Scaling your business refers to the concept where increasing the business revenue outweighs the new costs. The fundamentals of scaling an organization are based on three things: capital, speed and efficiency. How much capital a company has available determines the ease of scaling; navigating challenges, hiring the right people and expanding operations. The speed aspect determines how quickly the company adapts to and captures new growth, and the efficiency aspect determines how optimized the company remains as it scales.
There isn’t a one-size- fits-all solution when it comes to scaling as there are many variables to take into account. In general, there are 4 different types of scaling: bootstrapping, slow scaling, fast scaling and blitzscaling.
Bootstrapping is an approach to scaling that prioritizes organic growth through the internal means of the company. This type of scaling is typically slow or moderately paced as it depends on the product, how creative a company’s marketing is and whether their business solutions are inherently scalable such as the business model of SaaS companies. The benefits of bootstrapping include: being the default state for most businesses as it doesn’t rely on external capital, a greater focus on the customer and increased founder freedom due to less pressure from stakeholders and external entities.
Bootstrapping a company involves growing and scaling the company at first through the founder’s funds, but eventually through reinvesting the profit from servicing customers. Although there may be some capital needed at the start, it is the most accessible way to start and grow a business. Not every entrepreneur has the product, market or network that is needed to receive institutional financing, but they still may be serving an important niche. In this case, growing organically is the only option. As the scale of the operations are more confined, there is also less likelihood of running into talent shortages or lacking the leadership to manage a fast growing organization.
For companies that are not taking external funding, their focus has to be more geared towards the customer experience. The customer is the only group that is bringing cash into the business which means that more focus and care has to be placed on retaining and servicing them. Paul Graham said it best, ‘’ I have never once seen a startup lured down a blind alley by trying too hard to make their initial users happy.’’
As there are also no capital injections to test new marketing channels or add unlimited features, entrepreneurs that are bootstrapping need to be very receptive to the customer at all times, even going so far as to consult with them on key decisions. This intense focus can help create a distinctive brand and a loyal following.
The problem with other methods of scaling such as fast scaling is that entrepreneurs often lose control as they bring on investors. As customer scaling is self-funded, entrepreneurs gain the benefit of retaining control over their brand, operational execution and their strategic vision as the company grows. In a similar way, there is less pressure both externally and internally which is associated with the growth needed from investors.
This pressure can completely change the dynamic and culture of the company, particularly when targets not being hit could mean the company implodes. For example, Github was able to leverage the low scaling costs and grew organically, though they did take funding in 2012. Similarly, the women shapewear brand, Spanx, has remained completely bootstrapped up until this date, despite their impressive size.
Slow scaling is similar to bootstrapping and shares some of its benefits. The key difference is that companies who choose to scale slowly may take on external financing to supplement customer growth. This typically will come in the form of bank loans which means companies in this category usually already have sound fundamentals and use external financing for strategic reasons, as opposed to purely for growth. Financing may also come in the form of venture capital, but only after the company has bootstrapped after a significant period of time. In this sense, slow scaling companies are essentially bootstrapped companies that delay funding.
Scaling slowly is arguably the most balanced way to scale a company, leveraging both capital investments with a solid customer focus. This leads to better decision making and a longer time frame which allows the company to scale smoothly.
As the emphasis isn’t on speed, companies that scale slowly can put a greater focus on efficiency. This has a number of effects. First, companies that are scaling too fast can often create a disconnect with their early employees. People function best at different stages of a company lifecycle, with early players typically preferring more freedom and late comers being more used to structure. Scaling at a slow pace can allow your best people to adjust as the company grows so that you don’t have to cut them loose.
Second, culture is normally the first thing to be sacrificed as new people rapidly come on board. Your culture could be one of the factors that made your company successful in the first place and scaling slowly can help you preserve that competitive edge.
Third, there have been cases of companies such as the cleaning services marketplace startup, Homejoy, who scaled too fast without having the right product/market fit – including not having the right business model. Scaling slowly allows you to ensure that you are building the right thing in a sustainable way, before picking up the pace.
First, you retain the intense customer focus that bootstrapping provides as a significant amount of your operations still relies on customer revenue. Not to mention that with external financing such as angel investment, you still have some flexibility to make strategic decisions. You could leverage outside capital to experiment with a new product line or pivot your core business if you feel that there is a better direction to take the company. These are decisions that can’t be made so easily when bootstrapping as the capital isn’t there.
There are many examples of companies that were sustainable during early years and then expanded their services after securing investments. For example, Lynda is a visual content library of professional education courses built initially by Lynda Weinman for teaching web design. It was later acquired by LinkedIn for $1.5 billion and integrated into their platform. Shopify is an eCommerce platform that allows users to set up their own online stores and sell directly to consumers. The founders ran the company independently for six years before seeking venture capital.
In contrast to faster scaling methods like blitzscaling and fast scaling, slow scaling enables entrepreneurs to make better decisions. Like with bootstrapping, resourcefulness becomes a priority – every dollar spent needs to be accounted for and channeled into the right focus. There isn’t a large pool of resources to draw on if mistakes are made so more focus is placed on developing core entrepreneurial skills.
Large capital investments can also lead to poorer decision making in the case of overspending or unnecessary purchases. This also affects creativity – where well funded companies may spend millions to reach customers with ads, less funded companies may come up with creative ideas that harness the company’s talent to create more brand friendly marketing campaigns.
Fast scaling represents the most common way to scale among venture backed companies. Although some bootstrapped companies can experience large customer growth from a viral product, venture capital is generally needed to ensure that this rapid growth is smoothly executed and utilized to the fullest.
Scaling a company fast is one of the most difficult things a person can do. There are many challenges and despite how well planned and prepared you are, things will go wrong. In addition, there are numerous internal challenges that entrepreneurs have to deal with while scaling including doubt and constant stress to meet the next milestone. These factors provide some of the best learning experiences for entrepreneurs and can help develop crucial skills and character. Being backed by institutional investors also provides a robust network for entrepreneurs to lean on – whether that’s soliciting strategic advice or reaching out to an executive hire.
Often times when there is a market opportunity, there will be a variety of companies going after it at the same time. This could be companies that have been operating in the shadows or larger players who decide to launch their own versions of a product. Scaling your organization fast gives you some measure of defence against the competitive forces in the market. As it can be difficult to truly differentiate your product unless you have patents, not scaling fast enough means that you can significantly limit the potential of your company.
Oculus VR is virtual reality hardware manufacturer which is credited for reigniting interest in the stagnant technology. Starting initially from kickstarter, they went on to be acquired by Facebook for $2 billion a few years later. They represent the difference between a fast scaling and blitzscaling company as they haven’t been able to capture the market fully, owning around 25% of the VR market as of 2019. The hardware nature of the service and reluctant consumers have also inhibited their ability to blitzscale.
The economies of scale concept is most relevant to manufacturing businesses. It works in a manner that when your overall production goes up, your cost per unit goes down. This is due to mass production, capital savings and better supplier terms. Scaling up your operations quickly allows you to achieve this which has the effect of increasing your margins, allowing you to scale up even further. In the digital space, the concept most relevant to this is network effects. Attracting more participants onto the platform provides more value for users, leading to greater value exchange and commissions being earned by the platform.
Blitzscaling is a concept that emphasises the phenomena and techniques of organizations that reach massive scales in a relatively short period of time. First written about by Reid Hoffman in his book ‘Blitzscaling’, this method of scaling values speed over efficiency when operating under uncertainty, particularly when there are large addressable markets (although there are people who dissent from this concept). The idea of blitzscaling is also related to Mark Zuckerberg’s infamous quote: “move fast and break things”, as a means for technology companies to rapidly scale and innovate in uncertain environments.
Blitzscaling is the method that allows for the fastest growth which fulfills the ultimate aim of a business. Naturally, this makes blitzscaling the ideal aspiration of most companies – if they can pull it off. Companies that blitzscale can see tremendous growth over a short period of time. Facebook for instance has only been around for 15 years but is one of the largest companies on Earth with a market cap of over 500 billion as of April 2019. Even in the physical space of real estate, WeWork which was founded in 2010 has grown to a valuation of over 20 billion in 9 years, a proposition unheard of before.
This method of scaling is particularly important when it comes to large addressable markets. Connectivity through social networking was a problem that affected everyone. The same could be said about finding the right place to stay when abroad which AirBnB solved through blitzscaling. In addition, where network effects are involved in the terms of platforms as the aforementioned are, generating as much growth as possible is crucial for the platform to reach a critical mass and provide value from the start.
For entrepreneurs who are interested in creating an impact or legacy, blitzscaling can provide a way to do so. Scaling rapidly and becoming a behemoth of a company is impactful in it’s own right, but the service or product you are providing may just be useful but not necessarily impactful. But starting in a less exciting but lucrative niche can pave the way for future projects due to your company’s larger resource pool. Jeff Bezos leveraged eCommerce to blitzscale Amazon when the internet was new but now he’s exploring space. Likewise, Google started off organizing the world’s information but are now developing self-driving cars. All of this only being possible off the back of the large companies they created through blitzscaling.
The faster you grow, the more likely you are to corner the market. Blitzscaling companies typically fall into the realm of monopolies, even though they deny being as such. Being the fastest mover has its advantages. First, you can command more capital from investors as the fear of missing out is stronger when it comes to blitzscaling companies. Second, this leads to greater innovation and defensibility by buying up domestic and foreign competition. Third, the increased visibility and brand recognition also allows these companies to attract and pay for the best talent, further solidifying their monopoly.
Slack is a very good example of this. The app which is essentially a team collaboration software tool has become cemented as the go-to tool for instant messaging among teams. In Aug 2018, the company had a valuation of $7.1 billion dollars. They also have an impressive 8 million daily active users, of which 3 million are paid users. On top of that, the company also enjoys the highest conversion rate among freemium software products. Much of their growth came from word-of-mouth virality and a brilliant business model plan.
Ultimately, whether you opt for a slow and steady scale strategy such as bootstrapping or pursue a fast-and-furious option like blitzscaling depends on the dynamics of your industry. Even if you do not have a scale strategy yet because of small business growth, use such constraints to your advantage and focus on your most important asset: your customers.
Stefan Soellner is an expert in scaling for companies, experienced consultant for business model and product innovation, and coach in the field of innovation management.