Entrepreneurship Tips — Scaling

Well, although this is not officially defined by anyone, growth is literally any growth at all. We define scaling as the kind of growth that venture capitalists seek for high returns on their investments, which means fifty-percent compound annual growth rate (CAGR).  Typically, the math of this, which is reaching $100 million in sales in about five years, means a company will need at least 50% annual growth, and maybe 100%.  Here is a table that shows this kind of growth and reveals that massive compounding factor of this kind of growth. And explains why venture capital must seek large...

The vast majority of companies will need outside capital to grow at more than twenty percent or so compound annual growth rate (CAGR).  This can vary a lot by industry, sales cycle, margins and other cash-flow factors.  Some industries are more capital intensive, requiring upfront investment in plants, equipment, people, research and development or other things. However, generally if you plan to grow a company over $1M in sales, you will need a working capital financing strategy projecting these needs over three or more years. We define scaling as over fifty-percent growth.  So, unless your gross profit margins are exceptional,...

There is a ratio called span of control that says the most people directly reporting to a single manager should be seven. This can vary some based on the people, management systems and other factors, but it generally applies in most areas of a company.  More direct reports means the manager will have little time for other work and activities like planning, strategy, communications with outside vendors, etc.  Of course, not every manager has seven employees. Some may have only one or two.  I usually differentiate this novice as a “supervisor” not a manager. They oversee an employee or two...

This is a complex question, as there are many things that must evolve with growth. We break this down into the four “gear shifts” to get through the five stages of growth shown in the image below. The numbers above are just an approximation and can vary widely by industry and company, but are guidelines. Each stage requires very different management style, level of planning, people and risk management. These changes must be done, or the company will go sideways or fail. And often means giving up previous lessons learned and habits in the new stage.    Raw Startups require speed,...

Typically, product companies are more scalable than service companies because they are easier to scale and also easier to build barriers to entry around, which protects your margins from twenty clone companies. This is because anyone can hire your people and replicate most of your services. Many industries have near zero barriers to entry like real estate sales where you just rent a desk and join the MLS.  It is also possible to have service companies that are hybrids because they have some proprietary processes, products and trade secrets embedded that help create some sustainable competitive advantage.  H & R...