Everybody’s obsessed with the idea. It’s not just Start-ups, it’s also Corporates. There is just too much noise about how easy it is to launch a new business idea, the whole notion of “lean start-up” and getting to market cheaply. There is far too little focus on whether and how an idea can scale. We live in a world where every idea has 10 competitors, where technology and innovation can come from anywhere. Today it is rarely the idea that is the defining factor in the sustainable growth of a business.
It’s a truism, but no less important for being one, that there has been a fundamental shift in the way business is done, since the turn of the 21st century. The well-established concept of 1st mover advantage may have something to do with this. “1st mover advantage” was initially critiqued in 1981 by Michael Spence and then popularised further by Stanford Business School professor, David Montgomery, and his co-author, Marvin Lieberman. It remains a business school obsession, in spite of various attempts by different people to challenge it, including The Harvard Business Review. Too many people focus on “breakthrough ideas” in the belief that this will guarantee success. The reality is much more nuanced. There are many different examples including Netscape, Overture, My Space where 1st mover advantage did not lead to category leadership. Perhaps more importantly in today’s world, many successful ideas and technologies can be replicated very fast, so the barriers to entry for competitors tend to arrive later, once a company has significant market penetration and not once its idea is in the market. This is all about scale.
In my own experience there is no rhyme or reason for why being the first mover works sometimes and sometimes it doesn’t. For example in the online market research industry, Survey Monkey, was the early player and has established a significant market share on the back of this. Other competitors have followed but none so far have made a dent on its market dominance. Whereas in consumer legal services, a number of early entrants have come into the UK market on the back of the deregulation of the industry, but none of them has established themselves successfully, including Quality Solicitors, which is heavily PE backed. In fact many companies have failed.
The other obsession both in start-ups and in Corporate innovation departments is with finding “a niche”. Obviously having a very clear view of your target market is critical to success, and a scatter gun approach normally fails. However, too often now, business managers are driven to identify micro niches or segments that are “clear market spaces”, but that will never be large enough to establish a scaled business or even get through most corporate innovation pipeline processes. It is critical today to find solutions that work across niches and therefore will scale, because otherwise the business or entrepreneur will flog their guts out and burn resource without sustainable success. After all anywhere between 50% (source RSA 2014) and 90% (CB Insights 2015) of start-ups fail depending on whose research you believe.
So today any ideator or innovator should focus early on about scale. There are 10 questions that you really need to answer convincingly, if you want to scale an idea.
- Have you got a product that enough people really want to pay for?
As most business people know, the sooner you put your idea down in front of people the better. Every idea needs a lot of constructive criticism to shape and improve it. But too often this means that the business focuses on the idea or product at the expense of understanding the pricing dynamics. It can be all too easy to create a product that people want to use if it’s free, but don’t want to pay for when you start charging. In other words there appears to be a market for the product but it may not be a sustainable market opportunity. You have to understand why successive customers want to use your product and continue using it, above other competitors. You also have to be sure that there are enough of them, before you can really begin to scale the idea or business. This is a triangulation of product, price and market size that can only be guaranteed once you have been in the real market for long enough.
- Have you got a great team that covers all the roles that you need to scale?
New ideas and new businesses rarely can afford many people. So they start with the minimum number of people to launch the minimum viable product. This is sensible and understandable. But as soon as the company starts to taste success and growth, it needs to change. This change needs to happen not just once but many times, as the idea gets used and bought by its first and subsequent customers. When we started eSubstance (later Ink Publishing) in 2000, unusually we had too many of the wrong people on the back of £10m of 3i funding (and others). After a shakeout and 3 years of losing money, we acquired Ink and got the right team and established the right product. We then began to grow at pace and scale the business, but it wasn’t for another 3 or 4 years after that, that we successfully identified the other roles that would allow us to scale properly internationally. The challenge of many young businesses is to find the key people who will really scale the business, as this may or may not be the Founders.
- Have you started generating long-term interest in your idea and not just immediate sales?
It’s never easy to generate demand for any new idea, product or business. Often this is because the idea or product isn’t quite right. This puts enormous pressure on the business to make one or two early sales. It’s only once the business has sales that they can start to see which elements of their product are more or less interesting to customers. The problem is that it’s all too easy for a business to get into a routine where it needs more sales to keep going and the only way it can do that, is to sell more of what it has sold already. This hamster wheel can prevent a company from being able to explore where the opportunities really lie and have the time to change the product mix to meet these.
When I took over as CEO of the well-known innovation consultancy, Edengene, which was losing money, the existing management couldn’t see that the corporate venturing market was disappearing. Instead corporates now wanted internal innovation. Just looking for sales opportunities in venturing was not the answer, the business had to reposition and create new demand in a different aspect of innovation.
If a business wants to grow, then it has to find the wider market opportunity and the resources to invest in generating long term customer demand, and not just focus on immediate sales. This is a subtle but critical difference. Every business needs to tease this demand out, but if you invest too early in demand creation then you may not have the product that the market wants and if you invest too late then you may not have the cash and energy to do it
- Have you identified and set up the systems and processes that you need to scale?
It’s often difficult to identify the problems that are going to come your way in advance of them happening, but this is what the best entrepreneurs and innovators do. You need not only to identify them but to define and establish the processes and systems that can overcome them so that you are not dependent on manual resolution.
Key issues that require scalable processes include customer service, quality control and financial reporting systems. When you have one or two customers, then customer service is easy to do as you are falling over yourselves to keep them happy, but as soon as you have a sizeable number to deal with, then the systems need to be scalable and automated. Manual won’t cut it any longer. The same is true of quality control. It’s not a problem when you have a handful of customers to manage, but it rapidly becomes a problem, as you seek to scale. Without a clear process to deal with the issues, the business simply cannot scale.
The same issue is true of financial systems. They always start simple, but rarely can accommodate great change in the business model. With the international expansion of Ink, the business became incredibly complicated with 1000’s of small advertisers paying money in different currencies and several different P&L’s. This meant that our financial systems which were fine with a turnover of £10m just couldn’t cope well enough or quickly enough once it was £30m. Soon it could take 6 weeks to get a decent set of management accounts together. This was just too slow and became a massive hindrance to decision making. Then we had to make a huge systemic change which took time and money. We would have done better to have recognised the issues earlier and taken smaller hits along the way to upgrade and scale the systems in line with our rapid growth.
- Have you got the finance ready for when you need it but not when you don’t?
Most early stage businesses lack sufficient finance to do everything they want. Hence the ever increasing pressure or encouragement from the business press to go and raise funding of some sort. Often this peer pressure is unhelpful. Raising external finance of any sort is a hugely distracting task and starting too early is generally a mistake. The critical issue is to understand the market and your business well enough to anticipate when you will need funding and focus accordingly. If you don’t have the proof that you have a scalable idea and opportunity, then getting finance will be hard. You are better to keep working at understanding where the real opportunity lies and where you can have a competitive point of difference. Once that becomes clear then raising finance can be a good idea.
I raised £750k for a business, Law in Order, as a joint venture with Kennedy Cater. Our proposition was a white label one stop shop for legal services for large organisations to sell to their customers. It was and is a good idea, but we were too early into the market and couldn’t secure a deal, so we sat on the money. Ironically having the money early, didn’t guarantee success.
Conversely as a larger growing business, you can find that the banks and many other types of investor are crying out to lend you money. Again this can be unhelpful. The question then becomes why do you need the additional investment and / or when might you need it. It is entirely possible that having some funding is a good idea, for example to allow you to acquire a complementary company, but when you have less money to play with, you think more laterally about how to overcome a problem or seize an opportunity.
The answer is to think through how you see the business scaling and when finance will become critical. When you need the finance, then you must be pre-prepared and you must dedicate resource to make it happen.
- Have you got a plan for how to scale geographically?
Most ambitious business owners want to grow internationally but if they haven’t done it before they often don’t recognise the difficulties involved. The obvious suggestion is get someone on board who has, but that is not enough. The clue to international scale is how easily your business model can be packaged up and replicated in another country. If the product you sell, the price you charge and the way you sell it, all needs to be very different, then expect it to fail. You have to be able to roll out a similar model to make it work
When we expanded our digital agency syzygy into Germany with limited resources, we had German revenues and customers, but we hadn’t worked out how to get a stable business unit in place. It took a lot of effort and a merger with a German agency before we were able to embed the solution properly.
With Ink, we tried twice to penetrate the Chinese market profitably, the first time without a Chinese partner and the second time with one, but in both cases, we struggled to establish the business, because the model wasn’t close enough to what we did in other parts of the world.
Expanding to your second market requires the diligence of a start-up. You need to know how and where the second market differs from what has worked in the home market and pinpoint every aspect of your model that is different. Only then can you be sure you have a decent chance of addressing the differences and making it work
- Are you clear on what your next revenue stream will be?
Some businesses are lucky and can scale past £100m in revenue without having to consider more than one revenue stream, but they are still fairly rare. For the majority, scaling the company will require more than one revenue stream or certainly significant adaptations to the original one.
At Ink, once we had worked out the scalable proposition and business model, namely that we would produce the customer’s inflight magazine for free in return for taking the advertising revenues, we went a long way without needing another revenue stream. It was only when revenues got to £30m and the market got tougher with reducing margins that we really saw the need to focus on alternative revenue streams. This was very lucky because it meant that we were able to scale internationally off one core business model. It also meant that we were able to take time to explore the second revenue stream which became advertising on boarding passes and e-tickets.
Too often businesses that need more sales start looking for alternative products to generate additional revenues, when they should just be focusing on getting the core product positioned correctly for a scalable market. Whatever the business situation is there is a fine line between investing too early in the “new shiny idea” and being over dependent on the established revenue stream. The management need to find a mechanism for continually evaluating this question without destabilising the day to day business.
- Are you aware that you will need to review all aspects of your operational model once you start scaling?
It’s all too easy when you start growing at pace to just keep doing more of the same thing based on more revenues and more people. That can work for a while but will come under pressure sooner than you think. It’s easy to believe that if you have achieved good margins in the past, and they weaken, that you can pump them up again, as opposed to recognising that the market may have changed. Self-confidence can be a great thing, but it can also lead to complacency when it comes to changing the operating model.
Those businesses that have made a virtue out of getting rid of the bottom 10% of performers each year do not suit everyone. However, they do ensure that the lifeblood of a successful business keeps looking to outperform others. So it is with the operating model. You have to keep brutally challenging assumptions and looking to replace them with better alternatives.
You also need to cut costs on a regular basis. Every business takes on too much cost in different areas as they grow. Some of this resource becomes ineffective or inefficient. It needs to be cut back. You have to put pressure on people to rethink how tasks are executed and to instil the importance of creating repeatable processes as opposed to slow manual interventions. Once you have a business that is generating £millions of revenues, then you need to recognise that if you haven’t cut some costs in the last 12 months then you need to. You need to be in a perpetual cycle of improving how you spend your money as you grow revenues and costs.
- Have you thought of what areas you will need middle management in and how to keep your people productive?
The lack of middle management is a perennial scaling challenge for successful businesses. Too often senior management do not see the need to bring in people who are at least as good as them and ideally better than them, to drive the business forward. It is far too easy to nickel and dime on key staff, but if you hire the wrong people it takes twice as long to resolve the mess you create. It’s a well-known fact that successful start-ups hire great people. What is less well known is that medium sized companies often start to make hiring mistakes and bring on less and less superstars. This is often the result of letting a lack of time dictate how recruitment is done. But successful large companies still maintain rigorous and comprehensive hiring processes. These mitigate against the hiring of weaker people. This is a lesson that every scaling business should remember.
Similarly it’s easy as you grow staff numbers in the 100’s to forget that people perform best in smaller teams. So if you want to continue to have depth in great people, then make sure you rethink how they work with each other. Look to break groups of people into smaller teams. Look to simplify decision making processes that may have become extended and inefficient. Keep the small team ethos alive and make sure that individuals can see how they contribute to the growth of the whole enterprise.
- Have you identified and found your partners?
Last but by no means least, successful companies scale by engaging with the wider ecosystem around them. They look to partner with complementary companies and people who can add value to their business. Frequently the real benefit from this approach is that you attract new opinions and thinking into the business. You find new ways to operate and achieve things by learning from other industries and companies.
Partners can and should mean everything from an Advisory Board to a partner network to joint ventures to virtual staff. You may not always see who these partners should or could be, but others often will, so make it easy to collect and listen to external inputs and act on them.
Every successful business must be based on a solid idea, born out of unsatisfied customer needs and a competitive opportunity, but you don’t need to be original or a first mover to do this. You certainly don’t need a different idea to build a big business, although it can be. It’s more critical that you understand how to be better on key dimensions and then surround yourself with a great team and a well thought through plan. It sounds so obvious but often it’s very easy to forget these truisms in the white heat of innovation and entrepreneurialism!