Most investors will say that they love to support startups that are scalable- or about to scale. But what do they really mean by that? Simply put, it means that your business has the capacity to increase revenue with small incremental cost. About to scale is when you have a trusted product and a trusted business model that is able to grow into new regions and marketplaces.
A typical example of a scalable product is a software, because it costs some money to develop the prototype, but several more copies can be quickly replicated at almost no incremental cost. Most consulting businesses — like PR — are not easily scalable since the work must be done by professionals, and ‘replicating’ professionals is slow and expensive. Investors do not like to invest in startups that are based on services.
Here are some practical tips on how to make your business more attractive to investors:
- Start with an idea that is scalable
Just because your friends believe that an idea is cool doesn’t make it scalable. Investors are attracted to ideas that are a borne from research of external professionals, which promises a billion-dollar opportunity with a double digit expansion rate. As mentioned above, a software is one perfect example of a scalable business idea. Although the initial costs associated with development are high, there is little cost associated with really delivering the software.
Digital downloads are another example,because there’s actually no delivery cost for each customer with downloading online. Developing a product that can be sold and downloaded from a website is a very scalable business idea. Besides software, businesses can make e-books, video games and templates for pitch-decks or whitepapers that can be downloaded after a customer buys them online.
Franchising your business is a scalable idea because companies can expand to other regions without incurring additional costs. When you sell a franchise, you are not responsible for the cost of constructing new buildings, paying its staff or financing the day to day operations; it’s the job of the franchise owner to do that. However, you still get to benefit from the profits of the original franchise fees, royalties obtained from the profits and any other charges the franchisee pays you.
- Build a business plan and model that is attractive to investors
Most of the time, people confuse a business plan with a product plan that is meant for customers: offering free services and customer support. It is generally difficult to grow and scale a business based on free high-maintenance products. Scalable businesses have significant margins (over 55%), low support and a small number of staff.
When developing your business plan, keep in mind a low-cost, high-profit goal. While freebies and giveaways help in attracting customers from the start, they are not sustainable for a scalable model. One exception to this is a mobile app where you use the initial ‘free download’ to lure customers and make them pay afterwards for in-app purchases.
If you are presenting your business plan to a potential investor, focus more on the financial structure, growth and expansion plans, development of the product itself and how to multiply revenue. If your idea requires more staff each time sales increases, then it might not exactly be scalable because costs will rise automatically.
Work with an expert on your business plan. Most times people lose investors with their poorly prepared business plans. There are lots of materials online that explain how to write a successful business plan and organize a good pitch deck.
- Use a minimum viable product (MVP) to support the model
What is a minimum viable product? Eric Ries defines it is that version of a new product that enables a team to obtain the maximum amount of validated information about the customers with little effort. In other words, it is the working model of your product that allows you determine market reaction and identify ways to improve the product.
No product, not even one with great potential, is ready to scale without a working version. This version must have multiple customers that are willing to pay full price, otherwise it wouldn’t validate a scalable business model. Before asking investors for money, make sure you have a model that has at least proven itself useful among a tested group of your target audience.
The primary objective of an MVP is to deliver on customer value. It is important to get the value right for your MVP. Where the users of your product are also your customers, try to get back some of that value by charging then from the beginning- see, minimize freebies. People are generally willing to pay for a product that solves a problem for them. This is the ultimate validation of your scalable model, and it’s guaranteed to interest any potential investor.
- Build a strong team to take yourself out of the critical path
The secret of most successful companies is successful teams. If you want to build a scalable business, then you must build a successful team first. This usually begins with a vision; define your business’ values and mission statement. Identify what you want in a team and look out for those qualities when hiring. In the early stages, it is crucial to hire like-minded people who not only understand your business vision, but share your attitude to work.
Develop leadership skills because talented people are drawn to good leaders. Leadership is an aspiring quality, and while some are born leaders, most people become one. It may help to seek a mentor or coach. Train your staff for continuous improvement and they will be motivated to do better. Investors are interested in knowing the qualification and experience of the team you hire, and a sub par one can put them off.
If you continue to spend a lot of time working ‘in’ your business, instead of ‘on’ your business, then you are quite far from being ready to scale. Show that you have, and can continue to employ talented staff to run the scaled business, without you micromanaging every detail and business decision.
- Outsource what is non-strategic to optimize leverage
Savvy business owners don’t outsource their core competency, and never depend on intellectual property that isn’t their own. They also don’t try to manage all the non-strategic aspects of the business, because growing the capacity to do this is inefficient and costly.
If you run a business that produces downloadable music files on your website, then it would be counter-productive to manage your IT and infrastructure facilities at the same time. Think about the time and energy that could be used to improve your MVP being spent taking log entry and troubleshooting issues in the server room. Outsource this responsibility to an external host provider like Umbrellar and free up your in-house staff for more core roles. The managed server @ Umbrellar especially is a great option for businesses.
Outsourcing non-strategic aspects of your business to professionals ensures that they do it better than you could ever have. This indirectly adds to increased productivity and efficiency of your scalable business. Outsourcing is also financially cost-effective because most of the jobs done by professionals are considerably cheaper. It also saves money in unnecessary training that would have been spent on your in-house staff.
Scaling requires taking advantage of external resources, and getting external professionals to perform your non-core business operations can achieve that successfully.
- Focus on marketing and indirect channels to promote your product.
Many marketing gurus laud the benefits of word-of-mouth marketing and direct selling. While these methods are effective in their own right, they are relatively slow for a scalable business. In order to increase your product visibility and sell them in volume, you need robust marketing strategies. If your company is not essentially equipped to carry out this function, then outsource it to an agency.
Scalable products are typically low-cost, high volume in nature, hence marketing campaigns actively targeting your customers must be employed. If you are promoting your product online, a digital marketing strategy involving a combination of SEO and pay-per-click campaigns is usually effective. Depending on the nature of your product and its target audience, you could leverage mobile and social media networks to actively engage customers.
Traditional marketing channels are very effective for scalable businesses. Since your business is relatively unknown, you will want to push it into market for people to see it regularly. Get access to important business conferences where majority of your target customers attend. This includes workshops, seminars and sponsored events. Ask for opportunities to promote your product at busy events. Visit websites like Meetup.com for important events in your area. LinkedIn is a great platform for getting information and joining communities.
Marketing is an ongoing activity. Here’s a comprehensive guide for a scalable marketing plan. Continue to upgrade your product line so that you can attract new customers. Request feedback from your users and improve on the remarks. People purchase products from businesses that they trust.
- Build Partnerships
No business ever becomes successful without building partnerships along the way. As a startup, try to establish trusted business relationships with other players in your industry. By becoming startup partners, you can exchange scalable business ideas and share experiences. Collaboration and partnering with outsourcing companies drive down costs and create opportunities for your business to develop.
Even global giants in the industry choose to form partnerships. In 2006 Nike and Apple formed a partnership. The products of their union together were fitness gadgets to help customers monitor their heart rate and other health indices as they exercised.
Establishing relationships with current market players is a dynamic strategy. Rather than regarding them as competitors and keep a distance, you benefit greatly from collaboration. Service swap is achievable through such partnerships. Instead of spending money, partners can agree to swap services — say, technology for space or energy and vice versa.
What’s more, investors perceive this dynamic attitude as scalable potential and might be willing to support such businesses. Partnerships may often lead to franchising which is another business opportunity. Besides LinkedIn, other professional networks like Makerbase and Lunchmeet are great places for entrepreneurs to meet and collaborate.
- Attract and leverage Investor funding
Unless you are part of a bigger organisation, or wealthy enough to self-fund, it can be tough financing aspects of your business. Think about marketing, the costs of advertising and promoting your products alone can be overwhelming. You would need some help funding this exercise. Enter- the investor. Remember most of your activity from idea formation to developing an MVP, team building etc. has been geared towards not just your business, but attracting investor support.
Investor funding forms an easy and sustainable way for businesses to grow and stay ahead of the competition. It is a partnership that benefits both the entrepreneur and the investor. One major tip is to form a business relationship with your potential investor long before you ask them to invest in your business. That way, you will be in a better position to convince them about how vested you are in the business.
Investors are very particular about numbers. Prepare your growth projections and explain them confidently when you make your presentation. Your financial structure is probably the most important aspect of your business plan, so it is advisable to work with a professional when incorporating it into the plan.
To be clear, not every business needs or wants investors, but it does help if you want to scale fast. A majority of small businesses today are family-owned, which can be prosperous, satisfying, and small by design. It is a strategic choice. If your passion is to impact the world, or even become a market leader, scalability is the surest way to multiply and extend your reach. Be warned though, it will take much of your time-in fact, a whole lot. But in the end, it can be highly rewarding.