Cracking the code: Why scalable businesses attract investors
It seems that companies with a scalable business model have a never-sleeping growth engine, as if they've cracked the code to grow without the usual struggles and hiccups of stagnation. No wonder they fascinate everyone, from budding entrepreneurs to seasoned investors. In this blog post, we'll unravel what a scalable business model is, why it's a perfect match for venture capital, and share some scalable practices for any business.
What Is a Scalable Business?
In essence, a scalable business can increase its output without a proportional rise in resources, costs, or effort. In other words, it's a business where revenues soar while costs stay grounded.
Think of digital giants like Netflix, Dropbox, or Amazon. These companies certainly have costs—often exceeding their revenues at the start, making them unprofitable and in need of external capital. But as they recoup their upfront investments in content, software, or platform development, their profitability rises with growth. This is because they have low marginal costs, meaning the cost of producing one additional unit is minimal. This contrasts with traditional business models, where profits may come faster but marginal costs don’t decrease much as the business scales.
Consider a traditional furniture manufacturer. To produce more furniture, they need more materials, equipment, and possibly a larger factory. They might achieve some efficiencies and economies of scale, such as bulk purchasing or production learning curves, but these become challenging if the manufacturer works on individualized orders. Now compare that to Netflix: once they have acquired or produced a piece of content, it can be streamed by an almost unlimited number of subscribers without incurring significant incremental costs. The cost of serving an additional subscriber is relatively low, mainly limited to bandwidth, content localization, payment processing fees, and some customer support.
Why Are They a Good Match for Venture Capital?
Let's talk about profitability. A traditional furniture maker might have higher profit per item sold compared to Netflix's profit from an additional subscriber. In other words, the furniture maker has higher per-unit profitability. However, because Netflix can grow much faster, its overall profitability can eventually surpass that of the furniture maker. This need for upfront investment and delayed profitability makes businesses like Netflix ideal candidates for venture capital funding. They need significant investment to grow and reach profitability.
Investors are attracted to scalable businesses for several reasons. Exponential revenue growth promises significant returns. Lower marginal costs lead to higher profit margins as the business scales. Scalable businesses can quickly capture large market shares, becoming market leaders. This dominance often results in higher valuations and profitable exit opportunities through initial public offerings (IPOs) or acquisitions. Venture capitalists seek these high-reward opportunities, favoring them over traditional models with easier to achieve, more stable but lower profits.
Scalable Business Practices for Any Business
So, how can any business become more scalable? Take a furniture maker, for example. IKEA is a scalable furniture maker thanks to its standardized, ready-to-assemble products and a well-optimized global supply chain with flat-packed boxes. IKEA has achieved scalability through operational changes, but digitization is another powerful tool for growth. Consider online workouts or language classes—they can reach far more clients than their traditional counterparts.
Embarking on the journey to scalability can transform a business from a local player to a global powerhouse. It's about smart investments, efficient operations, and leveraging technology to minimize costs as you grow. Whether you're a startup dreaming big or an established business looking to scale, understanding and implementing scalable practices can set you on the path to exponential growth and success. So, are you ready to join the ranks of the scalability champions?