If you’ve ever been to an entrepreneurial gathering or talked with a venture capitalist, chances are someone has asked, “Is your business scalable?” Or maybe you’ve read an article or blog post and wondered, “Is my business scalable?” Or maybe you’ve wondered, especially if you’re in a service-driven business, “Can my business even be scalable?”
At the heart of all those questions is a definitional question, “What does scalable mean?” And that immediately raises a whole slew of other questions. Why? Because like virtually every other word in the English language, there’s more than one definition. Ask ten people what scalable means and you’ll probably get ten different definitions.
Back in my old pastoral days one of my most used phrases was, “Context reigns as king in interpretation.” For example, if I say, “Eleanor ran her stockings this morning,” my guess is that you didn’t imagine Eleanor in a jogging suit running along the street with a leash attached to her stockings next to her. Why? Because the context defined the use of the word “ran.” However, if I said, “Anik ran his program this morning,” you might not be sure if I was referring to a computer program that he ran or a workout/running program that he ran. You need more context.
In the case of the word, scalable, the same principle reigns. Just as there are multiple definitions of the word “ran/run”, so there are plenty of options for the word, scalable. I’m going to give you two.
I. If You Want to Be the Next Google or Amazon
When venture capitalists use the word, scalable, they’re usually using it in a very specific way. And to understand the way they use it, you need to think like a venture capitalist. VCs want to find home runs. They want to find the next big thing and, in general, get their money out fast. They don’t want long and slow, they want short and fast, which is why they tend to have a preference for technology companies.
A scalable company for them usually means several things.
1. Your business can grow sales volume rapidly with a decrease in variable cost (i.e. it can grow its revenues far faster than its costs so that each new sale and/or customer costs “less”) which leads to massive profits.
2. Your business can handle a sudden influx of new customers/sales. This is one of the main reasons why most service-based businesses aren’t attractive to VCs because they usually depend upon talented individuals and customized solutions. Both of those items make it difficult for a service-based business to handle a rapid influx of new customers. They just can’t handle the demand.
On the other hand, if a software company’s core product works with millions of customers and simply needs more bandwidth and hardware to handle the increased load, that’s scalable from a VC vantage point.
3. Your business is positioned in a large market (and can take market share from others). If there’s not a large market/huge demand for underwater-weaved baskets, the company that wants to produce them probably won’t be perceived as scalable (even if they systematize the process of producing those baskets underwater). The market isn’t large enough to interest them. To be scalable for a VC the market for your company should be able to support you becoming a $100M, $1B or $50B a year company.
For most VCs, I think those three qualifications will work for defining what they mean when they ask you, “Is your business scalable?”
Note: Chances are some of them might add a fourth, which is their preference, which would be that a scalable company is one that needs outside capital to drive demand and scale up.
So, if you want to build the next big thing and become the next Steve Jobs, Jeff Bezos, Elon Musk, etc. you should think of building a scalable company using the three criteria above.
II. If You’re a Typical Small Business or Start-Up
Okay, now that we’ve gotten past the “dream” let’s get back to reality. Most entrepreneurs and business owners won’t create the next big thing. There’s nothing against dreaming that way, but the odds are pretty much against it. There are roughly 28M businesses in the US. Of that, roughly 6M have employees. Of that 6M, 89.3% have 29 or fewer employees and 98.2% have 99 or fewer employees. If you do the math, that means that only 4/10ths of 1% of companies get beyond 99 employees (or 99.6% of all the businesses in America have fewer than 99 employees).
So, what does scalable mean for the rest of us? Here are my four criteria (that I think will help you)
1. Your business is systematized so it can run without you. The primary reason why most small businesses aren’t scalable is because owners/entrepreneurs aren’t scalable. If your business needs you and your brain power and effort, it’s not scalable. It’s an incorporated career.
To be scalable, it has to be able to run without you (which is actually good news for you because being scalable means you’re freed up to work on big projects, take time off for vacations and/or start new projects/companies/ventures).
2. Your business can produce a consistent and predictable result for clients/customers (i.e. that it’s replicable). There’s nothing wrong with leading a service-based business, the problem is it’s hard to scale because each customer/client tends to require a customized solution (think attorney, consultant, accountant, architect, etc.).
By definition, a customized solution can’t produce a consistent and predictable result because it’s not repeatable. So, the trick for most small businesses is to learn how to take what they do and reduce it to a process that can be applied over and over again to produce a predictable and consistent result.
3. Your business isn’t dependent upon exceptional talent. Now, I want you to notice I didn’t say your business needs to be able to run regardless of who’s employed because that’s a lie. You’ve been to some franchises one time and others multiple times. The reason why? The people, they still matter.
However, to be scalable, your business can’t be dependent upon a lot of superstars. First of all, they’re hard to find and secondly, they tend to be expensive. Instead, you want to build a business that can be run with good, competent people who can work the systems and deliver extraordinary results.
4. Your business can handle a reasonable new influx of customers/sales. While VCs want your business to work if you get a rapid influx of 1,000 or 10,000 new customers this month, chances are that won’t happen to you. But, what if your small business were to increase by 50% this year? Or if you were to double or triple or even quadruple your sales this year, could your business handle it? Could you rapidly bring in new resources (from people and processes to hardware and finances, etc.) and get them up to speed to handle that demand?
So, if you want to build a scalable business, and aren’t concerned with building the next Google, I’d encourage you to focus on these four ideas.
1. Systematize your business so it runs without you
2. Build your core offering so it produces a consistent and predictable result regardless of who the customer is
3. Build your business so that good, competent people can produce those results using your systems and processes (though there’s nothing wrong with grabbing as many highly-talented people as you can)
4. Design your business so it can rapidly handle a decent influx of new customers/sales
Based on those criteria, how are you doing? My guess is you probably now know you have some work to do.
To your accelerated success!
P.S. Do you have any other ideas or insights on what it means to build a scalable business? If so, make sure you share them in the comments section below (or click here >> if you’re reading this by RSS or email)