Pete is a classic entrepreneur. He spent 15 years building his manufacturing firm to a R30 million outfit, before his big opportunity came to take on contracts worth R120 million, allowing him to scale to R150 million within five years. This was everything he’d worked towards. This was his retirement plan.
Five years later, instead of running a R150 million business, Pete is burnt out and broke. His company is closed and he’s lost everything. The crisis has even torn his family apart. How did this happen?
A common fate
Unfortunately, it’s a far more common story than most of us would like to admit. 70% of the top 1% of businesses (by growth potential) land up failing to scale. Sometimes, like Pete, they lose everything and close the doors. Other times, they land up bigger, but managing a chaotic hell of their own creation: A daily sprint to survive, a never-ending treadmill of frantic hustling to keep things together, with the horizon never coming closer.
The most common reasons? Either scaling something that fundamentally is not scalable, or scaling poorly; not making the right changes at the right time.
In this article, I’ll be focusing on the first reason: Attempting to scale a business that is fundamentally not scalable — because not every business can be scaled. If your ambitions are focused on high-level growth, step one is to determine if you have the right business model to do so. Because if you don’t, that’s the first change you need to make.
Some companies scale easier than others. And some don’t scale at all. Let me illustrate with two extreme examples:
Very scalable: Dropbox makes an extra $10 for every user they add, while adding $1 of cost, and zero operational capacity. That is very scalable.
Not easily scalable: A start-up ad agency is soon faced with a growth ceiling created by the limits of the founder’s time and energy. This normally occurs somewhere between ten and 20 people. An ad agency is not a scalable business model because growth requires top, senior creative talent. Such individuals are rare, have attractive options, and usually prefer to either work for big multinationals, or run their own businesses. It’s therefore tough for smaller agencies to attract and retain talent without offering large chunks of equity, which can be a zero-sum game. It sometimes even works out net-negative. Unless you find a way of breaking that constraint, this is not a scalable business model.
So, what makes me scalable?
Building a scalable business is a bit like picking a spouse. There are a number of criteria to consider, the absence of any one of which is a deal killer, even if all other criteria are amply present. A suitor may exceed your fantasies in every regard (looks, smarts, fun, caring, etc), but if they are also prone to parallel relationships, that’s enough to pull the plug and look elsewhere.
Just as in relationships, a number of things must come together to make your business scalable. Here are the ten most fundamental drivers of scalability grouped into three core areas: Scalable market, scalable business and scalable team.
- Size (Total Addressable Market, or TAM): The market must be big enough to achieve your ambitions. As a rule of thumb for ambitious entrepreneurs, TAM must be at least 4X your business size goal. If you want to build a R500 million business, you need a R2 billion market.
- Economics: It’s expensive to scale. You need to invest in great management and top talent, plus spend on infrastructure ahead of actually seeing growth. To make that sensible, it must be very profitable serving your market.
- Growth: The market must be growing, and preferably faster than the rate of new competition.
- Number one: Highly scalable businesses almost inevitably are number one, or will become number one in their market or niche. If you can’t lead the market, you must be able to lead a sizable niche.
- X-Factor: Every market has a bleak outlook: More competition, lower prices, lower margins. Unless you have some fundamental reason to continue to lead the market despite competitive intensity, such as proprietary tech. It must be good enough that you can be and stay number one in your market.
- Scalable channels to market: Some customers are just impossible to reach profitably. A scalable business has access to channels to effectively target, market to and sell to customers profitably.
- Scalable operating model: Scalable businesses have unconstrained access to all critical materials and talent, without breaking the economic model.
- Scalable economics: You can calculate the scalability of your economics with a simple formula: [Gross Profit per R10 million new revenue] / [new cost required to manage each R10 million new revenue (managers, systems, facilities, etc)]. Highly scalable businesses have a 2X or higher ratio. 1 to 1,2 is borderline and scaling will be like walking on glass. Most businesses have a ratio <1, which means they will lose money by scaling.
- Scalable founders: Statistically, most founders are not scalable. They lack the experience, skills and personality profile to make the required shifts as the business scales, and to develop the organisation through its various lifecycle stages. Scalable entrepreneurs are able to:
- Build a great culture for >100 people
- Attract and build an A-Team of truly impressive senior leaders, and delegate large parts of the business to them
- Be ‘builders’ and ‘managers’ — that is, graduate from ‘entrepreneur’
- Submit their interests to the best interests of the organisation, even when it’s painful — we see this when founders step down in favour of CEOs with corporate experience
- Lead the transition of the business to a professionally managed company, introducing systems, processes and policies in a way that does not break the company’s culture.
- Leadership team: Particularly in the most painful scale up stage — going from ten to 100 staff — the key driver of scaling well is the quality of the top team. That’s why quality of early hires is a great predictor of scalability. Leaders who can adapt and be effective in a business of ten, then 20, then 50, then 100 staff are truly remarkable, and therefore exceptional. Not many manage this transition. These leaders can be effective in three completely different ‘modes of organisation’: The hustle (at ten people); The build (from ten to 100 people); The operate and grow modes. By implication, they are — or can grow into — executives. They can hustle. But they can also shift from a tactical focus (immediate fires and opportunities, action focus), to a strategic focus (future focus and system focus). They are able to run operations while transcending operations, bridging the long-term strategy, the short-term strategy, operations, culture, team, and finances, and they can do that in a company of ten people, or 100 people. Of course, you can bring in new leaders and you can replace leaders that are not scalable, but this dramatically slows the scale-up journey and can even derail it.
The result of having founders and leaders who are capable of scaling with the organisation will be the automatic development of the other key ingredients for a scalable team: Great talent, a highly engaged team, a great culture, and an effective organisation.
The key to growth
If you’re following the path to scale, or investing in a scale-up, it’s important to be aware of the causality amongst the above ten factors. Typically, the main factor that drives the speed at which a business can scale is how quickly founders can delegate major areas of responsibility, so that the business can continue to make rapid progress at scale.
This in turn is driven by the ‘next level’ (non-founding) leaders, as well as the leadership abilities of the founders. The problem is that early-stage companies struggle to attract top talent, unless they find people who want to be a part of the equity-incentivised leadership team pursuing an exciting opportunity. This type of career opportunity can usually attract top talent, despite the various reasons these individuals gravitate towards well-paid corporate roles and their own ventures.
But that sort of opportunity does not typically happen by accident: It’s the function of the founders getting points 1 to 9 right. In a nutshell, the first thing you need is an amazing team of founders who work smart to nail points 1 to 9, find and pursue an amazing opportunity, and then harness that to attract amazing talent in order to delegate effectively, so that you can scale beyond the limits of the founders’ time and energy.
What To Look Out For When Seeking A Mentor Or Coach
There is value in choosing a mentor or coach to help you build your business, says Dr John Demartini. Here he offers some sound advice on how to go about doing this so that you benefit from the experience.
When I was in practice I noticed many doctors attempting to build a business would seek out mentorship from management consultants, from people who have already been down that path. And there’s wisdom from learning from foresight and not learning from trial and error. But there’s a pitfall – I noticed that not everybody is able to do or sustain the actions that these consultants would suggest. Where some would follow and immediately go and succeed, there were others who would sometimes feel self defeated because they couldn’t sustain the actions that the consultants would suggest and recommend.
So a small percentage would excel and do extremely well. But there were those who would spend their money on the coaching and they’d never get anything in return. So the question is – what made the few excel with the help of a coach, consultant or mentor? And why is it that the majority of them didn’t do as well? And it boils down to how congruent the actions of the coach or consultant are with the values of the person that’s striving to build a business.
I have listened to numerous professional consultants all offering slightly different information about how to build a business. I have taken and learned from all of them. Some of them would suggest things I just couldn’t do – it just wasn’t me – and other things that I could do. And when I couldn’t do something, the coaches and consultants believed I just was not disciplined, not driven. They would imply that I didn’t have the drive… Their material works, but I wasn’t following it.
And those of you who have had the same experience will understand what I’m saying. And you need to know that the reason you don’t do what these coaches suggest is because it’s not aligning to your values. So you are labeled lazy, undisciplined, not driven. You are given these labels instead of realising that you’re self defeating because what they suggest is not congruent with your values. And so you go to different consultants until you finally find the one who matches, whose values are aligned with yours.
So it’s important to not envy and imitate somebody with a drastically different set of values. If you’re seeking a coach or mentor, make sure the coach/mentor has a value system that is closely enough aligned to yours or you will be setting yourself up to fail. Just because somebody is successful doesn’t mean if they are your coach or mentor that they will have the values that will lead you to that same form of success. You need to either shift your values to be able to succeed in their system or you need to find the mentor that aligns more with your values. Otherwise you’ll be beating yourself up thinking there’s something wrong with you when there’s nothing wrong with you. When you find the right mentor, you will take off.
So you either have to change your values to match the objectives of the coach, or change the coach to match the truth of your own values.
So the bottom line is, if you’re going to get mentorship, coaching or consulting from somebody, don’t just select the person because they’re successful. Select them because they’re successful and they have some alignment with your mission and your values. Make sure you select your mentorship and a consultant that is truly valuable to you; don’t live in a fantasy about who you are.
The Link Between Scaling, Relationship Building And Technology
It is the first solution of its kind in South Africa, this platform supports entrepreneurs to effectively establish legal foundations in their businesses for optimum growth and overall business success.
The challenges and opportunities of this new world and that the world is more connected than ever. The constraints of distance is no longer applicable and as a result business has little constraining borders. Networking is therefore still a component in key relationship building.
It brings me to my real point – in a world so busy and connected, what we cannot make more of is time and time, unlike any other commodity is invaluable when it comes to forging important relationships and sustaining them. So, if technology can break barriers when it comes to legal cost and time spent on it… why not? Especially when so many have experienced the consequences of not documenting the most important relationships in their business.
The SchoemanLaw SME Self- Service DeskTM is the ideal tool for any member-based organisation wanting to capacitate and empower members. It is an affordable and reliable online solution for start-ups and SMEs, where Users can customise and download their own contracts online and in minutes. It is the first solution of its kind in South Africa, this platform supports entrepreneurs to effectively establish legal foundations in their businesses for optimum growth and overall business success.
The following documents are examples of those available on the platform (currently hosting over 35 documents / agreement types):
- Confidentiality and Non-Disclosure Agreement (“NDA”)
- Independent Contractor Agreement
- JV Agreement
- MOI and Shareholder’s Agreement
- Supplier Agreement
- Letter Demanding Payment
- Various HR Documents and Company Resolutions
- BBBEE Affidavits (EME and generic QSE)
and many more!
Prices range from R195 and R895 per document if downloaded on a pay- as- you- need- basis or R249 / R495 per month on a subscription basis, this is over 75% less than usual rates if traditionally drafted by an Attorney. What is more, Users have the support of a Law Firm not only having created, but who maintains the platform and supports each User. We even offer customisable solutions. So, there support and a solution for any business regardless of size and industry are on offer.
The platform is easy to use, no prior legal training is required, and Users are supported through help texts, free podcasts, videos and training events. In the case of a legal incident occurring, you can consult with an attorney with the click of a button.
The platform is also ever evolving and completely customer- driven. Documents are added as and when customers request them. All the documents are also frequently updated to ensure that they align to the latest best practice. There is no need to leave your legal needs unattended ever again! The SchoemanLaw SME Self- Service DeskTM therefore ensures that SMEs are no longer invisible and capacitates them to free up time needed to build relationships, grow and scale their businesses.
Empower your business today, go to: https://www.schoemanlaw.co.za/online-legal-services/
5 Winning Ways To Strengthen Your Bottom Line This Year
Let’s get down to the nuts and bolts of your profitability.
The beginning of the year is upon us, and the question everyone is asking is, “How are we going to make this year more profitable than 2018?” Break away sessions to strategies are always good, however, the most effective organisations know that the best ideas didn’t come from high-level planning, rather, they come from the field.
1. Your winning market
The saying goes, ‘The riches are in the niches.’ This year, stop spreading your sales focus thinly across several markets. Review your data on the which niche or subgroup of buyers make up your best customers. Then laser focus your best sales efforts and talent on these prospects this year. If you don’t have data on your buyers, then make a commitment to invest in your CRM software this year, so that next year your focus can be accurate.
2. Your winning product or service
Don’t let chance dictate which sale you focus on, rather identify which of your products or services has the highest margins. Your data will tell you which products or services you should focus your sales efforts on this year, and which you should phase out, or simply terminate immediately.
3. Win more customers
You have a big budget for your lead generation, but invest more this year on optimising your lead conversion rate. No matter what industry you are in, or if you convert leads digitally or face to face, your ability to turn leads into sales is a potent leverage point to increase profits. For example, if you increase your conversion from 20% to 25%, that 5% increase in conversion will lead to a 20% or more increase in profitability (assuming your costs stay steady.)
4. Whittle down waste
One immediate way to see your bottom line improve this year is to keep a tight rein on your sales team giving out discounts and freebies, and on your production team’s unregulated wastage. You’ll be surprised when you add it all up how much profit you’ve lost this way. Set boundaries over what is and isn’t okay for your sales team to do during the sales cycle.
Rather create bonuses or value adds that they can add in that have high perceived value but low cost of goods sold. For example, you might offer two free training classes to a new customer when they buy a year’s subscription to your software service.
A training class has a high value, but likely costs very little to add more seats to the room. As far as your production team goes, if you haven’t already, you should invest in business software that tracks productivity in your team, as well as in your machinery and equipment, to improve efficiency and reduce wastage. This alone is worth the investment costs of the software.
5. Say ‘No’ to scope creep
Scope creep is when your customer alters the scope of your product or service after the initial agreement of work has been signed off, but with no alteration to the initial quote. It is excessively common and can be very detrimental to a bottom line in service businesses.
This year, be clear about what is and isn’t on offer in the quote, and if there are any adjustments down the road, inform the client upfront of these additional costs. Wait for approval before starting the work. Be clear about prices for common extras that clients may want and let them know you’d be happy to provide these additional items for them at these pre-agreed prices. This could also be an opportunity for gentle upselling.
With this in mind, may 2019 see your bottom line grow from strength to strength.
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