[Stellar Insights] Here are some tips to help entrepreneurs know how and when to scale their organisation

Building a large, sustainable company is hard, and the odds are always against the entrepreneur. Often we believe that if we find a meaningful problem to be solved within a large market (hopefully with some tailwinds), achieve product-market fit (PMF) and go-to-market fit (GMF), then we have the ingredients of success.

While each of these are seminal stages of building a company, in my opinion, the real battle begins at this stage.

A good friend of mine says that the true ‘valley of death’ for SaaS companies is between $10 million and $25 million ARR. This is exactly where the challenges of scaling an organisation begin. It is hard as you have to build a ‘human engine’ that can keep pace with the rapid growth of your company.

Unlike your cloud backend, the complexity of an organisation is non-linear, and founders are often faced with a fresh set of ongoing challenges in building this ‘human engine’. Unlike machines, humans have egos, capability challenges, relationships, wants/desires, and histories.

Here are some tips for founders to think about.

Rule #1: Do not scale organisation until you have a product-market fit and go-to-market fit

This is probably the most obvious. In simple terms, it means that there is a customer segment, for whom your offering creates demonstrable value. Judging this part is tricky — one needs to dig deep into parameters such as cohort stickiness, organic growth, low churn, etc.

Once you do have a product-market fit (PMF), you need to find what I call a ‘go-to-market fit’ (GMF). GMF is a repeatable motion for acquiring new customers in a way that acquiring the next customer is easier/cheaper than the earlier one.

If you have GMF, then the lifetime value of the customer (LTV) should be measurably greater than the cost of acquisition of a customer (CAC). If CAC>LTV, it does not make sense to acquire any customer and means that you do not have a GMF yet. Growth, just for growth’s sake, is only going to create ‘bad burn’.

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Rule #2: It is criminal to not scale if you have product market and go-to-market fit

Just the reverse of Rule #1, but generally not as obvious. Not too many companies find a PMF and a GMF. If you have, you are not doing justice to your startup by being conservative.

This is the time to put fuel to the fire. This is also where the real battle of scaling the organisation begins.

Rule #3: Move from generalists to specialists

In the early stages of the company, you need all-rounders, at least outside of core engineering. These are people who can adapt to different situations, play the role of sales, business development, product — essentially, whatever the company needs. These are first principles thinkers with high learning agility — their lack of muscle memory avoids fixation to conventional wisdom.

However, at some point, you need just the reverse. You need people where you do not want to rediscover the wheel — you need muscle memory for each function. You want people who have ‘been there, done that’.

This can be digital marketing, enterprise sales, product management, software testing — essentially, things that have been done hundreds of time elsewhere, and you want to benefit from those learnings.

Why is it hard? This is where the generalists begin to feel a bit disenfranchised. Though they should not, and this is where good thinking on part of the CEO will help.

Rule #4: Creators, growers, and optimisers

We often think of people in functional buckets — marketing, sales, product, and engineering. However, yet another distinction that I find very useful is dividing them into (a) those who create, (b) those who rapidly grow something that has been created, and (c) those who optimise/ run.

As your organisation grows, you will find the need to constantly do new experiments. Creators are ideal for these experiments — they like to do new things from scratch, have the ability to derive unique insights, and their passion lies in solving problems.

Growers like to scale what has been built once a ‘recipe’ has been found. As the tag suggests, their energy comes from rapid growth. They are a good mix of creative and process thinking.

Optimisers are supreme process thinkers who like to extract juice out of what exists. For example, how to increase gross margins by 3 percentage points in an intra-city logistics operation.

As a CEO, you want to use the right talent for the right job/ stage. As discussed in Rule #3, your early employees are likely to be best suited for creators, and perhaps some for growers, so rotate them across such roles.

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Rule #5: Enablers are as important as the core

Often, the glory in any company goes to the chain that lies in the sales to the production value chain. This includes sales, marketing, channels, product, and engineers. These are like parts of a vehicle that are ‘core’.

However, for these parts to work well, you need the ‘enablers’. Examples of these enablers are HR/recruiting, sales and marketing operations, finance, chief of staff/ CEO office, etc. Created too soon — they struggle to find their feet. Created too late — you might have done a lot of damage to the core parts of the organisation.

In one of our portfolio companies that has an outstanding CEO, working capital is the biggest driver of capital consumption. While the founder has done an excellent job of building the core team and navigating the company over the last few years, we were always short of a real CFO.

There was never a disagreement on the need, but it just didn’t happen until recently. What the current team was trying to learn and solve for through first principles, the new CFO brings with him as muscle memory.

In particular, within no time, he has helped secure multiple lines of credit for working capital and is working on reducing the Days Sales Outstanding (DSO).

Rule #6: Change half the management team every two years

Lawrence Peter famously said in 1969 — people in a hierarchy tend to rise to their ‘level of incompetence’. It happens in any organisation and even faster in startups given their rapid growth.

I think of it like Moore's law — every 18-24 months, the organisation may grow by 2X and the revenue (or whatever the right business metric) even a multiple of that.

Roughly half the management team needs to change with each funding round/each order of magnitude change to your top line — it's very simple, some people are able to deal with the increased size of the business, some are not.

It is perfectly reasonable (and desirable) to reward someone for past loyalty, but you are doing a disservice to everyone by putting people into positions that they are not capable of handling.

There is another reason why this becomes necessary — in your early stages of the company, you only have ‘doers’. As you grow, you have a management team of ‘managers’. For example, sales head, marketing head, customer success head, etc. Essentially, these are functional experts who are good at coaching ‘doers’ and enabling them to perform to their potential.

As you grow further, your management team needs coaches of coaches, and not coaches of players — which is a different skill. Peter principle applies here as well — some will scale to that level of leadership, and some will not.

Rule #7: Hire for tomorrow, not for yesterday

Corollary to the previous rule is that when you hire someone, think about capabilities to function at 10X the scale of your current scale, i.e. hire for 12-24 months out. For example, assume that your sales machine presently needs to be fed with 100 new qualified leads every month.

You are also looking to hire a marketing leader. If things are going well, it is likely that in 18-24 months you will grow as much as 10X. What that means is you need to hire someone who can generate 1,000 leads a month for your sales engine — that person is likely to have very different capabilities to one who will generate 100 leads a month.

For senior hires, it takes time to hire the right people, get them on board, get them to understand the nuances of your business, and make them productive. That’s why thinking 18-24 months out is so hard, and I find very few founders who are able to think that far ahead.

One of our portfolio companies, Whatfix, hired Vispi Daver as head of sales and US operations in early 2018 when the company was still very small. It was a bold call. Looking back, it is difficult to imagine the company being where it is without that decision.

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Rule #8: You have never fired anyone too soon

Yes, you read it correctly. You will know in the first 90 days whether someone is working out or not.

If it is a cultural misfit, better to get rid of people fast. If it is an existing employee, by the time your conscious mind questions their scalability, chances are your unconscious mind already knows the answer — as the saying goes, if there is a question then there is no question. Do not prolong the agony, just let them go.

In 2006, I set up a team in SAP US for creating large global references. My boss and mentor suggested that I fire the first hire after three months. I felt that he was being overly judgmental, and I resisted the idea in every way I could. He eventually asked me a question one day, “Alok, if you were to start again, and you had one headcount, would you hire this guy?” My answer was no, and I realised my mistake.

Rule #9: There is a time when one of the co-founders may need to leave as well

Your toughest decisions will involve your co-founders or yourselves — there will be a time when either you or your co-founders will not scale. It is a special case of Peter’s Principle.

It is important to recognise the situation, and ensure a safe and respectful passage for the co-founder to move out. It is going to be one of the hardest things you will ever do. The same applies to yourselves, the CEO, but that is a job for the board.

Eric Schmidt’s hiring as Google’s CEO in 2001 was clearly one of the most impactful calls made by the founders. Rob Bernshtyn’s hiring as the CEO of Coupa in 2009 when the company was still in the early stages, had a similar impact.

Rule #10: Find the space to be vulnerable

Lastly and very importantly, most of us have not climbed the ladder of scalability, so we end up rediscovering some of these at every step. Find one or two advisors, preferably people who have been entrepreneurs and done this before, to advise you through this path.

This could be your board members, provided you have developed a relationship where you feel comfortable being vulnerable with them. This needs to be a person with whom you do not feel judged, you can say what you want without sugarcoating and admit your own failures, and who you respect. Such people are invaluable and worth their weight in gold. Find one or two and keep bugging them when you can!

I know the rules above are probably an oversimplification of reality. Each day of building an organisation brings new challenges. I strongly believe that each company is eventually defined by its people.

In due course, the markets you conquer, the problems you solve and the products you build will change. What will define your ability to do this are the people in your organisation. Knowing how to scale that ‘human engine’ therefore is the most important job for the founder/CEO.

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