Steps to Scale Efficiently
Hot off the press, property start-up Hostmaker has gone into administration. But before that, the company was able to raise some £23 million in funding. So what went wrong? Lets explore….
The start-up seemed destined for success, at least in the eyes of the press and VCs. It was named one of the fastest-growing scale-ups and part of Deloitte’s Fast 50 list. But behind the scenes, there was a significant overspend and losses – to the tune of over £20 million in three years.
Much of this expenditure was spent on advertising, namely on the London transport network to attract new users. However, this was an ill-fated venture, as Hostmaker became mired in controversy for the ads. The Mayor of London, Sadiq Khan, was urged to ban the adverts across the transport network as they encouraged the breaking of a UK short-term lettings law. In a city with mass housing shortages.
Inefficient scaling and market-entry
One of the key problem for Hostmaker was very inefficient scaling, using all of its funding to grow operations in France, Spain, Italy, Portugal, Thailand and Dubai. The team was bloated, with irrelevant skills and they spent their time building product features that the users didn’t need or want, complemented with the need to localize the product creating further complication. This was worsened by a lack of innovation – workers didn’t feel free to speak up with new ideas. There was a lack of clear vision, which was again compounded by the company entering new markets prematurely. You could say, the company tried to run before they walked – without knowing the route that they were taking nor the skills needed to get there.
Indeed, the company only generated £17 million in sales between 2017 and 2018. In 2018, Hostmaker spent £9.9 million and turned over only £12 million. Administrative expenses totaling £16 million eventually led to a £14.3 million loss. Which beggars the question, how did the company raise £23 million in funding from VCs?
Of course, Hostmaker is but one of many similar stories. Blippar, Yplan, Loot and Faraday Grid all provide cautionary tales. For a time, everything seems great, they are on-trend and fast-growing. Then, after scaling at unprecedented speed, it all goes wrong.
Proving market need
One of the major reasons a start-up fails is because of little-to-no market need. However, in the case of a scale-up and post-Series A, this shouldn’t be an issue, but often is. Typically, in these cases, the companies often hire the wrong team, have cash flow and pricing issues and are out competed quickly. Having a stage-gated approach to investing, via Angel, then Series A, B, C and so forth, gives founders enough time and pressure to prove their business models.
There is less risk, fewer wasted resources and you avoid the likelihood of a bloated, over-skilled and under-utilized team. Fiscal discipline encourages experimentation and operational optimization. Plus, founders can spend more time determining their product/market fit, ensuring their technology is reliable and that their supply chain is efficient; this is quite important step to scale efficiently.
Demonstrating the right growth
That said, often, after a Series A, founders feel under pressure to demonstrate growth. Ideally, they should achieve this by focusing on customers, but many turn to using headcount as a success metric instead. They want to show how quickly their company is growing and, because of this, they focus on in-house teams over outsourcing. But this is a shortsighted approach to scale efficiently.
By only hiring in-house, a company can quickly become mired in complexity that results in a lack of customer focus, a lack of agility, increasing overheads and poor execution. Many founders may also believe that an in-house team is the only way to protect their IP (intellectual property). But Apple offers a great example of protecting IP and using outsourcing to become more agile and responsive.
Amongst this, it is also worth noting the impact of unexpected COVID-19 pandemic on investors and start-ups currently, and in the future. The reaction, so far, has been mixed. With some VCs reassuring founders and even setting-up therapy sessions for portfolio companies. Others are doing the opposite, pulling funding or exploiting founders. Uncertainty breeds fear, especially when big organisations are pulling out of events and delaying travel, and public markets are disrupted. Start-ups and VCs must prepare accordingly, with some investors warning that COVID-19 will impact fundraising for the next two quarters.
The advice for start-ups, at the moment, is to fundraise as much as possible if they expect to run out of cash before the end of 2020. They should also prepare their processes and workforce for potentially turbulent times, for the remainder of the year.
Time will tell what impact this will have on funding over the long-term, especially high-capital, high-growth (and therefore high-risk). With the hyper-competitive VC market now, largely, ground to a halt because of COVID-19 and the resulting economic chaos, there may be a widespread move back towards lower risk, stage-gated investing.
Six-steps to Scale Efficiently
To avoid becoming another scale-up failure, I recommend the following six steps to scale efficiently:
- Focus: always remain focussed on your core customers and value proposition. Get this right, and then begin scaling. This focus will help you prove your business model and market fit, both essential steps before scaling your business. An unprofitable business model, like WeWork with its unsustainable rents, will only create more problems as you scale. Indeed, any early issues with your business model, value proposition and market fit must be rectified as soon as possible, as they will snowball when your company scales.
- Scale horizontally and vertically at the same time: scaling horizontally means you spread your business wide, but offer a thin value proposition as a result. Customers and prospects often need many other products to satisfy their needs. Scaling vertically offers a solid value proposition for a very narrow user segment, so your company becomes very niche. The real value lies in balancing both, by offering more products and services to each target user segment but also adding new segments at the same time. Be careful to select adjacent segments and values that are close to what you already have, however, rather than randomly
- Keep it lean: this means being efficient, not cheap. Optimise at every level to ensure you don’t have any ‘fat’ in the system. This may take the form of agile project teams that form around sprints, it may involve outsourcing to gain skills for a short period of time instead of adding ongoing costs through an in-house team. It may also include turning to cloud-based services like SaaS (software-as-a-service) and PaaS (platform-as-a-service) to reduce capital expenditure and to be able to scale up and down as needed. Be creative in how you get your resources and infrastructure, only spend what you need and constantly review to make sure every investment is generating returns for your company and helping you reach your goals.
- Be agile: make sure that your company can respond quickly to changing user needs and the business landscape. You can do this by being lean and also having flexible structures and operations in place. Agile project teams can quickly respond to a market need, for example, a new function in your product, and then can move onto new projects once the need is fulfilled. Likewise, an outsourced team can work with you on a specific sprint, without the ongoing overheads of an in-house resource. Agility also relies on clear communication and updates across the whole company, so everyone understands what the goal is, how they can contribute and what success looks like.
- Don’t try to reinvent the wheel: you don’t create IP by redeveloping what’s already available and doing it in-house. Instead, you need to really understand where your IP lies, build it faster and create barriers around it that prevent others from replicating it easily. This ties closely with your value proposition, define what makes your company different and worthy on investment in the long-term. What need does your product fulfil? How can you protect your IP from being copied? Remember, outsourcing can be a viable option to upscale resources and skills quickly, and it doesn’t always risk your IP. Melanie Carmosino, the Director of Operations in Microsoft’s Intellectual Property Group (IPG), explains that outsourcing certain tasks, depending on your data security requirements, if IP data in on-prem or in the cloud, and your risk appetite, can be an effective way to increase productivity and decrease costs. She also advises that, “It’s critical that your third-party service provider be integrated and treated as part of your company’s team and culture…By taking active measures to build bridges between third parties and your in-house team, you will increase the likelihood of success.”
- Learn from others’ mistakes: this particularly rings true with the inclination of doing everything in-house. By following the crowd with this, you risk making the same mistakes as your competitors and bearing the same costs. Instead, you can gain a competitive edge by looking at alternative ways to gain the same benefits (like using outsourcing for some or all of your development) without the risk or downsides. Likewise, use the experiences of failed, and failing, start-ups and scale-ups as a cautionary tale. Not just in making sure your business model, value proposition and market fit are watertight, and in keeping focussed on customer growth over headcount. But also by keeping an eye on cashflow and preparing, as much as possible, for sudden events that could impact growth, operations and investment. Being a start-up founder, every day will bring a new lesson that you can use to improve your company and become a more attractive investment proposition.
I hope the industry takes heed and changes its ways for the better. A move that doesn’t just benefit investors but also start-ups, giving them the right metrics and milestones to aim for. Instead of just unfettered, uncontrollable growth and rising spend.
Why Innovify is your best Scale-up Partner?
Having worked with many start-ups and scale-ups over the years, Innovify has experienced many of these challenges first-hand. Therefore, we can offer our learnings and experience, to stop you from making the same mistakes that others have in the past.
We can also offer:
- Expertise: in scaling products, and deploying product teams and tech infrastructures at scale.
- Flexibility: for you to scale up or down as per your product roadmap and thus keeping your cashflow burn to the minimum.
- Full IP ownership: of the product remains with you, not owned by us. We offer a full IP ownership for all the work done by us on your project.
- Cost-effectiveness: we are up to 43% cheaper as compared to a typical in-house scrum teams on a like-for-like basis ensuring minimal overheads and better productivity.
- Pay for outcomes: unlike others, we price for outcomes and not for time spent. Meaning greater cost-efficiency and innovation for your company, without the risk.
- Closer to you: Innovify is London based, with a dedicated team who can be onsite as and when you need them.
Contact us today to discuss your company’s needs and how the Innovify team can help in taking steps to scale efficiently.