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Why Scaling A Business Is So Difficult

Scaling, business

Scaling a business is very difficult. Many get to a level and then it tapers off and they struggle, especially if you aren’t funded by a Venture Capital group.

I’ve been lucky enough to scale a bootstrapped company, a VC-backed company, and now a venture-equity-backed company; each has its challenges, but there is a common thread.

It’s difficult, challenging.

I’ve stated the obvious, but let me back up a bit. My brother and I bootstrapped a small retail company that we bought in 2005 and sold in 2015; we grew it 42% CAGR and sold it to a Private Equity company. Scaling a bootstrap business is tricky; you don’t have excess working capital, and every dollar we had was reinvested in the company, typically into inventory. The problem with scaling is people and money are typically not overly prevalent.

What happens to many businesses is that they get to a point where they are too big to continue the path they are on, but they don’t have the capital to hire the right team that they need. They are personally doing multiple jobs. I was the CEO, CFO, and CTO. That is not sustainable. But if you assume $200k for each C-Level, we didn’t have $400k in excess working capital; it was all invested in inventory. You either bite the bullet and hire the “professionals” or stall or grow very slowly, which isn’t a problem if you are content with it as a lifestyle business.

I will be honest: in 2005, I thought I wanted a lifestyle business. But over time, my drive took over; more prominent was always better, and the race started to be number one.

This same pattern emerges with SaaS startups; it isn’t isolated to retail companies, especially where they are founder-run. They typically run to a point where there is a decision on lifestyle business or scale. Scaling is a tough decision; you aren’t guaranteed any return, and it is a large bet many founders don’t want to make.

You have the money to scale when you are VC-backed, but that doesn’t mean you know what to do and where to invest correctly. For instance, you should invest forward in Sales and Marketing but play catch up with operations and other areas. If, for example, Sales and Marketing is running at 15% of revenue, you would invest up front, taking that percentage up to maybe 20%, and then wait for payment to whittle it back down closer to 15% and reinvest. On the flip side, you want to play catchup for nondemand aspects. We would watch operating labor; if we wished to 10%, we would wait for it to get to 9% and then add. This allowed us to leverage the current workforce and gain efficiencies. If our engineering and product teams did it right, we could always do more with less, so it was constantly leveraging slightly.

In retail, the golden egg was always inventory turns. We targeted six turns of our inventory and often operated in the 7-9 turns range; this freed up a lot of capital to invest in other areas. Times have changed quite a bit over the last five years, with many retailers not holding their inventory, doing drop ships, leveraging Amazon FBA, and lowering warehousing investment and operating costs. In SaaS, it is gross margin; if you are efficient, you free up a lot of working capital to invest.

Whatever the type of business, the game is still the same; the cost buckets are just different. Scaling requires understanding where to invest, committing to that area, and planning how to continue to add or when to pause to grow efficiently. For instance, whether you are adding new employees or opening a new branch, a business VoIP phone service can help you scale up or down without hassle and improve your communications. These services are incredibly flexible and easily adapt to your business’s changing needs. Likewise, their advanced features, remote work capabilities, and integration options can benefit businesses of all sizes and industries amid other cost-saving advantages.

Special thanks to our friends at Searchspring for their insights on this topic.
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