How to scale up startups is a daunting challenge. The growth of startups into mega-corporations like Apple, Sony, Microsoft, GE, Amazon, Google, or Intel is the inspiration for entrepreneurs. Invariably, they started their journey in an embryonic form. But how did they scale up? The underlying factor is the scalability of their products, whether Microsoft’s software, Apple’s computer and smartphones, Google’s search engine, Sony’s radio, TV, and image sensors, or Amazon’s online bookstore. How did they develop those magical products that turned humble beginnings into mega-success stories? Suddenly, did customers start buying their great products showing the exponential growth of their revenue and profit? Surprisingly, NO. None of them come up with Eureka idea. In the beginning, each of their products was primitive. Customers found little or no value in their ideas. Interestingly, those once primitive appearances subsequently turned into significant innovations, scaling up startups into mega-corporations.
Startups take ideas to market as a new product or reinvention of existing ones. Irrespective of the result, those ideas emerge in primitive form. For example, the smartphone was primitive in 1994. Similarly, search engines emerged, offering little value. Likewise, ideas like hard disk drives, electronic image sensors, or light bulbs appeared in primitive form. But their subsequent success has created Eureka impression—out of scalability. But how to build scale effect in products that sell at a loss? If you increase the production volume of those primitive emergences, loss increases. Hence, the conventional theory of economies of scale doesn’t work. Ironically, they face the reality of diseconomy of scale, the higher the volume more the loss. The core challenge of creating the scale effect for a startup is to create a flow of ideas for increasing the quality and reducing the cost of their products.
Scale up startup challenges:
In the beginning, startup ideas have a loss-making tendency, as they emerge in primitive form. On the one hand, hardly, there are customers for those primitive products. On the other hand, the willingness to pay is so low that it produces a loss. Hence, the crack of the matter to scale up a startup is to increase sales and turn the loss-making revenue of their products into profit.
Let’s look into the examples of great success stories of ideas. Growing as a Mac, Apple I was a not-profit-making venture for Apple. As of 2021, the Smartphone market is $400 billion, and Apple generates staggering, highly profitable revenue from it. But IBM discontinued the first smartphone Simon in 1994, as it failed to produce a profit. The $30 billion hard disk market started with the idea of a 5MB disk drive weighing one ton. Similarly, the idea of an electronic image sensor emerged as an 8×8 noisy device.
Indeed, expanding the production of that primitive emergence of those ideas did not create profitable, growing revenue. To scale up, IBM had to keep making progress in storing an increasing amount of data on the same disk area and reducing the access time. Similarly, Sony had to keep reducing pixel size and noise. As a result, both IBM and Sony succeeded in reducing per-unit cost, and customers were finding higher disk density or smaller pixel size better.
All the great ideas need to experience similar progress in cost and the willingness to pay. Such reality is at the core of the scale up startup challenge. Unfortunately, as opposed to taking such a lesson, current startups are after subsidies for increasing their primitive products’ sales to expand the customer base. Surprisingly, investors are finding it a success criterion in support of inflating the valuation.
How to scale up startups?
As explained, scaling up startups means creating a flow of ideas and integrating them into products and processes to produce and deliver them so that quality keeps improving and the per-unit cost keeps falling. But, the natural tendency of the loss-making beginning of great ideas does not offer a quick remedy to the problem of scaling up startups. It requires the systematic creation of ideas for improving the quality and reducing the per-unit cost of production. But how to get those ideas and sustain a long journey of consistently creating ideas are challenges indeed. Hence, it demands a well-thought-out strategy based on understudying about creating the scale effect. This strategy should form the foundation of developing organizational capacity and culture.
Scaleup culture—empathy and passion for perfection:
For getting ideas that customers will value, we need empathy. And for creating a flow of them, we need a passion for perfection. The next challenge is to pick up those ideas for leveraging technology possibilities, which will increase the perceived value and reduce the per-unit cost simultaneously. To address these three-dimensional challenges, we need to focus on culture—so that people will intuitively believe, think and behave accordingly. It demands a seamless blending of human perspective with technology possibilities. Hence, the fusion of art, science, and technology should form the core of scale-up startup culture.
Innovation strategy for scale up startups:
The challenge is not just to keep producing ideas like a popcorn machine for ideas to scale up startups. They should fit into a strategic framework for winning the competition race. Hence, we need a strategic framework upon finding answers to the following questions:
- What is the winning inspiration? —the purpose of guiding aspiration.
- Where will we play? –understanding the playing field like geographies, products, categories, segments, and channels.
- How will we win? —the unique value proposition and competitive advantage for winning
- What capabilities must be in place? —technology acquisition, refinement, and idea portfolio
- What are entry market segments and growth paths for creating a new market and occupying existing one?
- What does it take to turn a humble beginning into a creative destruction force and disruptive innovation?
- Suitable management system and organizational structure.
In this regard, the lesson could be drawn from Apple’s innovation strategy. The strategy should include the selection of suitable technology core at the appropriate state of maturity. Worth mentioning that not all technology cores are equally scalable. It depends on the science base. Hence, inappropriate choice of technology core and state of maturity run the risk of failing to create the required scale effect for reaching the creative destruction and disruptive innovation state. This strategy exercise should lead to the formation of core scale-up capacity development by leveraging: (i) technological economies of scale, (ii) economies of scope, and (iii) network externality effects.
Technological economies of scale for scale up startups:
Yes, empathy will provide us those ideas which will meet customers’ unmet needs. And passion for perfection will lead to keeping generating such ideas. But from where the startup will get support to implement them so that quality goes up and cost reduces simultaneously. We need to harness technology possibilities to meet this conflicting goal, creating the scale effect. Hence, startups should have a suitable technology base and harness its latent potential to meet such conflicting situations. This is one of the reasons scaling up a startup is so hard.
Family of products for economies of scope:
As opposed to the idea of one product or set of isolated products, the innovation of a family of products contributes to scaling up the startup agenda. The development of a family of products around core assets leads to reuse of it. As a result, spreading development costs over multiple products reduces costs for each product. Furthermore, core assets in supporting commonality also open the opportunity of increasing value proposition through complementary roles between family members.
Deriving network externality effects:
In addition to native innovation features, startups should also benefit from the positive network externality effect. The offering should be made so that perceived value should keep growing with the growth of the customer base. Furthermore, an additional scale effect could be harnessed by synchronizing with externality factors such as 3rd party plugins and networks. Hence, time and synchronization should also get priority.
Sustaining innovation strategy for scaling up startups:
Once an innovation shows the potential of producing profitable revenue, competition would respond. Competitors will start offering replication, imitation, and innovation. As a result, the original creation will face downward pressure on the willingness to pay—negatively affecting the scale effect. To counter it, startups need to keep releasing successive better versions. Hence, scaling up startups demands good prediction and preparation with appropriate idea portfolios to respond to sustain the scale effect of the offering.
As startups begin the journey with loss-making revenue of primitive emergence of their ideas, conventional economies of scale effects do not work for them. It’s challenging because they need to derive those ideas from empathy and technology possibilities, which keep improving quality and reducing costs simultaneously. Hence, entrepreneurs face high-level difficulties in scaling up their businesses.
As explained, the scalability of startups refers to creating a means of increasing the quality of the innovation and reducing the cost simultaneously so that startups can scale up the volume and turn the loss into profit. For switching to startup to scale up, entrepreneurs need to make the feasibility analysis to determine whether their level of empathy, passion for perfection, product idea, chosen underlying technology core, nature of competition, and timing are favorable enough. They should craft out a systematic path to scale up their startups upon doing so.
If entrepreneurs cannot pursue scaling up, as the startup has a natural tendency to start the journey at a loss, the accumulated loss will keep piling. The biggest problems that startup faces to scaling up are (i) empathy and passion for perfection for creating the flow of ideas, (ii) suitability of the technology core to implement them for increasing the quality and reducing the cost simultaneously, and (iii) crafting a systematic pathway.