From a venture investor’s diary #4: 7 scale-up dos and one don’t-do

By ssyc1
April 19, 2023
No Comments

To help young companies increase their odds of success, I continue to add to my typology of “scale-ups” mistakes to avoid: too early, wrong direction, lack of focus, and so on. Here I share some key lessons on scaling in the form of “seven dos and one don’t-do”.

7 do’s

First, focus on scaling revenues and the sales function, scaling is not simply about hiring fast. Getting 1 or 2 important hires right is key, so is putting the right people in the right place. Hiring too quickly will only bring a lot of pain (I discuss this at greater length here with the broader lesson being to bring on the right partners – you key hires are probably one of your most important partners!).

Second, can we just remember what the word “strategy” actually mean? By definition: choosing means dropping some things. Not only are you unable to do everything, it is hazardous to do so! Steve Job’s quote on this is very pertinent:

“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are.”

In fact, McKinsey recently has yet another new way of showing this in a strategy update: resource re-allocation is one of the top opportunities for high impact.

Third, getting metrics right can help. Here, my first key point is that 3 or 4 metrics measured correctly and consistently is more than enough. The second key point is to exercise care to select those metrics that matter to the value of the business (e.g. we tend to like MRR growth, MRR churn, average order size and sometimes also number of customers or combined % of top 10 customers). The concept of average order size, if increasing, is related to that of negative churn (see point 4 below too): both mean that if the company were to cease spending money to acquire new customers, the business would still grow. My final key point here is that the “direction of travel” often matters more than the absolute value.

Fourth, the customer equation / your pipeline #1: Drive revenue but think about the quality of your revenue! This of course also comes from having quality customers; on top of that: do work to get customers to “repeat” their buy, do leverage from a major early customer to diversify away from single-customer concentration, and do grow “share of wallet” or $ per customer.

Fifth, the customer equation / your pipeline #2: Keep refining your model! (time allocation across various segments, automate to serve SMEs). You need to allocate your sales team’s resources across your customer segments in the right way and you need to build your sales pipeline in the right way: Automate more to serve your SME segment! Or, as these VCs summarise it well:

“Everyone plays a role in optimizing unit economics. Understand how your specific team helps influence the LTV/CAC equation, and get to know the levers you can pull to increase Annual Contract Value (ACV) or Gross Margin and to decrease churn rate.”

Sixth, the customer equation / your pipeline #3: Keep refining your model! (churn + “stickiness”) You need a sustainable business model and the most important part of this comes from your customer and the product-market fit. Churn could reflect you haven’t achieved that fit.

Finally: ALIGN. You can achieve so much more with the same resources (people + $) that are aligned than the same resources that aren’t! Here’s 8 alignment tools if you are looking for help!

One most important don’t:

Don’t scale too early! (We use a 10-question tool to help companies assess their “scale-up readiness” quotient … you need to be able to answer questions like “can the business scale profitably”, “does your scale-up strategy and execution deliver a profitable flow of customers?” and so on). It is rather easy to be making poor hiring decisions when raising a lot capital seems relatively easy during “boom” times: so don’t raise too much until you are sure you have product-market fit, manage your burn rate, and get your 2 to 3 critical hires right.