Early-stage start-ups challenges: Scaling

Following the insights shared by founders and investors on our People and Culture blog, we now turn our focus to discuss scaling.

During early-stages, once a start-up has found the product market fit, the founding team should be ready to scale the product and sales. To do so, an important share of the capital at this stage is spent on business development and sales to improve and implement the go-to-market strategy.

More than 80% of start-ups fail¹ because they are unable to adapt an emergent to a mainstream product. They must move from niche tech enthusiasts’ clients to more mature and risk-averse mass market clients. Founders need to be prepared for this challenge and consider how to evolve their product/service relatively early in their entrepreneurial journey.

Here’s what the start-up founders and VC investors told us about their experience during the scaling journey.

From zero to one... to a million: Finding a wide network of mentors, advocates, and alliances

Start-ups should consider the accelerators that will help them scale effectively. Nearly all the founders interviewed emphasized the importance of a wide network of mentors, advocates, and alliances that can help propel the company forward.

The first sales are the hardest because clients take a considerable risk in trying a new product, particularly business clients. The right mentors and advisors provide support to enter the target market when start-ups still need to build a track record. The support can take several forms, either by providing introductions to clients, sharing lessons learned or identifying best practices to solve key challenges.

“Having great advisors on my board who have done the entrepreneurial and scaling journey before was really helpful. I received the right support from them whether it is financial, sales, legal or tax” – Series A start-up founder.

Additionally, start-ups need a solid and reliable sales engine to get to the next level. A good network of mentors and advisors is not the only factor that will help a start-up to reach its objectives (e.g., reaching multimillion revenues). Therefore, finding partners or distributors with market experience and client relationships reduces the sales cycle, liberating resources to accelerate product deployment. However, the relationship has to be mutually beneficial for a partnership to work.

“You need a strong sponsor within the organization. If you don't have one, it isn’t worth the effort because it will take a lot of time, resources, and cash to do something together. By the time you start working together the start-up has burned all its cash along the way” – Series A start-up founder

Predictable unpredictability: The sales cycle

One of the main challenges faced by start-ups is maturing the go-to-market strategy. All founders interviewed mentioned that sales cycles are often long and unpredictable. For instance, one of them mentioned that selling to similar corporate customers took between three and eighteen months.

This unpredictability has a great impact on early-stage companies’ viability, as they can’t afford long sales cycles.

In addition, the sales cycle influences the go-to-market strategy. For instance, partnerships or product licensing can be alternatives to direct sales in industries where the sales process is too long for start-ups.

The main blockers to sales mentioned by founders are lengthy procurement processes and third-party risk assessments, which may include several rounds of requests for information on technical, security and regulatory matters. Often, start-ups underestimate the time and resources required to fulfil procurement processes, especially when selling to large organisations.

The start-up can prepare for the procurement process by speaking to experienced advisors and mature scale-ups, as well as leveraging the relationships they have already established. This will help start-ups to gather all necessary documentation and certifications beforehand to expedite the process as much as possible.

Therefore, mentorships established the seed stage and partnerships forged at later stages can act as accelerators to reduce the sales cycle.

"Every single b2b enterprise software company achieves its multi-billion-dollar status through partners and distributors, we simply can't hire sales and business development reps fast enough to go from 180% to 300% yoy growth rate" – Series B founder

Good is the enemy of great: building to scale from the very beginning

As start-ups mature, they need to onboard exponentially larger numbers of new customers. Therefore, it is important that early stage founders build a product or service that can scale from early development to a mature solution to avoid re-work at critical stages.

We’ve mentioned in our blog on People and Culture that start-ups not always invest enough or use the right resources to build a scalable architecture from Day 1. Instead, they focus on a minimum viable product (MVP) that works ‘for now’ to test market needs and demand. This is a challenge commonly known by investors as ‘tech debt’ and a key challenge to scale when sales start to pick up.

Founders need to avoid this mistake or tackle it early on because it comes as an opportunity cost at the worst time: when sales or usage start to pick up. By then, start-ups spend a lot of their resources on re-building architecture when they should focus on customer onboarding and product improvement. Therefore, tech debt hits start-ups twice, as an additional cost and missed revenues.

This should be a principle applied at every stage across the maturity journey. Start-up founders shouldn’t settle for a good enough architecture at any stage if they want to sustain high growth.

However, founders can’t always anticipate market changes or a business pivot and re-work might be needed to cope with the new circumstances. In that context, if redesigning the architecture is necessary, it is worth the investment to scale at a faster pace later on.

“Some architectural decisions taken at the beginning are not the best. Later, when start-ups need to scale their systems, they need to redo everything. They end up with the same dilution effect as if they would have taken the money earlier because they raise a much higher round to redo the work” - Series B Founder

Doing much more with less: Re-designing the target operating model and setting a clear road map

As the product moves beyond the MVP stage, the focus shifts towards maturing the product while establishing a healthy sales pipeline. The leadership team has to manage costs during a period of growth where production, development, and delivery are expected to increase exponentially.

Start-ups strive to achieve operational efficiency with a smaller than average headcount. New processes are formalised through lessons learned during the development stage and the ways of working adopted as part of the company culture.

Therefore, consideration to increased robustness in process efficiency begins at this stage, pushing to effectively re-design the target operating model.

Start-up founders may increasingly lean on their accelerators or partners for support in managing core business operations or support functions (e.g., legal, financial or tax related). This enables the leadership and delivery teams to focus on product enhancements and designing a hassle-free deployment.

A couple of founders also mentioned that it is important to have a clear innovation road map to anticipate where resources will be required and leverage support from partners and advisors.

Most founders interviewed outsourced support functions or relied on partners for two main reasons. First, to maximise the resources and skill set within their teams that focus on the core value proposition. Secondly, to avoid building support areas before traction starts to pick up fast enough to justify the cost.

“Hiring resources in the wrong departments, the wrong people or growing the team too fast too soon has an impact on burn rate and can accelerate going to a Series C round that would dilute the founder”- Series B Founder

Conclusion:

Scaling is the area where founders shared the most similar challenges during our interviews. Most of their efforts are focused on:

• streamlining a scalable and reliable sales cycle and
• building solutions and operations that can absorb a spike in demand

As in our previous blog, the key takeaways from our conversations can be summarized by looking at the founders and VCs investors priorities.

Start-up priorities for scaling:

• Leverage a strong network during the early stages and build a more scalable sales channel at later stages
• Work with mentors, advisors, and partners to anticipate hurdles and streamline the sales process as much as possible
• Build a strong product that can scale from early development stages to a mature solution to avoid re-working later at critical stages
• Define the operating model of core and non-core functions and lean on mentors or partners that can support running or developing those areas
• Ensure operations are improved on an ongoing basis, leveraging lessons learned and client feedback
• Define a clear road map to maximise funds and resources

The VC investors interviewed mentioned that their primary focus was on the team. However, when it comes to scaling, their priorities when making an investment decision were:

• Assess whether the start-up has found a market-fit for its value proposition and it is ready to scale
• Ensure start-ups have a strong and scalable sales channel
• Assess whether the key capabilities are held and owned in-house instead of outsourced with other non-core functions

Start-ups founders and VC investors stressed the importance of partners and experienced advisors to scale at early stages even more so than to overcome People and Culture challenges. Some of the key challenges to scale and how expert support makes a difference are summarized below

Start-ups:

VCs:

Please feel free to reach out to the authors of this article if you would like further information or are looking for support in any of these areas.

To learn more about our conversations with Fintech founders and VC investors, read our next blog on Expanding.

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Reference

1. One of the VC investors interviewed defined failure as investments with returns below their targets. The investor acknowledged that 10% of their investments exceed their expected return, 20% break even and the remaining failed to achieve the investor expectations.