Scalability

What Investors Mean By Scalable Business

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 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.

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.

So, do you need to build a scalable business if you want to have the next VC backup 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.

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