If you’ve read this far, you should have a better understanding of the four stages of scaling and the seven scaling levers you can pull at each stage to turn your idea into a large publicly-traded company that keeps growing rapidly. Chapters 2 through 8 described methodologies for how to exercise each of the scaling levers plus case studies of successful and less successful companies and key principles for applying the levers at each scaling stage. But how can you apply these ideas to your startup? To answer that, I’ll conclude by presenting a set of general principles to bear in mind as you grapple with the challenges of scaling your startup and a tool you should use called the scaling quotient to assess your startup’s strengths and opportunities for improvement so you can sustain your company’s growth.
The Seven Principles of Scaling
The case studies we’ve seen suggest seven principles of scaling. You should think of these principles as North Stars that keep you heading in the right direction as you encounter the challenges you must overcome to turn your startup idea into a large, rapidly-growing company. Here are the seven principles.
Stay Intellectually Humble
Of all the scaling principles, one stands above the rest. It’s an idea I thought was brilliantly described in Yuval Harari’s book, Sapiens, which I read in 2018. Harari’s point was that one simple change in mindset unlocked most of humanity’s greatest accomplishments. The change? Instead of taking the answers supplied by religious institutions as the undisputable source of truth, people started admitting when they didn’t know something and did experiments to try to discover the answers. What I find interesting is that plenty of CEOs act as though they are the sole source of all knowledge and truth. This mindset is like a straitjacket constraining a startup’s full potential. That’s because such a CEO also feels crushing pressure to always appear to be in control and is unwilling to delegate important tasks to others. Changing this mindset to one of intellectual humility is the one easy-to-articulate but hard-to-accomplish change that can unlock a founder’s full potential for success. In Chapter 4, we saw how that mindset permeates Amazon, as articulated in its Day One philosophy which keeps Amazon from getting complacent and focuses the company on listening to its demanding customers and continuing to give them more. It is only by staying ahead of the customers’ changing needs that Amazon can continue to reinvent itself.
Target Blue Oceans
They are very big sources of customer pain.
There are no available products that solve the problem well.
The company has the skills to build an excellent solution that the customer values.
The market potential is well over $1 billion.
Keep Betting on New Growth Trajectories
It is very satisfying for a founder to enjoy growth by meeting the needs of the startup’s initial market. But companies that succeed initially can only sustain their success if they realize that such growth opportunities eventually mature. To sustain growth, successful founders must always be anticipating that their existing markets will mature and must bet on new growth opportunities with enough vigor to make the transition from a declining product to a growing one. In Chapter 2, we examined the case of data warehousing service Snowflake, which increased its customer count by 300% in 2018. As it grew, Snowflake bet on new growth trajectories, targeting new customer segments as it saturated the growth opportunities from its first ones. In 2015, Snowflake sold to companies in the entertainment, media, online gaming, and technology industries that were already using Amazon’s AWS cloud service ; it more recently sold to traditional enterprise customers—companies in financial services, manufacturing, oil, and gas, and retail—that were converting from on-premise to the cloud.
Create and Scale a Growth Culture
Some company cultures scale better than others. And since culture comes from the founder’s values, success or failure can be a very personal thing. The key point for a growth culture is to create an environment that attracts innovators who dedicate themselves to solving customer problems so well that the company has a great reputation. This reputation will help the company bring in new customers and keep existing ones. Yet such reputations are difficult to sustain. Founders must encourage people to keep close tabs on how well customers are using the product, fix problems, and identify unmet needs that can be the basis for new products. In Chapter 4, we looked at ezCater, a Boston-based business catering platform that was valued at $700 million when it raised capital in June 2018. ezCater’s culture put a premium on people who were passionate about inventing new products that customers were eager to buy and thereafter gave those customers excellent service so they would keep buying over a long period of time. If the people loved working for the company and the customers loved its products and services, then the customers would become its most compelling evangelists. As ezCater CEO Stefania Mallett said, “My cofounder and I are tinkerers. We ask, ‘Can we make it go faster?’ We come up with hypotheses, build a model, try it, track it, and learn from what works and what doesn’t. We try to stay ahead of the curve rather than lag it. This growth mindset is at all levels of the company and it means that everyone shares responsibility for achieving growth.”
Hire Functional Experts to Scale Your Processes
Founders will not make the journey from idea to public company unless they reinvent the company’s organization. The most important thing they must do is to hire heads of key functions like sales, engineering, marketing, and human resources who have previously built successful companies. Such leaders will know how to design and run their departments in ways that get more efficient as the company grows. Such scalable processes are essential as a company sprints to an initial public offering. In Chapter 5, we studied Redis, a rapidly-growing Silicon Valley and Israel-based provider of an open source database, which was adapting its organization to keep up with the growth in demand. Redis struggled to attract top talent before it introduced a product, so it hired the best people it could and “everyone did everything,” according to CEO Ofer Bengal. However, once its product was widely adopted, Redis was able to formalize functional departments like sales, marketing, and engineering , and the company attracted experienced executives who had run these functions in companies that had enjoyed successful outcomes.
Win New Customers Efficiently
The most impressive founders I’ve spoken with have developed the right match between their product’s benefits and the needs of customers. And that’s not all: they also know how to get their product to market in a way that does not involve sales people. Instead, such founders let potential customers try their product for free. Once they get value from the product, such users become the most effective internal evangelists for the product. And that makes selling far more efficient. As we saw in Chapter 8, Arcadia Data, a business intelligence service provider that was growing at 500% in 2018, developed a disciplined process for attracting leads and siphoning out all but the ones with the highest chance of becoming customers. Not only was its sales/marketing funnel effective, but Arcadia Data worked hard to improve it based on its analysis of what was working and what needed to be improved. For example, the company made sure it had the right number of telesales people and account executives to follow up on leads and turn the best ones into paying customers.
Retain Your Current Customers and Sell Them More
Finally, the most successful entrepreneurs are great at keeping existing customers. The key to doing this successfully is making sure that customers are using your product after they buy it. To do so, companies must assign people to work with their customers to find out what parts of the product they’re using, which they are not, and what bugs they are encountering. Such interactions fix problems, make customers eager to renew, and help identify unmet needs that can become new products that customers will want to buy. Arcadia Data was also good at customer retention and boosting revenue per customer. It retained customers because it gave them more value than competing products did. For instance, its competitors required customers to spend between $50 million and $100 million to purchase hardware to run its systems and to spend another $2 million to $3 million for software and staffing. Arcadia Data did not require these large investments and could provide analytical results in 15 minutes, compared to the five hours it took competing products. Arcadia Data also had a rigorous process for planning and evaluating its business, in which it estimated revenue and headcount in sales, marketing, and engineering in its four channels: inbound, outbound, partners, and upselling to existing customers. One key to Arcadia Data’s ability to sell more to existing customers was to encourage its engineers to talk to customers and customer service people to help them build new products that customers would want to purchase. Through these conversations, engineers learned what changes customers needed and what bugs to fix. Arcadia Data tracked its bug-fix rate, the customer churn rate, and the upsell rate. And the company introduced a new version every six to eight weeks.
Can You Scale Your Startup? Calculating Your Scaling Quotient (SQ)
Which scaling lever should a founder pull first and how does the answer vary by scaling stage? While I addressed which scaling levers should be pulled at each stage in Chapter 1, there are many right answers to this question. One approach is that when a company is getting started, the first thing to do is to create a sustainable growth trajectory, beginning with finding the right match between the company’s product and unmet customer needs. As a company reaches the second stage, hiring executives who have built scalable business models takes center stage.
Which scaling levers should a founder pull second, third, and so on? Although I discussed this in Chapter 1, there are also many answers to this question. For example, in the first stage, hiring, promoting, and letting people go comes second, as does raising capital. As a company approaches an IPO and thereafter, holding people accountable, creating growth culture, and coordinating processes take on greater importance.
- How can a founder decide whether to remain as CEO to tackle the next stage of scaling? ThoughtSpot’s CEO offered a good set of questions to address this issue, which he answered every six months based on anonymous feedback:
Do I feel bogged down or not?
Am I having fun?
Do people respect me or are they following orders?
Are we hitting our goals?
Are good people staying and doing well?
An insatiable appetite for learning is critical for a founder trying to turn an idea into a $10 billion company. That’s because each founder and startup faces unique challenges that require specific solutions. Founders must craft these solutions themselves, but they ought to form networks of CEOs and others who have overcome similar challenges. Such networks can offer valuable feedback and help founders manage the uncertainty and stress of what can often be the lonely job of leading a fast-growing startup.
- Creating a sustainable growth trajectory
Is your startup solving a problem that is so painful that potential customers would be willing to pay for an effective solution?
Do you know which growth vectors your startup will follow to get big and keep growing at each of the stages of scaling?
Does your company continue to invest in new growth opportunities to sustain its rapid growth at each stage?
- Raising growth capital
Do you have or are you creating customers who will happily refer you to others?
Is your product targeting very large markets?
Can your company offer so much value to customers that it will gain significant market share?
Do you have a team of experienced executives with prior experience in taking a company public?
Does your company have the discipline to set and exceed ambitious quarterly goals for growth and profitability?
- Creating growth culture
Have you articulated your startup’s values?
Are your startup’s values consistent with your beliefs and what will attract and motivate employees to create products that customers love?
Do you consistently behave in ways that embody your startup’s culture?
Do you use the startup’s culture to hire, promote, and let people go?
- Redefining job functions
Are you adapting your organizational structure to your evolving business strategy?
Are you splitting organizational responsibilities to limit managers’ span of control to six or seven direct reports?
Are you holding key executives accountable for results and giving them freedom to redefine their roles as the company grows?
Are you eliminating roles that cost more than the value they create?
- Hiring, promoting, and letting people go
Have you articulated a clear vision and values that inform the process of hiring, promoting, and letting people go?
Are you weighing the advantages and disadvantages of promoting from within to fill a new executive or management role?
If a strong contributor does not fit the requirements of a new role, do you help the person find a new job or manage them respectfully out of the company?
If you hire from the outside for a new role, do you evaluate whether the candidate embraces the company’s vision and values, has the skills needed to do the job as it evolves, and will take responsibility for achieving the company’s goals?
- Holding people accountable
Did you build an executive team charged with setting goals, monitoring progress to the goals, analyzing variances, and correcting course?
Do you collaborate with your executive team to set corporate goals?
Do functions hold themselves accountable for achieving controllable performance indicators that contribute to achieving corporate goals?
Do you operate effective systems to generate timely and accurate data to assess the company’s progress in pursuit of corporate and functional objectives?
Are you assessing and improving your company’s performance management process?
- Coordinating processes
Did you build an executive team charged with creating and operating processes to achieve corporate goals?
Did you engage your functional executives in identifying the mission and objectives of these coordinating processes?
Do you oversee the functioning of these coordinating processes or delegate them to the chief operating officer?
Do you monitor the effectiveness of the coordinating processes?
Do you improve processes that are still essential, eliminate ones that are no longer worth performing, and create new processes to meet new objectives?
Scaling Quotient Framework (Scoring Key: 5=Excellent, 4= Very Good, 3= Good, 2=Fair, 1=Poor) The maximum number of points for each scaling lever is in parentheses below.
Scaling Levers and Questions | Company Score | Score Rationale |
|---|---|---|
Creating a sustainable growth trajectory (15) | ||
Solving the right problem | ||
Sequencing growth vectors | ||
Investing in new growth opportunities | ||
Raising growth capital (25) | ||
Creating reference customers | ||
Targeting large markets | ||
Providing more value to customers than rivals do | ||
Fielding an experienced executive team | ||
Setting and achieving stretch goals | ||
Creating growth culture (20) | ||
Articulating values | ||
Using values to attract talent | ||
Acting in accordance with values | ||
Using values to hire, promote, and let people go | ||
Redefining job functions (20) | ||
Adapting organizational structure | ||
Limiting managerial span of control | ||
Giving leaders freedom and responsibility | ||
Eliminating wasteful functions | ||
Hiring, promoting, and letting people go (20) | ||
Articulating clear vision and values | ||
Promoting from within vs. outside hiring | ||
Letting go those who don’t fit future needs | ||
Assessing the cultural fit of outside hires | ||
Holding people accountable (20) | ||
Creating a performance management team | ||
Collaborating to set corporate goals | ||
Aligning functional goals with corporate ones | ||
Using a system to track progress towards goals | ||
Coordinating processes (20) | ||
Creating a process management team | ||
Engaging functions in setting process goals | ||
Evaluating process effectiveness | ||
Reinventing processes | ||
Your company’s score | ||
Maximum possible score | 140 | |
Scaling Quotient (your score/maximum) |
Founders seeking to calculate their startup’s SQ may need help. A starting point could be to examine the SQs of other startups. I am developing an SQ database that could be useful for founders seeking to assess their readiness for the next stage of scaling. Once you’ve developed the SQ for your current and next stage of scaling , you are in a better position to act. You should be able to identify which strengths can help you scale and which weaknesses you should seek to bolster, possibly by developing your own skills or by hiring executives with strong experience in these areas. The SQ can be a helpful tool for CEOs considering whether to continue or hire a replacement as they anticipate the next stage of scaling.
Conclusion
Most entrepreneurs go into battle with the cry of building a company that will change the world. Very few get there. The few that do excel at scaling their startup from an idea to a $10 billion company. By applying the lessons of this book, you have a better chance of really building a company that changes the world. And even if you can’t take your company to this promised land, the principles, processes, and lessons from the case studies presented in this book can help you get closer than you otherwise would have.