What Do Investors Mean by “Scalable Business”?

Before I get into the post for this week, I have to give a shout-out to the amazing team at Colombia 4.0 – Elkin, Ana, Ivan, Alex, and everyone else…thank you sooooooooo much for the wonderful experience! I was already in love with Colombia but you all reminded me why 🙂 It was an honor to be a speaker there and I hope I can get a copy of the video of my talk to share here on New Venture Mentor. 

Okay, now back to this week’s post.

Today I want to quickly discuss the idea of scaling up your business because I see a lot of new business owners get tripped up by this.

First and foremost, a scalable business is one that can maintain or improve profit margins as sales volume increases. A house painting company is not scalable because in order to paint more houses you need to hire more painters and you need to buy more materials so margins don’t really increase much with each new sale. A software company, on the other hand, is often able to scale quite well because you don’t need to add a new programmer every time you add a new customer so the cost per customer of your offering goes down with each new customer added.

A business that is looking to raise money from angel investors or venture capitalists needs to be a business that is scalable, that’s the only way the economics works. An angel or VC makes money when she can exit that company at a much higher valuation than she bought into it at, and that only happens when you’re able to scale. If you don’t have a scalable business, you probably shouldn’t waste your time looking for equity investments because they’re going to be nearly impossible to get.

It’s important to note, however, that when you’re first building your business, you may have to do unscalable things in order to build a scalable business, and that’s okay. For example, the founders of Airbnb initially went out door to door themselves to recruit hosts for their platform. Clearly, that’s not a model that could be scaled well. However, they needed to get that initial critical mass to prove their concept, so that unscalable activity of the founders knocking on doors and talking to people was the only way to get to the scalable business that they built. Ash Maurya has a whole post on this, which I recommend you check out.

So, do you need to build a scalable business if you want to have the next hot VC-backed startup? Yes. Does every single thing you do at every single point in the development of that business have to be scalable? No.

As you build your business, make sure you’re thinking about what your growth goals are and that you’re being strategic about how to get there. That will likely require some real consideration to be given to how to be scalable, even it means doing a whole lot of unscalable work in order to get there.

If you’re an aspiring entrepreneur, the best thing you can do for yourself is to just get started. Pick up my business planning ebook here to be guided through the whole business planning process for less than $5. More of a video person than a text person? Click here to try my ecourses instead.

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