This blog was originally posted on The Accelerators - WSJ Blogs on June 28, 2013.
Scalability is the first stage of success for an entrepreneur and his or her early stage venture investors. It’s when the concept is proven and the business can grow. This means that all parts of the organization are ready to expand to meet demand.
When most people talk about scalability, they are talking about revenue scalability and while that is important, it is not a sufficient prerequisite for success. A business has reached revenue scalability when growth becomes more formulaic, meaning that with a certain number of inputs (investment capital, employee productivity, etc.), a reasonably predictable number of outputs can be achieved (new customers, revenue, bookings, etc.).
Achieving and maintaining revenue scalability isn’t about getting any one thing correct. It is a complex, multi-dimensional challenge. Each of the different elements of revenue scalability reach break points at different levels. The methods that were effective in generating leads sufficient to grow to a $50-million business may not be enough to grow the company at the same rate to $100 million in sales.
By the same token, effective sales can change dramatically at different levels of scale. In the earliest stages of many companies, all sales are person-to-person directly made by the principals, but this doesn’t scale. Successful companies must put in place an effective sales organization. At an even larger scale, companies need to work through partners and channels to efficiently reach enough customers to effectively grow.
The specifics of these revenue scalability challenges will differ from company to company, but there is one aspect of the challenge that is the same for all companies: the critical component of hiring the right people. In the rush to hire employees to help meet increasing demand, companies often stumble by hiring the wrong people. Those mis-hires can take what was once a promising growth company and consign it to the dustbin of history. Revenue scalability is complex and important.
But scalability is more than that…
The scalability of most technology businesses is dependent on things beyond revenue scalability. For many tech businesses, service scalability and product or design scalability are at least as important as revenue scalability.
Service scalability is when the demand of expanded users can be met. Friendster may have been Facebook — and Facebook not much more than a cool app for students at Harvard — if not for the fact that Friendster was unable to scale its service. Friendster’s service performance was great when it had 100,000 users, but it degraded to the point of being unusable when it had several million users. Facebook deserves credit for building a service that was able to add massive numbers of new users without impacting the overall quality of service. For many tech businesses, service scalability is a proxy for “does it work.” Especially today, when many tech businesses are services delivered in the cloud, the ability to scale service to deliver a delightful experience to users is imperative. If a company can’t do that, it will fail.
Product or design scalability for enterprise applications generally encompasses breadth of support. For the first few customers, the environment supported is fairly limited. But to scale the business to hundreds or thousands of customers, the product will have to support many more user cases. For marketplace businesses, this is literally how the service is designed. The design of a marketplace that worked for thousands of listings, is unlikely to work when the marketplace has 100s of thousands or millions of listings. Product or design scalability is crucial.
Scalability is a job that’s never finished…
Managing scalability in any business is a never-ending process. The things that allow a company to scale sales today may not work tomorrow. The architecture that handled one million users probably needs some work to support 10 million users. And the design that allowed a marketplace to support tens of thousands of transactions probably won’t work for millions of transactions. This is as true for a startup as it is for a mature business. Investors at every level — from venture investors to public-market investors — are always on the lookout for signs that businesses can handle scaling and are making investment decisions based on scalability.