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 funds from around the world are looking for scalable startups to be part of their investment portfolios. But what is , really?
What is ?
A scalable is, in very simple terms, one that is able to expand (a lot) its number of , users and / or in an accelerated way, without having to increase its costs in the same proportion. It is not limited by its structure and does not sacrifice functionality and reliability to achieve this . that are scalable, for example, have relatively low operating costs, low resource expenditures, do not need to maintain large product inventories and do not have major infrastructure needs to expand their operations. Scalable 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 and thousands (or millions) of users.
All of this makes the scalable 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 with a invests time and money in the development and testing of the product / and its internal processes until it finds the fit . The fit is the version of the product that solves the problem of its , fits the needs of the and can be produced on a large scale with good .
after fit (Source: -Marketing )
After that, the new 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. usually raises money through new rounds of investment for an aggressive expansion of the . Here, it invests heavily in sales and marketing, gaining
Why is interesting when investing in startups?
Angel and Venture Capital funds target startups and expanding companies that follow the . But why The angel or VC fund usually buys a percentage of the for a specified amount – according to the ’s valuation in that investment round. He invests his money and expects the value of the stake he bought to grow as the ’s operations increase. With a , this can happen very, very fast compared to more traditional companies. The period of development and demand for the product / 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 for .
How do you know if a is scalable?
Many traditional companies do not have the 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 in terms of and , as it is limited by geographic, production and factors. A consultancy can offer the best possible to its clients, but if each client requires specialized attention from a team of employees, the 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 can grow.
With more traditional companies, 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 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 , AirBnB does not have to build more hotels in each city and hire thousands of workers to increase its . It simply has to increase the number of property owners (offers) and travelers (demand) negotiating on the . 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 themselves do not necessarily have to own their own inventories. The SaaS ( software as a ) is also scalable. Once the has been developed, it can be sold and distributed on a large scale to millions of , without a huge cost increase for the . The Mail Chimp is a SaaS focused on enabling 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 is Slack , a corporate communication that enables the 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 and very large companies.
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 with the ability to expand its share exponentially, without needing a proportional capital increase, is extremely attractive, mainly because of the potential for its and founders.Therefore, is the golden characteristic that angel and Venture Capital funds look for in startups. It is this capacity for accelerated that is essential to achieve the necessary returns on investments made in startups and expanding companies in their portfolios.