For startup founders, the path to becoming that billion-dollar unicorn is paved with countless unavoidable stops. Startups first have to find a winning idea and validate it. After that, they need to keep improving and iterating their product or service until they achieve the perfect market fit.
When a startup settles on a product that customers want, it will move from the survival phase and start working towards the success stage.
This is a huge transition.
For starters, companies then need to think about scaling and figure out how to serve a wider base without harming their unit economics.
Management is also an issue. When the startup was still small, the founder and their handful of employees could get by with a direct management structure.
However, as the company scales, the management structure needs to accommodate this change. Functional departments need to be established and new employees hired to fill those departments.
It is also critical to hire people who can add value to the startup and help usher it through this critical time.
If a startup succeeds in tackling all these challenges, it will enter a stage where it can start considering IPOs (Initial Public Offerings).
An Entrepreneur’s Complete Guide To Scaling A Startup And Going IPO
- How Can Medium and Late-Stage Startups Scale Successfully?
- To Go IPO or Not to Go IPO?
- What Comes Next?
How Can Medium and Late-Stage Startups Scale Successfully?
When it comes to scaling, two main problems need to be addressed:
A. managing the growth
B. changing management styles that come with recruiting new employees
Let’s take a look at them in more depth.
A. Managing Growth
A company can grow in one of two ways: It can either expand and acquire new customers or venture out into new markets and look for new niches to serve.
1. Expanding in the Current Market
To expand in their current market, entrepreneurs need to have a solid growth strategy.
Without one, they will struggle with growing their company and propelling it forwards.
For starters, if they misunderstand their main engines of growth, their company will stay stranded, unable to advance and acquire new customers.
Even without a handle on their growth engines, entrepreneurs still need to take a look at their finances and make sure that their startup is ready to take the leap.
2. Understanding the Engines of Growth
Entrepreneurs need to find out what made them great to begin with and double down on that.
Put simply, when a startup is still in its infancy, searching for a product the market is willing to pay for, there is still little understanding of why customers will want to buy.
However, upon achieving a product-market fit, a startup should have a clear idea of the motivations of its customers and enough insights to know what fueled its growth so far and made scaling a possibility.
For example, let’s say that company A is really good at generating buzz.
It has a great, viral product that conveys great social currency to whoever owns it.
With that in mind, company A might realize that one of its competitive advantages is leveraging word-of-mouth marketing.
After all, if something benefits you, you are bound to talk about it with other people.
If that company wants to scale, it can leverage this advantage and start coming up with ways to engage people more and more.
That, right there, is the heart of scaling.
It’s about identifying competitive advantages and using them to create sustainable growth engines.
When done correctly, the effects of the different growth engines should compound, leading to exponential growth.
3. Understanding the Finances
Entrepreneurs need to analyze their company’s financial situation and make sure that they have enough cash to test different ideas until they find the best engines of growth.
This starts by building an excellent model of the business, one that can be optimized and tweaked as necessary.
Essentially, entrepreneurs need to understand their business at a level that might elude others.
When scrutinizing the business model, entrepreneurs need to pay special attention to their unit economics.
They need to make sure they are not losing money and that the cost of acquisition isn’t eating up their profits from each new user. Otherwise, exponential growth will just do more harm than good.
Entrepreneurs will also have to monitor their runway: The amount of time they can afford to cover their expenses with the cash they have on hand.
If a startup reaches the end of its runway, it will have to either raise a new round of investment or take out a loan, both of which are unpalatable options.
It might be wise to have an experienced fundraiser on staff, one that knows how to talk to investors and convince them of investing in a C round.
4. Expanding in New Markets (6 ways)
Once a company has found a product-market fit, fine-tuned its engines of growth, and made sure that its finances will sustain it for the foreseeable future, it can enjoy exponential growth.
- Startups can achieve this by offering their services in new areas, seeing which regions pull them in and catering to those new markets.
- Alternatively, companies can try out new platforms. The best case in point is how Facebook shifted from desktop to mobile.
The transition might have been rocky at the beginning, but today Facebook makes 90 percent of its revenue from mobile ads.
- Aside from new regions or new platforms, startups can tap into new customer segments.
For instance, if a startup began by catering to high-end customers, it can start reaching out to more price-conscious buyers.
Alternatively, if its first customer was a millennial, the startup can try to tap into the boomer market.
- The fourth method of expansion is to widen the focus of the products or services sold.
So, a social network like Facebook can include an efficient messaging system that connects people and brings them closer together.
The idea is to find tangential offerings that add value to the core product.
- Another idea is to start thinking of acquiring other companies, just like Facebook acquired Instagram and WhatsApp.
- Finally, a small team can venture out on their own, try out a new idea, and attempt to find new MVPs that can achieve product-market fit under the patronage of the original startup.
B. Changing Management Styles and Recruiting New Employees
The second set of challenges in developing a startup comes from personnel.
The direct management style that might have worked when the company consisted of a handful of employees will no longer be effective when it comes to scaling a business.
However, finding the right talent and instilling the proper culture is a challenge unto itself.
1. Shifting Management Styles
Small and burgeoning startups can afford to have no organizational structure to speak of.
With 20 or fewer employees, everyone just reports to the founder and does a little bit of everything, with no functional departments.
However, this system is not sustainable as the startup begins to scale. At some point, a clear organizational structure with well-defined roles will become necessary.
The structure should be simple. This is not the place for innovation. What matters most is that the chains of command are clear and that everybody knows who they report to.
Aside from establishing a management structure, many founders struggle with delegation.
They take on too much work, assuming that what worked in the past can still work today.
However, as a company starts to scale, the workload increases exponentially, and it won’t be long before founders find themselves drowning under a sea of unfinished tasks.
Hence, it is important to delegate to employees or outsource tasks altogether.
Another way to reduce the workload is through automation. Today, countless tools can be used to improve efficiency.
For instance, Zapier offers several no-code automation tools that can make a founder’s life easier.
Entrepreneurs need to start by organizing their workload, prioritizing the tasks in front of them, and finding a way to keep track of everything that needs to get done.
This act of personal organization can be difficult, especially when several balls are flying in the air simultaneously.
2. Recruiting New Employees
Getting the right talent onboard is no mean feat.
To begin with, no startup wants to fall into the trap of rushing the hiring decision and ending up with inexperienced calibers who cost more money than they bring in.
Therefore, it’s vital to have a solid hiring process in place, one that screens potential employees effectively.
To really see the possible detrimental effects of a bad hire, let’s look at an example and imagine how the sales team of a startup would deal with the scaling process.
Obviously, as the business starts to grow exponentially, the sales team will have to deal with a deluge of new clients, which can be stressful.
This is exacerbated by the fact that the sales team is small at this stage because the company was still in its infancy just a couple of years ago.
So, what would happen if a bad sales hire were to be dropped into the above situation?
First of all, the bad hire could harm the company’s relationship with some of its clients, which could have long-term effects.
Unhappy customers are more likely to rant about their negative experiences than satisfied customers are to rave.
Over and above, when an employee is underperforming, other team members have to work overtime just to pick up the slack.
This is not to mention how demoralizing it can be to see someone waste the entire team’s efforts through their negligence.
Worst case scenario, a bad hire could end up pushing other employees out of the door.
This is why it is important to hire slow but fire fast.
3. Instilling the Proper Culture
Assembling the right team is only half the battle.
Once the proper talents have been hired, founders need to find ways to keep them motivated and to maximize their efficiency.
To begin with, founders should offer each employee performance feedback, a way to measure their progress and to help them improve. For it to have practical value, this feedback should be frequent.
Moreover, entrepreneurs want to tie compensation to performance.
This ensures that every employee is compensated according to the value they bring to the table.
Moreover, it lets everyone know what is expected of them and impels them to give the startup everything they’ve got.
Another form of compensation that is worth considering is equity. In fact, almost every successful startup gave its key employees equity, which includes Google and Facebook.
Most important of all, founders want to instill the right culture in their company from the start. Otherwise, if a toxic culture emerges, it might be very difficult to change later down the road.
The ideal culture should be one of growth and innovation. Employees shouldn’t be afraid of taking risks or trying out new ideas.
Entrepreneurs also want a culture of transparency, where all the relevant information is openly shared and employees are empowered to make well-informed decisions.
To make all that happen, entrepreneurs want to be sure that their entire team is aligned and that everyone is on the same page regarding the vision and mission.
In other words, if someone were to ask ten random individuals in the company, “what is the mission for the next six months?”, all ten answers should be exactly the same.
To Go IPO or Not to Go IPO? That Is the Question
Once a company has successfully scaled, it is time to ask what the next step should be.
At this stage, the company has grown considerably and developed a clear functional organization. Furthermore, several of the early investors will want to exit by now to look for other opportunities.
So, should a startup go for an initial public offering (aka IPO)?
Here are a few signs to consider.
1. Predictable Financial Performance
When it comes to public companies, financial projections play a critical role.
They enable analysts to valuate the company, affect a company’s ability to raise equity or debt, and give important indicators regarding the overall health of the business.
As a result, missed projections can have adverse effects on a company’s future.
If the company’s financial performance is unpredictable, these projections are essentially useless.
Hence, it is important to accurately project next quarter’s, and even next year’s, revenue. Otherwise, the stock may take an unnecessary hit.
2. Showing a Growth Plan
One of the main ways to valuate a company is determining its growth potential. The more likely a company is to grow, the more valuable it becomes.
To that end, it should have a clear strategic roadmap, one that shows how the company will be making the investors money in the future.
3. Having the Right Executive Team in Place
The hard truth is that the team that helped a startup grow and scale may not be suitable for the IPO stage.
In other words, they may need to be replaced.
It may be unfortunate, but the necessary skills required for a startup are not the same as those required for an IPO.
Therefore, founders need to take a closer look at their personnel and make sure that they have the proper team on board for going public.
There are also a few more new roles that need to be filled. For instance, a company about to go public might hire an entire investor relations team.
4. Being Realistic
Founders need to take a realistic look at their company and ask themselves some difficult questions.
Are there any vulnerabilities that are being overlooked?
If a company does most of its business with only one or two clients, then losing those clients could be disastrous for the company’s cash flow.
Alternatively, they could be working with a large supplier who has too much control.
All these vulnerabilities pose a source of risk that investors may be hesitant to take on.
One tool that can help assess these vulnerabilities is Porter’s Five Forces. A tool created to analyze the competitiveness of your business environment and to identify your strategy’s potential profitability.
Another area where founders need to be realistic pertains to valuation.
They need to know how much money they will be able to raise as well as how the market conditions will affect their valuation levels.
5. Making a Strong Case for Going Public
The main benefit of going public is gaining access to capital markets.
This, in turn:
- makes it possible to raise further capital in the future
- facilitates conducting M&A activities
- helps employees who receive equity-based compensation to cash out
- provides early investors with a clean exit
- shows the world that the company is compliant with strict regulations
- increases trust in the brand
However, the flip side to that coin is that going public is an arduous process.
It requires plenty of time and money.
There are countless reports to be filled, and the company will have to hire countless professionals to help with the process, including lawyers, underwriters, and accountants.
Moreover, an IPO might dilute the founder’s original equity in the company.
As a result, the founder risks losing control of their business if they end up giving away more than 49 percent of the company.
Even if the founder retains the majority of shares, going public means that they still answer to the minority shareholders as well as the board of directors.
Add to that the increased regulatory oversight, the enhanced reporting requirements, and the increased liability, it becomes clear that the founders need to make a strong business case that going public is the best option.
They have to weigh the pros against the cons and show that the pros come out ahead.
What Comes Next?
If a company is ready to go public, the founder will have plenty of work to do.
To start with, they will have to upgrade their fiscal organization and prepare for meticulous financial reporting.
They will also have to address some tax concerns and place a few controls in place to make future investors feel more at ease.
Conversely, if a company is not ready for an IPO, there are a few alternatives to consider.
A company can still go public through either a merger with a special purpose acquisition company (aka SPAC) or a direct listing of shares on a national securities exchange.
The bottom line is that each startup must choose the path that suits it best.
Before embarking on that journey, it is important to build a company with a finely-tuned engine and plenty of gas in the tank.
Do you have a startup that you consider scaling? Did you find these tips helpful?
Do you think we missed anything? Let us know in the comments!
Author: Michael Stephenson
He created TheEntrepreneurHub to inspire, assist, and motivate his fellow entrepreneurs. He updates the site with helpful resources and advice fit for all entrepreneurs, regardless of where they are in their startup journey.