Dragons Scale Naturally; Social Enterprises Don’t: Here Are Four Tips That Make It Faster and Easier for Every Entrepreneur
Editor’s note: This post is part of the NextBillion Series “Scaling Up Without Selling Out.” Learn more about our other 2019 series here.
If you’re a social entrepreneur, I’ve got some bad news for you: You weren’t born to scale. But here’s some good news: You can learn to do it anyway.
In reviewing 100 successful social enterprises from the past 10 years, our team at the Miller Center found that less than 10% were able to scale successfully – not just growing incrementally, but rapidly expanding their organizations into new markets to multiply impact and revenues. Our analysis of a database of over 10,000 commercial startups paints an even bleaker picture: Fewer than 1 in 100 of these enterprises scale.
Why is scaling a social enterprise so hard? Because what got you this far is not enough to get you the rest of the way. If you want to scale, you need to shift management gears, learn some new things and act differently. Just pushing harder with your existing model won’t work.
Over the past three years, Miller Center’s Replication and Scaling team has worked with more than 50 entrepreneurs to expand their reach, helping them to create greater impact more rapidly, with less risk and fewer investment requirements. We have established a process that can make scaling possible for every entrepreneur.
Here are some of the important coaching tips we use.
Shift from running the business to understanding how your business is running
In the first few years of a startup, your biggest and most persistent challenge is keeping things running. It’s a constant struggle. In startup mode, entrepreneurs typically spend all their time working just to keep the wheels from coming off the enterprise.
Premature scaling — the attempt to grow aggressively before your business model is robust enough to stand up to the rigors of massive growth — is one of the major causes of failure.
Before making the commitment to scale, you need to make sure you have an organization capable of producing, selling and delivering much larger volumes of your product or service – without diminishing quality or impact for existing and new customers. In addition to running the business, you need focus on understanding how the business is running, to identify the operational capabilities that need strengthening.
To that end, your leadership team needs to make an honest appraisal of what they have created. Here are a few things to ask yourself:
- Do customers think we deliver the best value? Don’t ask your team for their opinion: You need data from customers. To be successful, you must ensure that the value you’re delivering is a clear winner in the customers’ eyes, and that your products or services have a distinctive advantage over alternatives. If you don’t have proof of a winning value proposition, don’t bother scaling.
- Has our business model evolved? It makes no sense to scale inefficiencies and grow parts of your business that waste money – that’s a fool’s errand. Good luck trying to get investors to fund that business model. You need business processes that are stable and improve over time. For example, you should be able to consistently and quickly acquire new customers at costs that decrease over time. In other words, you need to manage your business model so the cost per social return on investment improves as you grow and mature. If not, scaling will take you into a slow but certain death spiral.
- Do we consistently make smart, informed decisions? Seat-of-the-pants management without good data may be standard operating procedure in the early startup stage, because you have no choice. But that approach gets risky with increased size. When scaling, lack of performance data frustrates all attempts to make sense of what is actually working, to identify the elements that need to be fixed right away, and to focus on the pieces of the business model that are successfully being transformed to full scale. The ability to measure key elements of the business model, and to use this operating data to make timely decisions is one clear signal that you are ready to shift into scaling mode.
- Can we acquire top talent when we need it? Talent acquisition is like digging a well: It is best done before you need the water. Don’t let weaknesses in your talent system — in terms of acquisition, motivation and retention — leave you lacking the people and performance you need at critical stages of scaling.
There are other important questions you need to consider: You need an honest appraisal of your organizational stability and effectiveness, your strategic and executional leadership, and your ability to partner and collaborate — since no single enterprise can do everything by themselves.
This may sound impossible to achieve, but fortunately, perfection is not a prerequisite for scaling. Don’t worry if you are not top-notch in all these areas; very few startups are. And most weaknesses can be improved during scaling so that the enterprise grows into its new, larger size. But attempting to scale despite gross weaknesses in almost every element of the business model will overwhelm the team, chew up funds, and slow your progress to a snail’s pace — a sure formula for failure.
Set the strategic direction early
Before any startup embarks on scaling into new markets they need to decide on a strategy for growth. Some markets are best served by the original business model. But in many new or distant markets, the best business model for scaling the startup is not the same as the original.
Before you push the scaling start button, determine if and how your original business model needs to be adapted to fit commercialization in the targeted markets. It is likely the most important decision you will make.
You need to answer these two questions:
- Which parts of the business model should not change? What are the essential ingredients that have made your startup successful, and that should be maintained in scaling? You need to decide which elements can’t be changed, because they are core to your sustained operations and make your offerings the most desirable. Messing with them would undermine the business model’s integrity, effectiveness and competitiveness.
- Which parts should change to fit the targeted markets? New markets and different conditions can require significant changes to certain parts of your business model. The elements that could shift to adapt to the market include the sales model, pricing, target market, staffing and ecosystem of partners. There may even be changes to the technology or the value delivered, if the new markets are sufficiently different from the original.
If no changes to your original approach are needed, scaling into new markets is basically a replication function – the business model is recreated exactly the same everywhere. That may be the right approach in some situations, as some business models fit nicely into a wide range of market conditions. But to get the right fit with a new market, you often need to modify and tailor the business model.
Some startups have used both approaches. One startup we worked with in India developed a business-to-consumer (B2C) model for its initial launch. It worked very well. Later, desiring more growth, they expanded into a new state in India by replicating the original model. Though there were some differences in the new market, the original model was robust enough that no change was required. But later, when they wanted to enter the adjoining business-to-business (B2B) market, they realized major changes were needed — selling to businesses was much different than selling to consumers. So they modified parts of the business model to fit the new B2B market and scaled successfully. More recently, they changed the model more aggressively to expand into the very different North American B2C and B2B markets.
In every case, they looked at the new markets and asked “What do we change and what do we keep the same.” To get the right market fit and performance, they tailored the scaling strategy – because the markets demanded different things from the business model.
Adjust your management valence
Achieving significantly higher growth rates in new markets is a major shift from the startup status quo. When you scale, you and your team become ambidextrous – managing the existing enterprise while you lead the scaling initiative.
The hardest part of this dual focus is weaning the CEO from thinking that only they can make crucial decisions. In the continual firefighting of early stage startups, CEOs keep their hands on every moving part of the business model and jump in to fix whatever needs fixing. After years of operating like that, they usually become wed to the idea that they must be involved in nearly all decisions — from pricing strategy to hiring decisions. Getting them to let go of that mentality and mode of operation is tough.
But it’s essential: While that may have been an important ingredient for success in the company’s earlier stages, you can’t scale with that model. It keeps the CEO entrenched in the original business and insufficiently involved in the new scaling initiative.
Instead, the board and management team need to accept some new responsibilities and do the heavy lifting in the existing business. That requires robust operating processes: A business model that requires constant tinkering and intervention by the CEO and leadership team won’t do well when the executives are distracted and partially consumed with scaling. In their ambidextrous management role, the CEO and executive team need to focus on how the business is running, and step away from being involved in running every aspect of the business. And at some point, every startup will need to add specialized staff, such as a CFO, to keep things running smoothly and ensure the CEO is not involved in every decision.
Final advice: Go fast and make things
Speed has tremendous value when you are scaling. It makes your cash last longer, generates results that energize your team, and makes your company more attractive to funders. That’s why we coach entrepreneurs to “go fast and make things.”
You can move quickly and make real progress. But you need to avoid jumping the gun and scaling prematurely. As we tell our entrepreneurs in the Scale Out program, you need to ask the tough questions about how your business is running, identify the elements that need to be strengthened, make your management team truly ambidextrous, and set a clear strategic direction. Once you have those things in place, scaling can be fast and relatively easy.
We have seen preparation pay off in much faster growth. Some of our graduates generated six times the impact and revenues that their original enterprise achieved.
Scaling may not something that comes naturally to entrepreneurs – but that shouldn’t stop you. You weren’t born knowing how to walk, talk or run. But you learned how, and now it’s second nature. You can become proficient at scaling the same way — learning from others and trying it for yourself.
Rob Shelton is an executive fellow at the Miller Center for Social Entrepreneurship.
Photo courtesy of T. Cowart.
- Social Enterprise