Scalability, the engine that drives high-growth startups
Scalability is critical in today’s business world and plays an especially vital role in the entrepreneurial ecosystem. It refers to the ability a company, project or system has to adapt and achieve exponential growth. In other words, this means an increasingly accelerated expansion, but without the need to proportionately increase the resources used.
If there is one thing that startups are known for, it’s their high potential for growth – as companies created to grow rapidly in a short period of time, growth is at the core of the startup concept. What sets these companies apart is usually a focus on innovation and, along with it, scalability.
Scalability is a term that defines a business’s ability to increase its revenues exponentially with a linear increase in expenses. That is, it represents a company’s potential to generate that revenue at a rapid rate without having to proportionately increase the resources used.
What is scalability for a startup?
If you want to take your business to the next level, especially if you want to elevate your brand to ‘scaleup’ status, understanding this concept is essential. Scaleup status refers to a startup that has reached a certain stage of maturity, growing at a rate of 20% or more in employees or turnover over three years. It has a solid business model and is looking to scale it up. A growing number of companies are managing to do just that, as evidenced by the Adigital report, which reveals that there are already more than 450 scaleups in Spain.
The entrepreneurial landscape is also strong in Latin America, with 31 unicorns, according to the annual list put out by CB Insights. These companies, with a valuation of $1 billion without being publicly traded, have experienced significant growth over the last decade in the region, although they are now affected by a more challenging economic climate marked by the rise in interest rates starting in 2022. Compared to the record figures of the previous year, startups face weakening investment in the first few quarters of 2023, according to ‘Insights: Venture Capital and Growth Equity Ecosystem in Latin America‘.
When a business is scalable it has the potential to increase sales without significantly increasing costs, which is typical in the startup ecosystem and with companies that have high innovative and technological potential. This ability to scale is one of the true distinguishing characteristics of these companies compared to other young companies, like SMEs. It is also something that sets them apart when it comes to holding their own in the market in tough economic times.
This process will affect those products or goods that have a stable manufacturing cost, regardless of the number of units being produced. This means that the company’s margin also increases when more revenue is generated.
This is why, for example, it will be easier to scale up supply in companies that sell digital products, since once developed, a successful product can be replicated and distributed digitally at near-zero cost for each additional user. Scalability is more challenging for service companies, since what they offer is directly related to the number of people available to provide that service and their time.
The ability to scale will also depend on the intrinsic characteristics of the business. A company that offers highly specialised services will find it more difficult than one that produces digitally and in an automated way. The most scalable businesses are therefore those involved in software, mobile applications and monthly memberships. Among the best-known cases are business models like Cabify and Glovo in Spain and the Mexican companies Clara and Kavak.
Scalability matters
High-growth companies experience rapid expansions in short periods of time. Scalability brings with it major advantages:
- Optimally accommodating this growth, adapting quickly to an increase in demand and reducing churn rate and the loss of business opportunities.
- Making better use of existing resources, achieving more with less, while ensuring outstanding customer experience and service quality.
- Helping to gain competitive advantages, allowing the company to respond quickly to market demands by setting itself apart from competitors.
- If a company can rapidly increase revenues without a corresponding increase in costs, it will be able to focus on testing new projects and innovations associated with its business.
A scalable business will be able to meet changing consumer demands over time without major changes to its operations and without compromising the quality of its products or services, potentially attracting new consumers.
Beyond the company itself, embracing scalability and achieving that level of entrepreneurship has a positive impact on the broader economy. Scaleups are companies that are designed to grow. In that context, not only do they rapidly increase turnover, but they also typically create many skilled jobs, providing employment even in tough economic times.
The market, with its scalable business models, is expected to continue to grow exponentially in the coming decades, resulting in higher income, employment and investment.
How to build business scalability
Successfully achieving scalability requires strategic planning and execution, and these tips and steps can help:
- Thoroughly assess the technology, operational and human infrastructure to identify areas for improvement and design strategies for growth.
- Integrate scalability from the start, when planning and designing all types of systems, applications and processes so that they can grow and adapt effectively.
- Use processes, tools and systems that make it possible to adopt innovative and rapidly adaptable technologies.
- Automate processes and optimise operations on an ongoing basis using smart technology solutions to handle higher volumes of work without proportional workforce expansions.
- Develop strategic financial planning and adequate resources to fund expansion, infrastructure and technology upgrades and have the necessary elements in place to scale quickly.
True scalability allows for business growth and expansion while minimising a matching increase in costs. But this requires advance preparation right from the company’s start, during the conception stage.
Beyond the original business idea or its characteristics, the keys to scalability include process automation, but also sound communication and marketing strategies, even outsourcing in those areas where feasible. Having the right operational infrastructure and technological support will help support rapid growth on the road to economy of scale.
