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One problem to avoid at all costs: premature scaling

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Scaling up is hard to do

“They say that scaling up is hard to do / Now I know I know that it’s true / Don’t say that this is the end, / Instead of scaling up I wish that we were starting up again…”

OK, I’ve corrupted the lyrics from Neil Sedaka’s 1962 hit song, but I think I’m right that at times scaling up can make you miss the good ol’ startup days.

Today there is an abundance of incubators, accelerators, angel investors, and VC firms to help founding teams avoid the many risks of failure and take full advantage of their opportunities.

Furthermore, various industry experts over the years have provided a roadmap for startups to navigate their way from brilliant idea to nascent business. (One recent example is Eric Ries’s Lean Startup framework.)

However, companies in “scaleup” mode do not yet have a commonly acknowledged framework or clearly defined set of best practices to help them mitigate the risks as they seek to grow from little or no scale to larger scale.

B2B SaaS is very different from B2C SaaS and requires a different growth strategy

A Get Big Fast mindset often takes hold among investors and the founding team itself, especially if they are conditioned to believe that ‘first mover advantage’ is critical and that ‘winner takes all’.

As my colleague Geoffrey Moore, author of Crossing the Chasm and other prominent books on growth strategy, wondered aloud to me recently: “On the Get Big Fast front, aren’t we just seeing the classic ‘chasm myopia’ that we have been helping customers to solve for since the 1990’s and 2000’s? It’s been made worse, for sure, by the B2C ‘chasm-free’ tornadoes, but now that B2B(2C) is in fashion, we’re back to square one.”

The enterprise SaaS marketplace that has emerged in the 2010s is often heavily influenced by the consumer internet success stories from the 2000s, when Amazon, Google, Facebook, and younger companies such as Expedia, Groupon, and Dropbox became prominent, followed later by the mobile-powered apps like Airbnb, Uber, and Spotify. For these companies, after initially crossing the chasm with more focused market strategies, customer adoption everywhere was a paramount objective, in a land-grab largely financed by VC and PE firms. Proving financial viability came a distant second, because some of these companies needed years to develop and refine their business models. Uber recently IPO’ed without yet having developed a profitable business model.

In today’s B2B companies the back-seat drivers on the board can become over-anxious for their company to become the number one player in their category, in the conditioned belief that they are in a winner takes all game. And when investors get anxious they often cause management to make unwise strategic and resourcing decisions.

Enterprise SaaS is a complex systems game

But the world of enterprise SaaS – led by the early pioneer Salesforce, followed by Netsuite, ServiceNow, and Workday, and more recently by Box, Mulesoft and Atlassian – is quite different. Enterprise categories are not usually winner takes all contests. And the scaling process is usually quite different. While consumer internet companies often target adoption before monetization – or before profitable monetization – B2B SaaS companies need to focus on helping large and medium enterprise organizations to solve complex, sometimes intractable, business problems, in exchange for which these customers expect to pay for the software and services they receive. Indeed, corporate customers much prefer to buy software from vendors that have a demonstrably profitable business model, because they generally want to know that they can count on the vendor to be in business to serve them for the next several years.

Among enterprise SaaS startups it is common for the CEO and exec team to become consumed with trying to serve too many different types of prospect and customer in different market segments, resulting in stretched resources, products shipped late and bug-ridden, and disappointed or defecting customers. CEOs and their co-founders may also get distracted by new shiny objects – whether this be a new technology, development of a second or third product before their existing one has achieved sufficient adoption, a new geographic region to invest in, increased outlays in marketing programs, in essence pursuing a More is More strategy.

The truth is that scaling an enterprise SaaS business usually takes longer than scaling a B2C SaaS business, and has different complexities. Almost invariably, it occurs in two to three distinct stages (more on this below). Getting this wrong – in particular, forcing growth in the wrong ways – can take a perfectly viable B2B SaaS company way off track. I’ve lost count of the number of young scaleups that I’ve seen experience a “chasm crisis” – faltering adoption, revenue lumpiness, board-management disputes, high management and employee attrition, etc. – causing loss of momentum and a need for a complete reset under new management. This can end up multiplying the actual time-to-scale of the business by anywhere from 2x-5x, while increasing its cost of funding before reaching viability by a similar factor.

The key issue – premature scaling

Overall, scaling up a young tech business – gaining mainstream product adoption, developing repeatable solutions for different use cases, migrating from lumpy revenues to a predictable growth curve, and enabling your organization to keep up with rapid change – is as poorly understood today as startup entrepreneuring was thirty or forty years ago. Part of the problem is that “scaling up” is treated as a single transition to infinite growth, whereas my experience is that it takes place in at least three distinct stages. You can’t expect to “scale” your organization to perform programmatic product development, operate marketing programs, ramp your sales teams, and manage customer success activities in one single transition. So it’s best to avoid being in too much of a hurry.

Enterprise SaaS – three scaling stages, not one

Many enterprise SaaS companies never quite complete the transition from their early-market mode of delivering one-off projects to a handful of customers, to delivering repeatable solutions to more customers in at least one target segment, and eventually into half a dozen different market segments. In fact, this transition is not a simple gear-change because it involves so many simultaneous moving parts. How can a young scaleup avoid falling into the trap?

The first step is to understand the three main scaling stages and determine how this model applies to your company today because this will help to determine your growth/scaling strategy going forward. Note that the stages described below may well apply differently to your specific category and company; the important thing is to break the scaleup process into stages that make sense for your specific business rather than treat scaling as a single monolithic move.

1. From no-scale to low-scale: Migrate from one-off projects to repeatable processes – this applies equally to product development, marketing programs, sales process, project management, and customer success activities. This initial scaleup stage often equates to crossing the chasm and is often the fence where horses fall first and hardest. It might take 24-36 months to complete this stage successfully, longer if, for example, you attempt to please everyone rather than prioritizing to a specific target market segment. Marketing at this stage is almost entirely about thought leadership on customers’ business problems and how you can help them to solve them (Why does what we do matter? Why are we different? Why should customers buy from us now?). This is where you build your first sales team under a sales leader who isn’t the CEO. Sales process is highly consultative with a real solution focus, rather than being transactional, so do not hire a sales VP from the classic (transactional) Oracle, Salesforce or other established-company background. Lead-gen at this stage results mainly from thought-leadership marketing programs. During this stage the executive team usually needs to be fleshed out and to begin implementing a middle management layer. The employee count starts in the tens and ends in the low hundreds. This is the stage where a profile of lumpy revenues from relatively few deals starts showing signs of becoming more predictable. Revenue growth rates may be 50%-70% or even 100%+ by the time your company has crossed the chasm and hit its stride. Key metric to assess when this stage has been successfully negotiated is that the company has gone from being a promising player to an emerging category leader in at least one (vertical) market segment.

2. From low-scale to mid-scale: Migrate from repeatable processes to standardized processes and deliverables– this is when you broaden your product, marketing, sales and customer success reach to include solutions for different use cases and even different types of customer. Marketing focuses on events such as industry conferences, customer advisory boards and user groups, and uses BDRs (Business Development Representative) to generate MQLs (Marketing qualified leads) for each target segment. Sales process is becoming standardized and transactional, sales cycles get shorter, quotas are quarterly. You may be migrating from one core product to two or more as you build your portfolio. In technology adoption terms, this stage equates roughly to playing in the bowling alley, working with customers in as many as six or seven different vertical or geographical segments. In the cases where the nature of the business has a bowling alley “forever” flavor (as opposed to being sucked into a mass-market tornado, which occurs with very few product categories), this stage might last for several years, very profitably. Organizations typically start this stage with employees in the low hundreds and end in the low thousands. ARR growth should be in the 40-70% range, and may be higher, with an increasing focus on expanding account penetration and thus customer success resource allocation. Valuations become dependent on competitive pecking order within main product category. The key metric to assess whether this stage has been successfully negotiated is that a company is now an established player in various prominent market segments.

3. From mid-scale to large-scale: Migrate from standardized product to standard offers with packaged services (Tornado) or product line extensions accompanied by tailored services for different use cases and niche markets (Main Street). Most product categories do not experience a mass-market tornado so this adoption stage may not apply. In which case, bowling alley (forever) morphs over time straight into Main Street maturing market mode. In either case, the company is now approaching maximum scale in relation to its product category or portfolio, and competitive pecking order is well established. Number of employees might reach the mid-thousands or higher. At this point growth rate slows to 15%-40% but profitability should be well established. Valuation is also well-known and difficult to change upwards. The key metric to assess whether this stage has been successfully negotiated is that company is now an established player in various market segments and has successfully launched subsequent offerings in an expanding portfolio.

It’s never just about the product

It is generally helpful for young scaleups to understand that the enterprise SaaS game is never just about having a great core product. It’s much more about your overall process for engaging customer executives and business users to not only install and implement the product as close to on time / on spec / on budget as feasible, but to get it successfully adopted, and ensure that your customers achieve positive results for their business. If you haven’t done this more than a handful of times, you probably don’t yet have anything like a proven process for successful implementation, adoption, and ongoing/increasing engagement.

Here’s a checklist of critical tasks that young, fast-growing scaleups must learn to execute as they develop:
1.Describe, position, and demonstrate your offering, to help customers understand what you are and what you aren’t,
2. Build effective business cases to help customers make their buying decision,
3. Manage customer expectations effectively, to maximize success and avoid dissatisfaction and defections,
4. Close deals in a (relatively) predictable set of steps and timeline,
5. Migrate from one-off projects to repeatable playbooks, then later to standardized offers,
6. Support customers through ups and downs, while expanding their use of your offerings,
7. Manage contract renewals and expansions effectively,
8. Introduce new offers in an expanding portfolio, to extend lifetime value with major customers.

Countries where tech is still a very young industry

One final consideration that applies in the newer tech regions such as the UK, where I operate mostly these days, is that the industry is much younger than in the U.S., where it started forty or fifty years ago. In the UK specifically, the industry got going only ten or fifteen years ago. Consequently, the talent pool in all functional areas is still quite limited, particularly in product management, solution marketing, and consultative sales. The executive and middle management layers are equally constrained by simply having less experienced people to choose from.

This constraint is a critical factor when you are trying to grow a startup from, say, 20-30 employees to 100+, and then to 250-500+ people in different locations/regions, all in a matter of two, three, or four years or so.

Where institutional investors can help

In a tech world populated by a record number of relatively inexperienced entrepreneurs and executive teams, they tend to be highly respectful of – and dependent on – their venture investors and non-exec directors. Where one or more board members might agitate for a more rapid and ambitious scaleup, teams will tend to hire the wrong people, or too many of them, too quickly; they might also choose to open in new countries before they are ready; or make acquisitions that they are not ready to absorb.

If I had my druthers the one thing I would want to achieve with VC and PE investors, and non-exec directors, is to wean them off their tendency to apply unrealistic Get Big Fast expectations and metrics to a young scaleup, expecting them to transition from early market one-off customer projects to selling and delivering standardized products in one step-change.

One of the most common specific mistakes that I see in this respect is to urge the founders to switch virtually overnight from each sales opportunity being handled by the CEO or founders, to hiring a VP Sales who’s “done it before” at a larger company and expecting them to bring in a team of sales reps to “scale the business”. Almost without exception this model leads to failure.

As long as they understand the various scaling stages and make an accurate assessment of which stage each of their portfolio companies is in, my hope is that they can support and fund the business appropriately rather than expecting too much, too fast.

Conclusion

For enterprise SaaS businesses, building lasting, profitable relationships with corporate and public sector customers takes time. Whatever the product, sales cycles typically range from six months to two years, and customers expect to increase their commitment and adoption significantly over time, assuming their vendor selection proves to be a success.

Building and maintaining a successful organization to serve these customers, dealing with different competitors over time, entering new geographical markets and industry sectors, growing the product portfolio to solve for new use cases, and keeping VC and other investors engaged and motivated to re-invest while they proceed towards a satisfying M&A exit or IPO – all of these activities take time and care to execute effectively.

Thus the scaleup journey tends to be riskier and more laborious than one might expect at the outset; but if entrepreneurs and investors are willing to slow down a bit in their rush to scaleup the business, in accordance with natural growth dynamics, they will find that the company will do a lot better than if they rush things.

Scaling is a multi-stage process, it just can’t be achieved in one leap, so don’t waste valuable funds, energy and time trying.

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