Growth and scaling are two of the most talked-about topics in the startup world. For words frequently thrown around in entrepreneurial lingo, one would think they mean the same thing.
They are often used interchangeably to mean the same thing: a company increasing in size, gaining more market share, making more revenue, or entering new markets.
But when looked at carefully, there’s a crucial difference between growth and scaling in business terms.
In simple terms, a company is said to have experienced growth when it decides to add new resources that bring about an increase in revenue. These resources can range from the number of employees and offices to capital and technology.
While growth in itself is essential to the survival of a company, it can be detrimental to some because they might need to keep adding resources to sustain the growth.
When growing isn’t scaling
To some extent, you can notice this happen with some professional services companies.
Consider an advertising agency with ten clients that is on track to add five more in a month’s time — this means more money. But to get work done efficiently and on time, the company might need to hire more people; in other words, increase costs.
For most startups, growth happens when the team has a product that people want, hence, they begin looking to make investments by hiring people, getting to a new office, spending on marketing, among other necessities.
At the recently concluded Techpoint Build 2020 event last month, Seni Sulyman, ex-VP Operations at Andela and now a self-acclaimed venture builder echoed this.
Speaking during the fireside chat “A path to growth” with Eloho Omame, Managing Director & CEO of Endeavor Nigeria, he said, “At this point, you’ve probably figured out your product-market fit. You probably know what your customers want and get a lot of feedback. And you have traction meaning you’re ramping up on sales and operations.”
Scaling, on the other hand, is when a company doesn’t necessarily add new resources but witnesses an increase in revenue. Here, it is very obvious that when the company makes more money, it isn’t as a result of a substantial increase in resources.
Unlike professional services companies, software companies find it relatively easy to scale. Software-as-a-service (SaaS) companies, in particular, find it easier as they can sell their products to more clients without adding more resources in terms of personnel.
At some point in a startup’s journey, the difference between these two is more evident. This happens when a startup has grown to a reasonable extent but isn’t a large company yet. Here, it will need to decide whether to grow at a regular rate or scale to achieve faster growth.
Giving his keynote speech on “A path to scale”, Paga Co-founder and CEO, Tayo Oviosu, gave an analogy.
He illustrated how the fintech company, founded in 2009, had to wait for three years before its commercial launch in 2012. In the following 3 years, the startup had 3 million users. But from 2015, it has added 13.3 million users.
Here, you notice how Paga was at a “Building phase” from 2012 to 2017 before scaling over the next two years. During this time, Oviosu claims that the company has processed 123 million transactions worth over $8 billion.
While Paga raised both Series A and Series B1 rounds in 2012 and 2015 to pursue growth, it can vary for other companies.
On the panel session of “A path to scale” with Oluwatosin Olaseinde, Founder of Money Africa; and Ernest Obi, Head of Global Sales of Flutterwave, Amadou Daffe, CEO of Gebeya, an Ethiopian-based talent infrastructure startup, said Gebeya has been able to scale properly with its $2 million seed round early in the year without burning a lot of cash.
However, Daffe is looking to raise more money to scale at a faster rate before thinking of expanding to other countries, which to him, signals growth.
“In the next 24-48 months, we want to raise our Series A to solidify our scaling model. Then from Series B, we’ll think about growth and try to figure out how to take our platform to other countries.”
For Flutterwave, Obi said the company’s Series B raise early in the year is enabling it to pursue growth and scale simultaneously.
How inflection points breed similarities
Despite their differences, there’s a thin line between growth and scaling. For Omame, these two envelope each other when a startup faces these inflection points.
According to her, the first hovers around people and culture.
Typically, after launch, a startup has between 1-5 employees. The focus here is on product development and validation of the business model.
Then 7-15 employees where Omame said the company has validated its product but has also become complex and hierarchical.
From there, 20-50 and then 50-100 where the startup tries to multiply revenue as its workforce increases. When the company reaches 500 employees, this signals dominance and a significant market share in that industry. The priority becomes how to sustain the company’s growth as its ability to scale might reduce significantly.
Omame maintained that whenever startups reach these stages, they’ll need to do some reevaluation in order to grow and scale.
“In each inflection point, you find out that things that used to work in terms of how you manage your people, how you communicate and work well as a team, how you reward performance, and all of that, change. You’ll have to take a step back and revisit them in order to scale effectively,” she argued.
Product and technology is another category with inflection points for Omame.
“You’re growing so quickly and your tech has to keep up and you’ll meet a bunch of inflection points,” she said.
Here, a startup launches with a set of features and has a loyal customer base that finds them useful. But as the startup begins to scale and adds more customers, their needs evolve. As a proactive approach, the team will need to either add more features or improve on the existing ones.
As the startup increases in size and continues to scale, Omame said that at some point the founders will need to think about what they bring to the company’s table, and if they are equipped to lead the company going forward.
Hence, having the right leadership team can slow or accelerate growth. For Omame, when running a business, it is important that founders look for ways to improve in areas where they are deficient. And if they can’t or don’t want to, they’ll need to hire people with more experience in those areas.
“It is at this point you see the leadership team diverging. You might see a co-founder exit because the organisation is becoming more complex with tougher decisions.”
In the long run, it is important to note that while more clients and more funding might bring in more revenue, founders should think about scaling first.
Like Daffe puts it: “As an entrepreneur, you should think scaling first. It’s important to look for ways to get your company from 1 to 10 with the resources that you have at hand.”
NEW REPORT ALERT: “Millionaire West African startups” raised over $1.806 billion between 2010 and 2019, 97.9% of which went to Nigerian startups. Find out more in the full report.
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