your competitor will. This can be especially true in the fintech sector for example.
Having the foresight to know that the challenges change with each step of your startup journey enables you to plan your strategy and finances accordingly and should ensure a much smoother ride and greatly increase your chances of success.
Whilst this is the last article for now in the Mentor series, I will continue to write regular articles here aimed at early stage businesses but they will have a much broader topic area and so will enable me to explore all those other areas that are of interest such as payments, using blockchain, IP, grants and a whole lot more.