“Scaling up” is essentially growing your business up and out. But it is not as simple as just selling more products and services, or hiring more people. Increasing sales will increase all the activities that support sales, such as technology, purchasing, logistics, accounting and after-sales service.
Is there demand?
Joanna Hill, interim CEO at the Start Up Loans Company, says scaling up can be challenging for any early-stage business, but careful planning and access to the right financial support can help make the process smoother. “If you’re unsure about whether you’re ready to scale up, ask yourself the following questions: is the demand outstripping supply and are there new opportunities to grow my market share? If the answer is yes, there may be a case for growing your business,” she says.
Part of the scaling-up process is outlining your business ambitions and when you expect to achieve them. To do this, you need to revisit your cashflow, products, marketing strategy and other key elements of your business plan.
Processes and people
David Turner, senior director at technology platform Oracle NetSuite, says it is vital startups’ IT systems are designed to cope with both rapid growth and constant change. “This is why so many startups opt for a cloud-based platform, which can easily be built up and configured as they add product lines, expand into new markets, and fine-tune their business models,” he says.
Having the right people in place is also crucial to the scaling-up process. Entrepreneurs will find they might have to relinquish some power and hand over control of certain business functions. Are you ready to delegate? If so, can you delegate to people with the right skillset and mindset?
As well as the right skills and approach, it’s important to hire people who will fit in, have the right attitude, and care about the company. Rather than committing for the long-term, hiring staff on fixed-term contracts initially can be a good way to assess how emotionally invested they are in the venture’s success. “Giving away equity to your first hires isn’t always required and money is not always the motivator; flexible working and other non-financial rewards could be equally as powerful,” says Richard Heggie, head of high growth and entrepreneurs proposition at Barclays.
Funding
A key decision when scaling up will be how to finance the expansion of your business. Bank loans and venture debt can provide a reliable source of capital and, unlike other forms of finance, won’t mean handing over equity in your company to anyone else. Another option is a government-backed loan scheme designed to support the creation of new businesses. The Start Up Loans Company, for example, offers government-backed loans at 6% per annum with a mentoring service for loan recipients in the first two years of trading.
However, from a lender’s perspective, scale-ups are not always the ideal loan candidate as they tend to be risky, have few tangible assets, and typically have negative short-term cash flow projections.
Funding from venture capitalists, angel investors or crowdfunding may be easier to obtain, and help you generate larger sums of finance. This type of funding has become a popular choice for high-growth companies and other firms looking to scale-up.
Traditional venture capitalists are usually structured as limited partnerships and invest with a view to generating large returns. Funds are raised from a group of limited partners and then invested into a portfolio of innovative companies.
Alternatively, angel investors often take higher levels of risk and can be useful for earlier-stage businesses. Many will have scaled up their own companies and this type of investor tends to invest at the earlier stages of a company’s growth, pooling their resources in investment clubs.
Another option is crowdfunding. This can take several forms with the most popular being equity crowdfunding, where businesses create an online “pitch” for investment. Some startups also offer non-financial incentives such as the company’s products or services in return for crowdfunding cash. Peer-to-peer (P2P) lending, on the other hand, matches lenders directly with borrowers.
Rob Love, chairman and co-founder of CrowdfunderUK, says crowdfunding has a unique place for the right type of business. “It can be very early stage – through rewards or equity; and more mature businesses – equity or debt (if businesses are profitable). As well as finance, crowdfunding provides validation and creates an engaged audience and market for business,” he says.
Some startups will also benefit from accelerators: organisations that support early-stage, growth-driven companies through education, mentorship, and financing.
Getting your pitch right
If you decide to pursue outside investment, you’ll need to pitch your idea to investors, either online (in the case of crowdfunding) or in person (to venture capital firms or angel investors). Investors will want to assess your business model, see how you have assessed the potential market size, and understand your unique selling point (USP). They will also want to know what’s in it for them – why should they invest?
Angelika Burawska, CEO at the Startup Funding Club, says market size estimation or calculation will vary depending on the type of business, however, there are two common approaches to it.
“You can either look for existing data about the market you are entering and check the total spent on that market in a year. Then you should narrow it down to the available market – it will be only a percentage of the market, as you are limited by existing competitors and other factors (marketing reach, geographical reach etc),” she says. “The second approach is by estimating the number of potential buyers of your product and multiplying it by the price of your product and how many times it would be bought in a year.”
Before any pitch, make sure you do your homework and arrive armed with a solid business plan. Potential investors will be quick to cut to the numbers, so make sure your figures stack up and do your research.
Barclays understands the challenges and opportunities for entrepreneurs and high growth businesses looking to scale-up their business. To find out how Barclays supports entrepreneurs, visit Barclays Entrepreneurs
