The pitfalls of scaling up

The pitfalls of scaling up

Getting a startup off the ground and finding a stable customer base is a huge achievement for any owner but what happens when you want to move from startup to scale up and need to start growing the business at pace?

To become an established and successful enterprise, there comes a point where you have to scale up, and that brings its own unique set of hurdles, challenges and potential opportunities.

Hassan Behcet gives you the lowdown on how to scale up your business effectively, and why working with a valued partner and adviser is one of the most important keys to success.  

 

When does a startup become a scale up?

With a startup, there are several stages in the process of getting you to be a proper functioning business. You need the concept, the research and the initial minimum viable product (MVP) to begin with – only then can you properly start trading.

You could come up with a concept chatting with your friends in the pub (or more likely on a Zoom call at the moment) but not everyone has the determination to do the research and to commit to the business idea.

That’s the first stage of knowing if you have the guts to stick with it, leave your job and get a loan to get this idea off the ground. Once your product or service is out there in the world, you can start to refine the concept and improve your offering.

This refinement stage is the first sign that you’re getting ready to scale up. It’s like going from being a newborn baby to being a toddler and starting to walk. You have to take that leap from crawling to actually walking – and being ready to scale is vital.  

 

Taking the leap of faith and starting to scale

There’s a leap of faith to be made when you scale up as a business, and that means having some real belief and determination as the owner. To give yourself the best shot of scaling up effectively it’s important to:

• Have the right structures in place – to scale up the business, you need the relevant structures and processes in place to make sure you’re ready for expansion. Without these you won’t be able to cope, so it’s crucial to set these up before you start.
• Create the right financial foundations – having good, robust accounting and financial systems in place is critical. You need to record your finances accurately and have data available, so you can forecast the next stages in your progress.
• Make good decisions – forecasting is great but it’s never 100% accurate. However, you need your data to be accurate and timely so you can make the right decisions. With up to date financial data, your information becomes factual rather than being reliant on guesswork.
• Write a plan – having a plan is vital. Ideally, you should sit down with your accountant to write out your strategy, so you have someone to challenge your plan and your approach. It’s important to have someone involved who’s not emotionally invested in the startup and who can use their experience to challenge you and hold you to account.

Being able to meet your additional demand

A key question to ask yourself is ‘How long do I think this scale up process is going to take?’. The answer to this in every business is different, so the length of the transition stage will also vary dramatically.

For some companies it might take six months, for others the scale up transition could take years. Tesla, for example, are struggling to scale up, despite their success and their huge share price.

They can’t meet the demand for their cars and you have to wait months for your car to be delivered. There may be a marketing angle to making people wait for a premium product, but the bottom line is that they can’t meet the huge demand.

If you look at Mercedes, on the other hand, they can produce a car in a very short space of time, because they have the infrastructure to meet demand. If you make a million cars in each period, you can make them efficiently, customise the colours and know you can make the cars on time. A startup can’t do this – mainly because you don’t have the infrastructure, the resources or the capacity.

Demand is a huge challenge for a scale up. As a startup, you want demand and you want to meet it. But you don’t know if the demand is there for sure. If you’re an established business with 10 products and one that doesn’t sell, that’s ok – you have 9 that do.

As an aspirational scale up, this is the challenge. To meet the demand and become an established business, with a range of products that reduce your overall risk.  

 

Having the infrastructure and the people

To jump from being a viable startup to being an established scale up, you need more infrastructure and more people – and that means investing in both.

As an entrepreneur, when you found a startup, you’re buying into the concept, and if you have success then you benefit. Finding staff and people who will also buy into that concept and share the journey, without the uptake, can be tricky. If your scale up becomes a success story, you have to reward the risk that your people have taken – so you need cash incentives, bonus payments or employee share incentive schemes to add a real incentive.

When you can point to scale up success stories, like Google – where employees with company shares made millions when the company went public – there can be an incentive for people to join your business, become part of that scale up team and help you achieve your success.

You’re also going to need to invest in the machinery, equipment, office space and other operational elements of the scale up infrastructure. That takes good financial backing, the right mix of funding and some sound decision-making from you and your advisers.  

 

Trusting your fate to the luck of the market

There’s a significant element of luck in the success of moving from startup to scale up, and being reliant on luck certainly adds to the risk of attempting to scale.

If you look at the social media sector, you can see this in action. Snapchat was all the rage a few years ago and was talked about as the social media player to watch. In 2020, its popularity has dwindled. Young people use TikTok and, in turn, TikTok has influenced people like Facebook and Instagram. Snapchat hasn’t replaced the established social media. Similarly, MySpace didn’t win out over Facebook.

A lot of these social media startups, at the time, were expected to do well but couldn’t scale up. Or in scaling up they lost their story and their brand. With the refinement and the scaling up, you either get it right and become established, or you get it wrong and another scale up takes the prize – and that’s where the inherent risk lies.  

 

Partnering with the right scale up adviser

Having a good adviser to guide you through the scale up process is invaluable, and brings you the knowledge, insight and experience of a truly objective outside partner.

At Haines Watts North London, we run our own business, as partners, so we know the challenges you face, the scale up hurdles you’ll have to overcome and the worries you may have as an owner, when it comes to risk, meeting demand and scaling up effectively.

When you partner with our advisers, you get a range of help and advice, and this can be incredibly helpful when you’re new to hyper-growth and the issues associated with a fast-paced scale up project. We’ll help you:

• Create a workable scale up plan – we’ll talk you through your scale up goals, your understanding of the market and the targets you want to achieve in the first year. Then we’ll work alongside you to create a detailed, proactive scale up plan, to drive your growth and success.
• Set the right metrics and KPIs – you need to set up key performance indicators (KPIs) that are relevant to your business and industry. If it’s a product, you'd look at your margins, your return on each product and your overall return on investment (ROI). We can help you track these KPIs over time and push your performance.
• Revisit your plan on a regular basis – we’ll meet with you regularly to talk through your performance, progress and how you’re tracking against your key numbers and metrics, so you can take action, and keep the impetus behind your growth. We’ll also challenge you on your decisions and will bring our objective, third-party perspective to your strategy, planning and long-term business decision-making.

As your adviser, I’m there to support you as a partner, not just an accountant. We’re there to become part of your business and part of the ‘we’ in your team. We’ll get you to where you need to be, so your scale up journey becomes the success story you’ve planned for.  

 

Talk to one of our North London Advisers about scaling up your business.