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The challenges of scaling up a business

Katie Coward

Created by Katie Coward, 10th May 2017

4 MINUTE READ


Tom BrittonThanks to Tom Britton, co-founder of SyndicateRoom, for supplying this insight into scaling up a business:

Remember the turn of the century, when starting up a business was incredibly difficult? The costs implicit in setting up, creating a website, hiring people and paying for office space with an internet connection strong enough to host your site made many a would-be entrepreneur think twice.

Now, registering a business can be done online in 5 minutes flat for a diminutive cost and virtually any coffee shop will provide you a good WiFi hook-up for the price of a flat white. Costs have come down so much that the only real barrier to entry for most people is taking the plunge and giving up a stable income for paycheques that may never come.

These days, the benefits of the stable 9–5 are being continually outweighed by the perks of being in a startup. It’s been this way since 2010, as evidenced by the ongoing year-on-year climb in fledgling companies – though, when the 2016 numbers are reported for the UK, we may see an exception coincide with the Brexit vote to Leave.

Number of establishments less than one year old

While record numbers of companies are forming, however, very few are actually making it out of the startup phase and into scale-up and beyond. Let’s use 2014 as an example. In the UK, there were at that time more than 500,000 new businesses started; the number of recognised scale-ups, on the other hand, fell short of 9,000 (according to The scale-up report on UK economic growth by Sherry Coutu CBE).

Scale-ups are vital because they are the real contributors to the economy through job creation and tax revenue. Compare the graph below to the graph above and it becomes clear that, while new companies are forming, the number of jobs created by these new companies is far below levels generated by roughly the same number of new businesses back in 2000.

Jobs created by establishments less than one year old

So, while it has become much easier to start up, there appears to be a massive barrier to scaling up.

Below we briefly examine the main reasons businesses fail to progress from startup to scale-up.

I. Leadership

Creating a business takes guts. The founder needs to have a good idea, a firm belief in it and in him/herself, and enough charisma to persuade a co-founder or two to come on board. As the company gets early traction, the founder’s drive and belief are often enough to keep things ticking over, to a certain point.

Scale-ups require a very different style of leadership and those at the helm of the company may or may not have what it takes to make that transition. Sheer drive and charisma are no longer enough. Founders need to move away from micromanaging and making all the decisions to placing their trust in their team, something not all leaders are willing to do; this is often a factor in startups stagnation.

II. Process

When you think ‘startup organisation’, do you – like me – immediately think ‘chaos’? Startups do their best to be agile, running lean operations when it comes to everything, including processes. While this can work in a small organisation with few moving parts, the second a company begins to scale a few processes can bring a lot of efficiency. Neglect to grasp this concept and the agility that once proved so useful will suddenly be holding the company back. Further, processes that are repeatable are ripe for automation, and automation saves time as well as costs spent on resources.

III. Funding

In the opening of this article we highlighted that the cost of starting up a business has fallen dramatically. Finding seed capital has become easier as the size of said seed capital has fallen and new players, including equity crowdfunding platforms, have entered the market. Further, some countries offer tax incentives to investors for providing this seed capital. The UK offers generous tax reliefs in the form of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, both introduced by the British government.

While the cost of starting up has dropped, the cost of scaling up has not, and the competition for it has increased dramatically, making this funding harder to come by.

IV. Culture/recruitment

As teams grow, their culture must also adapt to new people, new processes and new challenges associated with scaling. As the scale-up stage approaches, experienced hires are often made, and integrating these new hires and finding a new balance in the culture is essential – but much trickier than it appears. It’s not as simple as compromising a few things here and there, since instead of finding a happy medium one often finds that everyone is unhappy with the changes.

The trick to maintaining a solid culture has more to do with hiring the right people than it does in making multiple shifts to the established culture. Look for people that have the experience you need and are willing to help be a part of the change, patiently leading by example, rather than requiring a company memo to be sent explaining the changes required. If you ever do find yourself writing a memo about changes required to company culture, you’re in a lot more trouble than you think.

 


Katie Coward

Created by Katie Coward, 8 months ago, [last edited 8 months ago]


Tagged under Scaleup Scaling