Going from a startup to an enduring company with true business success means focusing on critical business issues. Examples include: How low can you get your unit costs? How will you expand your customer base and how much will it cost to acquire new customers? How much capital are you looking to raise and what do you intend to do with the capital?
The responses help assess the advantages and areas of opportunity that accrue with size, the likelihood that entrepreneurs have the skills, connections, and mental toughness to survive the perilous journey of scaling, as well as the potential risks and rewards of a investment in the company.
For every startup that grows, thousands don’t. About 65 percent of venture capital deals returned less than the capital invested in the past nine years. For funds that generated returns greater than 500 percent, less than 20 percent of them accounted for 90 percent of the funds’ returns. Even four out of 1,000 deals generated a return of 10,000 percent or more.
When does business success come for a startup?
This is why investors carefully evaluate each deal on its own terms. Of special interest are a company’s projected sales revenue and customer acquisition costs, its projected unit costs as it increases, and the projected rate of capital burn.
The faster the company can acquire customers and the lower the costs to win them over, the faster the company can achieve profitable growth. The smaller the company is to get its unit costs, the greater the potential to lower prices and increase volumes, as well as profits. And the lower the capital burn rate, the longer the company can survive to test its hypothesis.
Those are the secrets behind the numbers.
Thus, the economy of scale refers to the ability of a company to produce more and more units of a product at a lower average or unit cost. Production efficiencies allow the company to spread its fixed costs.
The two things investors want to know
Entrepreneurs and investors want to know two things, neither of which can be accurately determined at the outset. The first is whether the average cost curve for a specific product or service will decline sharply or be relatively flat. The second is the magnitude of the minimum efficient scale, the smallest production volume at which the firm reaches scale.
Now, scaling only occurs after the company discovers and masters a repeatable process that is effective and efficient: effective in the sense that it produces a product or service of the quality that consumers expect and are willing to pay for, and efficient if the unit cost of production drops significantly at higher volumes. This repeatable process is rarely obvious at first.
the secret of a scaling up constant
Successful scaling requires companies to gain experience in four competencies. One is to learn and learn to learn, another is to shape the organization and learn to pivot when needed, a third is to formalize the organizational structure, and the fourth is to go from prototype to scale or niche segment to mass market.
In itself, true business success only comes when an idea can be shown to work on a large and growing scale.
Teofilo Benitez Granados Graduate, Master and Doctor in Law. Author of Contemporary Problems of Higher Education. Focused on the university for entrepreneurs.