You have a software company so your company is scalable, right? Maybe not…
Read anything on SaaS startups and investor and you will find 1 buzzword: ‘scalable’. On the surface it feels like the word has 1 meaning, however, the spectrum of ‘scalability’ is broad.
Below you can find what venture capital investors mean with ‘scalability’ and why it’s so important!
Let’s go 1 step back. Investopedia defines ‘scalability’ as “a characteristic of a system, model, or function that describes its capability to cope and perform well under an increased or expanding workload or scope.” However, they go on and mention “in the corporate environment, a scalable company is one that can maintain or improve profit margins while sales volume increases.” In essence, scalability for SaaS startups comes down to an increase in efficiency per unit of output, consistency in your results and a process you control.
A scalable Software Product
Scalability is an often-used term in computer science, and it comes in many forms. A good example of a scalable system is Instagram (not SaaS). Instagram was acquired for 1B by Facebook when they only had 11 employees.
A software product is a scalable product when the growth rate in time that is needed from the engineering department to improve and maintain the product, is smaller than the growth rate of data input or data requests. Of course, the bigger the delta, the more efficient your software product is from a human resources point of view.
Another key point of scalability is that the infrastructure powering the product has to automatically scale on the end-users demand; whether incoming and outgoing requests are an increase of 10X or 100X, the platform should be able to handle this. How to realize this and where investors look for is a topic for another article.
Lastly, if you’re a data or AI-first company specifically, investors want to know what happens to your internal workload when the data requests or data input grows 3X, 10X and 100X? Often, an increase in data leads to marginal product improvements but increased cost and effort to manage the data set.
Scalable Sales & Marketing
Growth investors care a lot about scalability in a sales context. They find this relevant because they provide funds to scale revenues. Scalability in terms of sales means at least 3 things. First, does your unit cost-per-acquisition (CPA) go down when you grow revenues? Secondly, can your revenue grow at least linear with your sales force? Thirdly, churn should more or less remain equal if revenues grow (assuming ACVs remain the same). This can be visualized as follows:
Decreasing your CPAs when revenues/lifetime values grow means your company is ‘a pot of gold’. If you’re a company with a high viral factor (e.g., Whatsapp), this happens. Also, when you have a well-known brand (e.g., Unilever), your CPAs can go down. However, what we usually see is that the CPAs go up from the series-A and onwards. Simply because you’ve saturated the early adopter’s market and you will have to educate the other market segments. And this simply costs money…
Investors look whether your sales headcount growth is at maximum linear with your revenue increase. You don’t want to invest in a company that needs 100 new sales reps for a product that can only be sold by PhDs in biology. Chances are, you won’t find them 😉. Therefore, investors look at whether your product is easy-to-explain for new sales reps and whether multiple people in your company (i.e., ordinary ‘sales’ people) have been able to sell the product. To realize this, you will need to have consistency in a target customer, some standardization in lead generation and lead qualification processes and a solid training program for newbies. Your sales funnel should perform consistent results.
Companies want ‘residents’, not ‘visitors’. When you grow sales quickly and scale an organization, churn numbers often increase as well. Usually, this is because processes are not in place, or there are no proper checks-and-balances or the wrong bonus scheme incentives have been implemented. Getting churn numbers under control is a crucial scalability aspect.
Scalable onboarding processes
We’re very much aware that companies with 1M in annual contract values (ACVs) are usually not onboarded in 1 week (if you find one, can I invest 😉?). However, a scalable onboarding process means that there is a repeatable and consistent process to onboard customers and that onboarding times and contract values, and lifetime values are in line. An interesting metric to look for is the ‘onboarding time’ per revenue segment.
Scalable customer relationship management
The lowest paying customers are often the most difficult (or demanding) customers (have you been there?). However, if you’re customer success rep or an account-manager and you suddenly get a lot of customers that are much more demanding, your sales process is not scalable and should be revisited.
Financials that prove scalability
At the end of the day, growth stage investors will put weight on net revenues (MRR * margin) that grow faster than costs (or at least stay constant). This means that a company grows more efficiently and your invested euro gets, ceteris paribus, more valuable over time 😊.
This is just me thinking out loud. Feel free to place any comments or contact me for additional insights.
(This message was originally posted by Arthur Nobel at Medium on February 24th, 2020)