David Bell, Head of Scale Up Collective at Odgers Berndtson, takes an in-depth look into the significant challenges of scale up business growth as well as navigating the operational challenges.
- How a business scales will be as unique as the business itself.
- Balancing interests and expectations is crucial.
- Talent is a key factor in the success of scaling up.
- Having a senior executive team in place that has been through a scale up journey before or who shows the aptitude for doing so, is crucial.
Scale-ups are established companies entering a phase of accelerated growth. Having toiled to get from proof of concept to product or service launch, the business has achieved initial success. In many cases, a successful investment round or series of rounds is the next step. Once a partnership is created, scaling an investor-backed business can present a range of challenges that require careful consideration and strategic planning.
Below, we will consider some of the myriad associated challenges.
While private equity and venture capital firms provide capital for scaling, they also expect a substantial return on their investment. Balancing the need for adequate capital with the pressure to deliver returns is a challenge founders may not have faced before. Suddenly your beautiful baby isn’t just yours anymore and you have to take account of additional ‘parents’ and their forthright views.
Scaling a business often requires optimising operations to handle increased demand and growth. Improving efficiency, streamlining processes and implementing scalable systems become crucial to meet higher production or service delivery requirements. What worked with a 20 person business with a small customer base will fall apart quickly without rigour and process.
Talent Acquisition and Retention
Finding and retaining skilled personnel is essential for scaling a business successfully.
As the company grows, it will need to attract top talent and develop strategies to incentivise and retain key employees who are critical to driving growth.
Once you have achieved product-market fit, you need to scale rapidly and this often entails hiring the right people at the right time.
As Ben Horowitz of Andreessen Horowitz espouses in the a16z podcast, “this is one of the most important decisions you can ever make as a leader… can he run a playbook or can he write a playbook?” and his co-host Ali Ghodsi (Cofounder of Databricks) adds “mistakes are costly, mistakes can take a year and a half to two years to fix”.
Organisational Structure and Culture
As the business expands, its organisational structure and culture will need to evolve. Maintaining effective communication, decision-making processes and a cohesive culture becomes more challenging, particularly if there are multiple locations or departments.
Having a senior executive team in place that has been through a scale up journey before or who shows the aptitude for doing so, is crucial.
Market Expansion and Competition
Scaling often involves expanding into new markets or geographical regions. Understanding and adapting to local regulations, cultural differences and competitive landscapes can be complex and time-consuming. As Mike Drew, Global Head of Technology at Odgers Berndtson suggested at London Tech Week during our panel discussion on Expanding Beyond the UK: “Know your market inside out, do not open because of one great customer and do not think one set of boots on the ground constitutes an expansion.”
With growth comes increased exposure to various risks, such as operational, financial, regulatory or reputational risks. Managing and mitigating these risks becomes crucial to safeguard the business and maintain investor confidence. In this instance, the right board composition is crucial to position the business for both governance and growth.
Managing Stakeholder Expectations
Private equity firms, along with other stakeholders such as lenders and shareholders, have expectations regarding financial performance and growth. Balancing the interests and expectations of these stakeholders while executing the growth strategy can be a delicate task. Again, do you have the right leadership team in place, including the CEO, to manage internal and external stakeholder pressure.
Maintaining Agility and Entrepreneurial Spirit
As businesses scale, there is a risk of becoming bureaucratic and slow to respond to market changes. Maintaining agility, fostering an entrepreneurial mindset, and adapting to evolving market dynamics are essential to staying competitive.
Balancing entrepreneurship and development of processes and systems to scale is an art.
Getting the right Board and Leadership team in place is critical to this aspect of growth.
Successfully scaling a private equity-backed business requires a strategic approach, strong execution capabilities, and the ability to adapt to the evolving needs of the organisation and the market. As Notion Capital outlined in their data project The Unicorn Trajectory: “Businesses that become Unicorns hire leaders at 7x the rate of businesses that don’t become Unicorns, during the first 5 years after raising”.
Faced with many challenges, it is crucial for investors, boards, founders and CEOs to engage with relevant experts. As outlined above, one of the major areas of risk and exposure to successfully scaling a business is talent. At Odgers Berndtson, the Scale Up Collective is proud to partner exclusively with VC and PE clients to maximise value creation, to ensure businesses achieve traction, gain velocity and deliver a strong return on investment.
The Scale Up Collective brings together local and global expertise from our sector and functional practices to respond to business changes, supporting our clients’ unique talent agenda from leadership assessment to strategic hiring.
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