In a great blog post entitled “Scaling is Hard,” Jeff Bussgang of Flybridge Capital gave four challenges that companies face after they’ve achieved the elusive product-market fit and started to gain traction with paying customers. As Jeff points out, scaling your company requires a very different skill set than does building one from scratch, and for some organizations can be even more difficult than the first million in revenues.
In a way it’s like building a skyscraper: you can’t get to 100 stories just by stacking single story homes on top of one another. You need a better foundation and cohesive infrastructure to make it work. Similarly, building a $100 million dollar company is going to require a lot more ‘organizational architecture’ than building a $10 million dollar company, and many great startup management teams are, at least initially, unsure of how to implement this effectively in their growing firms.
As a VC focused on expansion stage companies with $2m+ in sales, OpenView Venture Partners is all about scaling. When we invest in a company, it typically has already found a niche and is beginning to get traction selling into a segment. Our consultants at OpenView Labs (myself included) help the company scale into a true enterprise-level organization.
In addition to Jeff’s list of typical challenges that a company faces when scaling (which are all spot-on), here are a couple of additional adjustments that companies often have to make as they transition from a startup to an enterprise:
1) Scaling the Organizational Hierarchy
Smaller firms generally prefer a flattish organizational structures. When the whole company can fit in a single conference room, you don’t need a chain of command to have everyone on the same page and get things done in a timely manner. Hybrid “player-coach” roles make sense when a team isn’t large enough to justify a full-time manager and is still experimenting with different processes. A player-coach can evaluate processes and techniques first-hand before implementing them with their team.
Once a company reaches 30, 40, and 50 employees, however, a flat structure will usually result in chaos. You’re going to need full-time managers and a clearly defined hierarchy to avoid breakdowns in communication and duplicated work. Whether your existing employees move into those roles or you hire experienced managers to oversee them, it is often a cultural adjustment that is difficult for some organizations to swallow.
2) Scaling the Sales Machine
Typically, a Software company’s first few sales are made from leads generated and nurtured by the senior management team. Still in the process of finding out who the customers are, what they want, and how much they’ll pay for the product, a more involved sales process is necessary to deliver in-depth feedback to the decision makers as quickly as possible.
Once a company has achieved the product-market fit, however, the process changes. By building out sales assets for more junior salespeople to fall back on, a company can reach a broader audience while allowing senior salespeople to focus on better opportunities and freeing up the Senior Management team. The key to this is scale: if you’re still feeling out your product-market fit, you won’t have the assets (for example, strong case studies and marquee customers) to support and guide a proactive sales process. For more information about the direction in which we generally point our companies, take a look at the blog of our Lead Qualification guru, Devon McDonald, and Labs MD and former sales rockstar Brian Zimmerman.
3) Standardizing the Product and Pricing
Startup client lists are filled with one-time agreements and highly customized products. Both of these are a great way to get your foot in the door and gather feedback about how you can better serve your customers. But once a company has found a recipe that works, the pricing strategy and product have to be standardized to speed up the sales cycle, take some pressure off the salespeople, and—this is a big one—avoid disastrous “You’re paying WHAT???” conversations between customers. While some variation in your products is still desirable, some degree of lost flexibility is a necessary casualty of this process.
Generally, much of the scaling process comes down to standardizing your internal and external procedures so that the culture and vision of the Senior Management team can extend beyond their limited immediate circle. That usually means at least a subtle shift in the company culture to a more structured approach from a more free-spirited and experimental one. As Jeff Bussgang points out in his post, this can be very challenging, especially if you haven’t been through the process before. But with such a challenge comes a great opportunity to differentiate yourself from your competitors, many of whom are in the same position.
Scaling is hard, but it can be very, very rewarding when done the right way.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides professional CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices in Charlotte, NC, the Triangle, the Triad, Southern Pines, and Wilmington with a team of more than 30 professionals serving more than 100 companies throughout the region.