4 Factors of True Scalability
Author: Jasper Ettema — Portfolio Manager
Whenever talking or listening to investors, most of these conversations seem pretty similar. Investors will keep emphasising that “team” is the most critical factor for success, so they invest in good teams. Additionally, they will mention looking for signs of scalability in the startup’s business models. To serve investors with these insights, founders need to understand what determines the scalability of their business. Throughout this article, I will display the four most crucial scalability factors which investors will always be looking for.
Factor 1: Local or Decentralized Operations
Some business models need local operations like logistics or manufacturing. They need to operate parts of their business locally with physical presence essential. An excellent example of this would be mobility companies like Tier Mobility. Tier Mobility provides rides on scooters. Therefore they need to spread scooters across cities and, once in use, recharge, relocate and maintain those scooters. These activities are a threshold to scalability since, before being able to provide rides in any city, a local presence has to be established. Tier Mobility has to cover entire cities at once and cannot just serve a small group of first customers at a new geographical location. Therefore Tier Mobility has sub-optimal preconditions for scalability regarding local operations. Suppose you hold this against any SaaS company, which usually has highly centralised operations. In that case, you can imagine that such a company might need less finance to grow and less effort to scale fast.
Factor 2: Need for Product Adaptation
Scaling your company will inevitably take you into new target groups and acquire new customer segments and international markets. Once you face this situation, the worst approach would be a “one size fits all”. Your new target group or element has different requirements regarding your product, so changes in your product will be needed to be successful. Even if you verify the new feature with similar conditions, priorities will not be the same. Scalable products will indeed need adaptation but are designed to deal with it. And great scalable companies are too. This is called “scalable by design”.
An excellent example of scalability by design is Talking Tom, a toddlers mobile app by a Slovenian studio called Outfit7. The app came entirely without any language! It uses pictos and memes to express what the kids should do next. Talking Tom has good preconditions to scale internationally very fast. No speech was involved, so no translation or new service teams are needed when going into a new language region. Additionally, they used neutrally designed characters that would work in many social and cultural environments, so the product’s design needed little change when going international. And lastly, they relied on distribution through channels that were already global.
Factor 3: Customer Acquisition
With this last remark on factor 2, I revealed Factor 3: Customer Acquisition. Once selling, to be able to scale, you need to ask yourself questions like:
- Which channels do I need to acquire my target customers?
- Are these channels internationally available?
- What does it take to use these channels in another country?
- Do these channels allow me to scale fast without any thresholds?
A great example of using widespread acquisition channels to scale fast is iTranslate. iTranslate is what Apple calls their “answer to Google Translate, “ a mobile translation service. This app is not natively designed by Apple itself but is made by a 40 heads-startup from Austria. Their main channel for acquisition is most certainly the app store! iTranslate’s strategy seems quite simple but wasn’t when they did it. iTranslate bought the Words “Translate” and “Translation” in Apple’s app store.
Even though translation software is only as good as the languages it covers, iTranslate found good preconditions to scale fast. They used the app store’s walled garden for acquisition, which gave access to all relevant target customers within one language without any geographic borders. Imagine being able to address all English speaking consumers (with an iPhone) without the hassle of going to the UK, the US and, e.g. Australia separately! This strategy resulted in 400M plus downloads and a mention as preferred translation software at the Apple event.
Factor 4: Network Effects
Last but not least, the fourth factor for scalability is “Network Effects”. As network effects can work for or against you, this factor is essential if your business model depends on it. Network effects comprise the social dynamics among users, customers, competitors and stakeholders. Marketplaces especially sensitive to this factor are marketplaces since they are always prone to the chicken and egg dilemma. Additionally, any messaging software or any pairing/mediation service will also face thresholds in scaling due to network effects. These services are only valuable when demand finds supply and supply finds the market. However, once they reach a critical mass, growth comes almost without effort.
An excellent example of network effects is GoStudent. Student provides a platform to match students with tutors. This service is only valuable to its customers when relevant tutors are available in time. They can be anywhere due to online tutoring, but they should at least speak the same language, teach the topic, and be aware of the requirements and mechanics of local education systems. Additionally, the students mostly do not pay for their tutoring themselves. Mostly their parents do, so the parents are the customers. For sales and distribution, this means a different target group to convince. Last but not least, the youth target group is highly influenced by peers, and existing offline tutoring services will hold against online tutoring through lobbying with national administrations and at local schools. So many network effects work against the success of students.
The more your business model is open to network, the more effort it will take to scale, but once it does, success is more straightforward to grasp than with short sales. One way to use network effects in direct sales, such as selling software licenses, would be through referral marketing. Dropbox has successfully sent free storage space to you and your friend if you make this friend sign up for their services. This way, Dropbox made their network work for them despite the chicken and egg dilemma.
Startups scalable by nature would:
- have only centralised operations (e.g. be pure digital)
- be able to sell one product across all segments within a target group
- enable its customer acquisition through global channels
- have network effects work for them instead of against them
However, such companies are rare. For average startups, the awareness that you might be strong on one or two factors but weak on the rest is a good precondition for setting up your scaling strategy. So whenever approaching investors, make them aware that you know where your strengths are and what your weaknesses in scaling fast will be. This will highlight your skills as a startup manager, and hey, didn’t I say investors invest in the team…?
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