Timing, team, ideas, business model, and funding are vital for tech startup success. However, what is the result they should produce? They need to contribute to startup sustainability through scalability. Startup scalability is the key to the sustainability of Startups for growing as large corporations through the success of disruptive innovations.
Startups are micro-enterprises with the potential to grow large by unleashing waves of creative destruction. They begin the journey with very little capital investment. Invariably, they roll out products at a loss. In the beginning, their products were inferior alternatives to incumbent matured ones. Due to low capital investment, the scope of cost reduction by increasing the volume is minimal. Unlike conventional scenarios, volume increase accumulates additional loss. Hence, the traditional scaling method of expanding the production deepens the loss, worsening the startup sustainability issue. Therefore, startup scalability refers to addressing conflicting requirements of increasing sales while decreasing production costs so that the loss falls and sustainability improves.
Startup scalability is the primary discriminatory factor between startups and all other micro and small enterprises. Although most micro and small enterprises grow slowly or remain as is, a few startups rise rapidly. However, over 90 percent of startups die within the first three years of launching. This startup mortality rate is far higher than that of conventional micro and small enterprises. Hence, addressing scalability is a crucial problem for increasing startup sustainability.
Scalable startup entrepreneurship within the context of micro, small, medium, and large enterprises
Startups emerge as micro-enterprises. However, unlike conventional microenterprises, they offer alternatives around emerging technology core. For example, unlike neighborhood bookstores, tech startup Amazon offered books purchased through the online store.
Unlike startups, micro-enterprises emerge to offer products around matured technology core. For example, a neighborhood bookstore offers the same paper books offered by large ones like Chapters or Barnes & Noble. Targeting the niche market and lean operation, a micro-enterprise may reach profit and scale up to a small and medium-sized enterprise. However, their sustainability depends on serving the niche market and not getting into head-on competition with large corporations in their industries.
Large corporations become big by making upfront colossal capital investments. As a result, their minimum efficient scale increases, resulting in scalability. Due to higher capital utilization, large corporations are invariably better and cheaper in serving the mainstream market. Due to high barriers caused by capital, brand value, and customer loyalty, it’s tricky for micro, small, and medium-sized enterprises to go large. Hence, their growth matures before becoming large corporations.
Startups show up with primitive alternatives to existing matured products. Hence, they roll out products at a loss. These primitive alternatives have the potential to grow as disruptive innovations—offering both scalability and sustainability to startups. However, unlike matured products, their primitive alternatives cannot benefit from the scale effect for reducing the cost of production through expanding the volume. For scalability, they should also increase the quality to find additional customers for their primitive products. Hence, either startups must find a way to scale up by reducing costs and improving the quality, or they suffer from lack of sustainability.
Startup sustainability through subsidies for expanding the market and pushing incumbents out of business
During the first two decades of the twenty-first century, we witnessed the strategy of startup scalability through massive subsidies. As customers do not find alternatives, primarily around the digital technology core, that are far better and less costly than what they have, the subsidy has become the focus.
For example, online food delivery does bring some conveniences. However, delivering each order to the doorstep incurs an added cost. Due to limited benefits, customers are unwilling to pay extra to offset delivery costs. Hence, a subsidy has been brought forward. The strategy has been to push dine-in facilities out of business so that surviving online food delivery startups could inflate prices to recover the loss. For the same reason, billions of dollars in subsidies have been pumped to create scaleup startups in ridesharing, online education, e-commerce, online health, and many more. However, despite apparent scalability, such a subsidy-driven approach faces the startup sustainability test.
Examples of scalable startup entrepreneurship
Here are a few examples of startup scalability:
- Amazon online book store—for the benefit of ordering books online and receiving them through the mail, readers were not willing to pay far more than large book shops were charging. Hence, Amazon’s online bookstore tech startup began at a loss, and the loss kept growing with the volume growth. Therefore, scalability through subsidies was eroding sustainability. However, Amazon found a scalability and sustainability solution by turning physical books into digital content or eBook.
- Microsoft OS and Office suite—of course, neither personal computer nor Microsoft’s OS and Office suite was highly scalable at birth. The scalability and sustainability success of Microsoft’s tech startup did not come from giving subsidies. It happened due to the Flow of Ideas in improving PC hardware and leveraging it through software features. As a result, quality kept growing, and due to the zero cost of copying software, the cost per unit of Microsoft products kept falling with the volume.
- Apple—of course, Apple I or even Apple II was not scalable solutions for Apple tech startups. Apple could not emerge as a sustainable startup by giving massive subsidies to expand its market. The success of scalability and sustainability emerged from the idea of Macintosh’s graphical user interface. However, Apple started suffering from scalability and sustainability due to a lack of flow of ideas. Subsequently, Apple solved it through the reinvention and evolution of music players and smartphones.
- Edison’s light bulb—despite creating a buzz, Edison’s light bulb was not scalable. Initially, there were only a few customers for it, and their willingness to pay was insufficient to generate profit. However, the scalability and sustainability of Edison’s GE emerged from the idea flow of expanding the light bulb’s life span.
- Google search engine— by offering customized search engine services to big libraries, Google could not scale up its remarkable Innovation. By relying on subsidies, Google could not have succeeded in scaling up into a large corporation. The scaleup and sustainability success emerged from the idea of a three-party business model and its clever implementation.
- Sony—by copying or offering subsidies to Transistor pocket radios or primitive digital cameras, Sony did not grow from a radio repair shop to a large corporation. Instead, Sony scaled up due to the flow of ideas for material, energy, and labor-saving while increasing the quality.
- Netflix—for sure, through subsidies to video on demand, Netflix did not disrupt Blockbuster’s video rental service. It happened due to the growth of streaming as a better and cheaper alternative to video rental.
How could Uber become sustainably scalable?
Of course, mobile app-based taxi or ride-sharing services emerged in offering convenience. However, the convenience was limited, and the Uber team ran short of ideas to keep improving it significantly. Hence, their strategy was to give massive subsidies to push taxi service companies to go bankrupt. Therefore, along with revenue, Uber’s loss was also growing. Hence, the subsidy for scaling Uber’s startup was not sustainable.
However, what could have been an alternative for sustainably scaling up Uber’s ride-sharing? For significant cost advantage, Uber had to develop the Robot Taxis—freeing the need for drivers. However, due to technology uncertainty, autonomous vehicles are caught in the chasm.
AI startup scalability
Due to the ease of demonstration of AI and Machine Learning applications to unleash mass disruption, AI startups have accelerated growth. However, a demonstration is not good enough. To make sales, those demonstrations must cross the threshold. Due to AI uncertainty, there is a high risk of getting caught in the chasm.
Overcoming the challenge of startup scalability and sustainability
The primary challenge has been increasing the quality and reducing the cost of startup innovations. Irrespective of the greatness of ideas, invariably, startups roll out their creations as primitive alternatives. Often, their primitive options are costlier. Hence, such a requirement appears to be conflicting. However, there is an opportunity to produce ideas that save material, energy, time, and labor while increasing the quality. However, to create this needed flow of ideas, there is an R&D cost. Hence, the challenge is to gain far more from quality improvement and cost reduction than R&D cost.
Despite the apparent conflict, there are examples of quality improvement and cost reduction simultaneously. For example, additional features improve software quality, expanding the customer base. As a result, due to zero cost of copying, per unit cost may come down. It’s also feasible in the hardware space. For example, lithium-ion batteries, mobile phones, digital cameras, and semiconductor success are attributed to it. Due to leveraging the success of making lithium-ion batteries increasingly better and cheaper, Tesla has been creating scalability and sustainability effects in its EV startup mission. Besides, ideas may create positive externalities and scope advantages. Hence, for startup scalability and sustainability, the focus on increasing the customer base of primitive innovations through subsidies must shift to advance the quality and reduce the cost of the initial primitive emergence of innovations.