Unit 25 of 63
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What Is (Really) Scalability?

Scalability is one of the most important and least understood concepts that VCs use.

📌 You will note the different format of this video, as it was originally shot for our VC Pitching Track.  

How do you recognize whether a startup is scalable or not? Do you agree with our analysis?

💬 Let us know in the Comments section below.

👀 Sources & Additional Material

  • I was just wondering, wouldn’t software companies like Dropbox also need to continuously improve their software in order to keep up with the cloud strorage competitors of today, perhaps making them less scalable now? Could it be that they were scalable in 2015 because of less competition, or is scalability a prior general characteristic of the software industry as a whole?

    • You’re totally right, these companies keep hiring developers to upgrade the product. The salary line increases in ABSOLUTE numbers ($$$). But relative to sales, the RELATIVE % decreases.

  • How far can a scalable startup go without any profit? (Or how long will investors support it?)
    Dropbox has had little/no profits so far, and even if there is high scalability, what if it never reaches the desired profitability?

    • Yes it’s a very important question and a moving one. With the current crisis, being able to generate profits has become more important than in the past.
      The point on “what if” is also top of mind for VCs. That’s why they spend so much time understanding “unit economics”. But in some cases, it’s never sure at the beginning (think Uber and Spotify).

    • Many entrepreneurs are surprisingly not good at distinguishing the two. One good way of finding out is to build financial projections and look at what resources you need to grow. If your cost base increases significantly compared to revenues, it’s not a scalable business.

  • It’s easier to understand scalability with an internet product model. But for some high-tech companies (AI, Biotech…), in their growing stage, the R&D cost may increase continuously with a smaller growth of revenue until the maturity of the technology. Can we still infer from the financial data or some operating indicators?

    • Yes you can. Analyzing the financial projections will tell you when, and if, those R&D efforts pay off. If you realized that there needs continuous development costs to grow revenue, then the business is not that scalable. If, on the contrary, there are minimum maintenance costs needed once the solution is built, then you’ll get more scalability. Naturally, Founders make assumptions when establishing these projections, and your job as a VC is to fund the next step to verify that assumption and de-risk the company.

  • To me, scalability is nothing more than the evolution of the ratio between revenues relative and fixed costs. If the ratio sees exponential growth, then the business model is scalable. Of course, this definition is tweakable. Alternatively, it could be the ability of a company to generate massive additionam revenues by deploying relatively limited resources.

  • I really like Alex Rampbell’s point that great things may not be scalable – your local coffee shop is likely not scalable, Starbucks is. I would tend to say that scalability is to be able to repeat the same process, all while keeping a reasonable cost structure. Many great products and services cannot ever be scalable.

  • I agree with the ideas and sentiments of scalability from the speakers in the video.
    In looking at the Dropbox model, the fact that they have a lot of enterprise clients, but a realization that product itself looked like it lacked enterprise feature is another aspect to consider. I think this introduces scalability from product perspectives as well. Products designed with initial abilities to extend via new features are able to leverage existing efficiencies or even create new markets (i.e enterprise usage). It is important to note that new product features or markets may result from customer feedback or usage insight over time.

    • Totally agree. I was watching this video interview on SurveyMonkey the other day. The executive there said that they had built a highly scalable product with only two developers (SurveyMonkey is famous for having bootstrapped its way to impressive growth). The dev team, though, had not planned for scalable growth in terms of the team itself, their processes, etc.. Very interesting talk, she makes the point in the first 10-15m minutes if I remember correctly.
      > https://www.youtube.com/watch?v=igdN3FG5XP4&t=759s

  • In terms of numbers, I think the idea behind scalability is variable costs. Unlike traditonal businesses, scalable businesses can grow in terms of market share or users, without any significant increase in variable costs. In other words, it effectively doesn’t cost extra to onboard one extra customer. The existence of network effects in such cases also greatly determine business scalability.

  • Scalability in my opinion would come down to cost of revenue and sustainable expansion. If you can grow your user base at increasingly lower cost per user, then you can be scalable. Also, you have to be able to expand with limited amount of resources required.

  • I think scalability is easier to understand when we look at software companies / SaaS businesses, etc. However, for companies like Tesla , Star bucks, etc which have physical products, we need to to link the concept of ‘economies of scale’ with scalability. This is an interesting topic to evaluate from the perspective of VCs.

    • Scalability is difficult to achieve when you deal with atoms, not bits. Economies of scale are a necessary but not sufficient condition for a scalable business model.

    • Or, I think scalability poses different challenges in different industries. The challenges of going to scale for a tech startup are very different from those for Starbucks.

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