Martin Ward is a Boardwave Committee Member and today writes this guest blog for us to offer insight into why some start-up businesses fail, where the pressure points are and what founders can do to navigate and ride these critical scale-up challenges.
Getting to the first $1m of ARR is super tough, just ask any SaaS founder. After all the blood, sweat and tears, surely it’s plain sailing to Series A and beyond, now there's a proven customer proposition and real customer proof points in the bag?
But the statistics tell a different story, with 75% of venture-funded startups failing completely and under 50% of businesses making it to their fifth year of trading[1]. Clearly, entering the early scale-up phase brings a whole new set of challenges that many don’t master.
Why do businesses fail?
The central issue is that while revenues grow at a steady rate, the level of complexity involved in creating and delivering those revenues escalates much faster. If you’ve worked for a large enterprise technology vendor, you’ll understand this, with the sheer complexity of doing business eventually becoming a major source of inertia.
For the aspiring scale-up, repeatability is the challenge that is often overlooked. As the volumes of customers grow, the task of maintaining momentum gets harder as more and more need to be added in each trading period. A sales process that worked to bring in the first few customers (who were almost certainly over-serviced), may not scale efficiently and founders can find themselves chasing decisions and over-investing in poor prospects to keep things moving.
What are the other critical scale-up pressure points?
There are many, but here are some of the key ones to consider:
· Founders often heavily discount their offerings for the first few customers to secure the critical first step on the revenue ladder. This is perfectly reasonable, but it also means the business model isn’t really proven until it’s subject to scale pressure. There might simply not be enough value being created to make the venture sustainable over the long term.
· Staffing can be another minefield. Early revenue was likely generated, and even delivered, by the founders themselves. As soon as volumes grow, new people need to be added quickly to maintain momentum. It’s hard to find good people, especially those prepared to work in the perceived uncertainty of the scale-up world, and even if you can, it takes time to get them onboard and up to speed. Then there’s the risk of a mismatch, either in terms of skills or cultural fit. Mistakes can be costly and set an early-stage venture back a long way.
· An unexpected momentum killer can actually be the SaaS solution itself. Early customers inevitably identify valuable new features that the product team then builds. Spaghetti code can result, with many different versions in circulation, increasing the support workload exponentially. The way forward here is either to avoid multiple code sets by enforcing disciplined version control or planning for a unifying re-platform once a stable set of features has been determined. Either way, the complexity of diverse and nuanced customer requirements must be managed.
· And finally, there’s funding. All of the positive growth pressures lead to the need for additional investment. But this is a full-on process that can take months to complete and be hugely distracting for the founders. The answer can be to have one executive focused exclusively on the raise, with others taking up the operational slack to avoid loss of momentum.
So, what can founders do to ride the inevitable scale-up pressures?
1. The first point is to anticipate, as far as possible, the increasing complexity and plan accordingly. This means consciously considering the scalability of the sales process, designing the marketing plan to generate the volume of leads to sustain growth, and opening relationships with potential funders well before cash flow comes under pressure. It can mean warming up potential recruits well in advance of actually offering a position. None of this is a perfect science, but the better the advance planning, the better the outcome.
2. The second point is around experimentation. Even at scale-up stage, the value proposition and business model can be materially refined. It’s important to constantly seek market feedback and ruthlessly experiment with new options until business-market fit is proven. You’ll know you’ve achieved this when pitching becomes a joy, the sales conversion rate is high, and all customers are profitable by design. A well-chosen advisory board, giving an external perspective, can be a valuable tool to support this experimentation process.
3. The final point is to achieve clarity. Clear roles and responsibilities for key people, documented processes for essential customer activities, understandable business objectives around which everyone can rally, and strong values to underpin the culture into which new recruits can align. These things can seem like luxuries in the scale-up pressure cooker, but clarity helps to simplify the growing complexity and ensure the Important isn’t sacrificed at the altar of the Urgent.
Bringing it all together, you did exceptionally well to get this far. Now the challenge is to become extraordinary and ride the scale-up wave towards the prized Series-A raise and beyond.