Why do Financial Companies Need Scalability?

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Scalability is a word widely used in the world of startups, but for many the definition is still not so clear. Angel investors and Venture Capital market funds from around the world are looking for scalable startups to be part of their investment portfolios. But what is scalability, really?

What is scalability?

A scalable startup is, in very simple terms, one that is able to expand (a lot) its number of customer, users and / or revenue in an accelerated way, without having to increase its costs in the same proportion. It is not limited by its business structure and does not sacrifice functionality and reliability to achieve this growth. Financial Companies that are scalable, for example, have relatively low operating costs, low human capital resource expenditures, do not need to maintain large product inventories and do not have major infrastructure needs to expand their operations. Scalable financial companies also develop extremely well thought out processes. They are tested, established and can be easily replicated and expanded without losing functionality with the dramatic increase in volume. That is, the production and distribution processes of scalable companies work well for both a few customer and thousands (or millions) of users.

All of this makes the scalable startup able to increase its size in an accelerated way. Serving a much larger volume of people without having a proportional increase in production, structure and labor expenses. A startup with a scalable business model invests time and money in the development and testing of the product / financial services and its internal processes until it finds the market fit . The market fit is the version of the product that solves the problem of its customer, fits the needs of the market and can be produced on a large scale with good profit margins.

Startup growth after market fit (Source: Startup-Marketing )

After that, the startup usually raises money through new rounds of investment for an aggressive expansion of the scalable business model. Here, it invests heavily in sales and marketing, gaining new customer in large volume and replicating the product on a large scale. Using the operations processes already established, without sacrificing quality. This is the process of climbing. Learn also about Solve Your Financial Problems In 5 Simple Steps

Why is scalability interesting when investing in startups?

Angel investor and Venture Capital funds target startups and expanding companies that follow the scalability business model. But why The angel investor or VC fund usually buys a percentage of the company for a specified amount – according to the company’s valuation in that investment round. He invests his money and expects the value of the stake he bought to grow as the startup’s operations increase. With a scalable company, this growth can happen very, very fast compared to more traditional companies. The period of development and demand for the product / market fit is an essential step on the way to scale, and when the time comes to scale, in a short period of time the valuation can reach a point where the return on initial investment in the case of an acquisition, exit or IPO, is extremely profit for investor.

How do you know if a company is scalable?

Many traditional companies do not have the scalability aspect that is so sought after by angel investors and Venture Capital funds. A bakery can be a great deal, but it has a natural limit of growth in terms of customer and revenue, as it is limited by geographic, production and market factors. A consultancy can offer the best possible financial services to its clients, but if each client requires specialized attention from a team of employees, the business will not be scalable. In order to serve more customers and increase sales, the consultancy will have to increase its costs proportionally, which will naturally limit the pace at which the company can grow.

With more traditional companies, growth may happen, of course, but it will be more organic and less accelerated. Also, due to systems and processes, many traditional companies are unable to handle more than a certain number of customer as this volume can overload systems. An online marketplace like AirBnB , which brings together property owners and travelers looking for a differentiated hosting experience, is highly scalable. To increase its revenue, AirBnB does not have to build more hotels in each city and hire thousands of workers to increase its revenue. It simply has to increase the number of property owners (offers) and travelers (demand) negotiating on the platform. Owners already provide the ready-made physical space and bear the maintenance costs, and travelers can see a variety of quality and price and continue to rent easily and safely – all 100% online.

Amazon and Mercado Livre are other examples of online marketplaces that are highly scalable. The two combine product sellers with buyers, and the platform themselves do not necessarily have to own their own inventories. The SaaS ( software as a financial services ) business model is also scalable. Once the platform has been developed, it can be sold and distributed on a large scale to millions of customer, without a huge cost increase for the startup. The Mail Chimp is a SaaS company focused on enabling small business and medium – sized enterprises, build and manage email marketing campaigns with ease. The tool is robust and works the same with both 10 registered emails and 1 million. Another example of a SaaS company is Slack , a corporate finance communication platform that enables the company to combine all communication and storage channels. In one place, you have email, Whatsapp, Skype, Google Docs, Twitter, and several other integrations, which facilitates access and management. The software works with both small business and very large companies.

Conclusion

More traditional companies can also scale, but this usually takes decades. With scalable startups, this volume can be reached between 6 and 10 years. A scalable startup with the ability to expand its market share exponentially, without needing a proportional capital increase, is extremely attractive, mainly because of the potential profit for its investor and founders.Therefore, scalability is the golden characteristic that angel investor and Venture Capital funds look for in startups. It is this capacity for accelerated growth that is essential to achieve the necessary returns on investments made in startups and expanding companies in their portfolios.

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Irma Terry

Irma Terry loves To talk about Finance, Scientific works in the theories of finances and credit, according to the specification of the research object, are characterized to be many-sided and many-leveled.