Capital seems almost free these days, with “unicorns” raising hundreds of millions of dollars every week. Chances are, you're dreaming of the day your own company garners big money. Yet, for all the talk of unicorns, the vast majority of seed-financed companies never raise a series A round. And, to get even close to achieving a unicorn's potential, you'll need to scale quickly and intelligently. So, here's advice on four aspects that will help get you there.
1. Survivability is thrivability: when to scale
If you spend money before you are ready to grow efficiently, you're not scaling optimally. At a minimum, scaling too early might force you to have to raise more money, and at a lower valuation than you’d like. In the worst-case scenario, the company runs out of money and dies. Remember, you have to be alive to win.
Scaling should happen only after you have achieved product market fit. Product-market fit is different from MVP, or minimally viable product, though founders often confuse the two. MVP is used to test the market for your concept. With product market fit, you assess your product’s scalability by imagining how you will cope if you suddenly get a lot more orders.
Are your processes documented so new people can perform them? If you’ve invested in a process for handling feature requests and bug fixes, you can scale. But if you’re still at the phase where the team makes decisions in an ad hoc manner, your product may still work, but you’re not ready to scale.
Similarly, your startup needs a repeatable process for getting new customers. Sales and marketing costs are usually at least 50 percent of revenue, and often much more so in the early days. You need a methodical process for analyzing, reviewing and reallocating marketing programs to find and grow customers.
The sales process must also become more repeatable and predictable as you scale. This happens when sales teams adhere to scripts that work and know the right qualifying questions to sort out the likely prospects. With a good process, you will know about how long a sales cycle should take, and results will be predictable. You'll also recognize that as you grow bigger, you can automate many marketing and sales processes, using software. There’s a reason our own venture partners company, ScaleVP, has focused its investment in the technology that automates sales and marketing departments: It’s essential for scale.
2. Green light go: Ready, set, hire!
Hiring has to be a founder’s special skill. This chart illustrates annual headcount in a handful of ScaleVP portfolio companies. Each added hundreds of new people over just a few years. So, with your own company, identify the people you'll need ahead of reaching those milestones, to create a pipeline of interested and vetted executives and experts there when you need them.
For example, a typical sales department splits into specialized groups to serve different market segments. Who will lead each group as you subdivide? When engineering needs specialists in diverse disciplines, and product management splits from product marketing, who will fill those roles? Founding teams and their next level need to constantly be in the market for the talent they’ll need in the following year.
Beware, however: The process of adding people adds stress to a startup’s culture. As you scale, stay mindful of your core values and make a habit of talking about them with both new people and the early team. Make sure that your style actually adheres to what you profess to value. Just as kids emulate what their parents do, not what they say, your employees will monitor your actions to decide how to succeed in your company.
Talking about your values also makes it easier to talk about performance issues and process decisions, because the whole team will share a common language about “who we are” and “how we act.” Hire and keep “attractors” who adhere to your values and bring in a network of people who want to work with them. And don’t be tempted to keep talented but divisive people on your team. They will repel the good colleagues and make recruiting harder.
3. Enter the dragon: hiring for growth
The military term "tooth to tail ratio" refers to the amount of non-combat personnel (the "tail") needed to support each combat soldier (the "tooth"). A combat unit will maximize this “tooth to tail ratio” as it enters battle: More resources get deployed in the field, to face the enemy, than in the support functions behind the lines.
You should plan to invest in a similar way, when you "attack" a growth market. Spend your headcount and time on areas that will earn you market share: product expansion, engineers and designers, sales and marketing, your talent pipeline and your investor pipeline.
The tail, which needs to be strong but lower priority, includes your back-office functions, like accounting and HR, rent and office perks. As happens in the Army, a great leader of your “tail,” e.g, a stellar early CFO, can optimize your back office and infrastructure to let your “tooth” departments win their battles.
When hiring sales reps in particular, use a repeatable and measurable process. In the earliest scaling days, you will build sales from the bottom up. Most companies hire their first three sales reps and have them report directly to the CEO. Then, later, they add a sales director or VP to keep growing the team.
Meanwhile, focus on sales tools. Scripts, pricing and closing processes need to be documented and then improved. Prepare your reps to meet the process expectations that should make them successful. Tell them how many calls to make and demos to give, to meet quota, and give them proven tools.
Entrepreneurs from technical backgrounds often shy away from quantitatively managing their sales organizations’ activities, as they believe that “smart people figure it out” and should not be subjected to micro management. But that’s just not the way sales works -- it’s a numbers game, and if your team is not smiling and dialing enough, merely being "smart" will be insufficient for pulling in the deals.
4. Funding the scale: when to raise more money
As you grow, you have to widen your capital base to keep pace with opportunities. Raising new rounds is similar to an enterprise sales process; you should target new investors as you would customers: For each round, look for investors who have funded similar companies at your stage and in your sector, but not in competing companies.
Keep your investor prospects in a tracking system, like your CRM, so you can manage contacts and follow up. Just as happens in sales, you'll want to nurture investor relationships.
Each time you raise money, try to get at least 18 months' worth of burn. VCs don’t want you to have to go back to them, for another funding round, within 12 months of an investment. VCs are also looking for you to earn a higher price at the next round, so give yourself time to grow. Milestones that make your valuation go up can include successful new-product launches, geographic expansion, acquisition integration and pure size.
Attracting capital further involves attracting talent, as you’ll bring on new board members, along with investors’ dollars. Seek board candidates with the skills and domain expertise relevant to your endeavor. Picking your new investors for who they are is far more important in the long run than is a marginal difference in valuation.
The average VC holding period is approximately nine years. That’s a long time to work together. And as an entrepreneur recruiting a new investor-board member, remember that you’re recruiting a new boss, and a boss who will have a perpetual contractual right to be your boss.
So, choose wisely: Find a partner with whom your goals and values align, so you can withstand the stresses and celebrate the joys of scaling.