A Successful Innovation? A Question of Scale

by Evan Shellshear

For most startups, the biggest question haunting them today is not money but scale. According to Forbes magazine, the number one cause of startup death is premature scaling. So the question on every entrepreneurs’ lips is: How quickly and when to scale? But before you answers that, I’d like to ask you why no-one seems to be concerned with the even bigger question, what is scaling all about? And what is so different now that small groups of people can create billion dollar businesses on their own?

For generation Y and Z, many believe that scaling is a 21st century problem. To receive VC funding or earlier stage investments, one always needs to be able to demonstrate the ability to ramp up sales quickly. Because of this many young entrepreneurs think that the question of scale is fundamentally a startup issue. But it’s not. The success of businesses for centuries has been all about effective expansion. Even for ancient businesses wanting to grow, skillful scaling was the key to prosperity.

Thousands of years ago, when the Christian church was just a small group of insurgents fighting for their spiritual goals, they formed some of the longest enduring corporations. In fact, according to the famous historian Bruce Brown, “[t]he oldest surviving corporation of any sort is the Benedictine Order of the Catholic Church, which was founded around 529 A.D.” As these organizations took it upon themselves to scale, with the meager means of sending people on foot or horseback for the expansion, it happened in a straightforward manner. Each person could convince a fixed number of people to join. Some were more effective than others and some had better opportunities than others simply because they lived in a major city.

This form of scaling, using people to attract more people or business, increases linearly for each person. Over time as the size increases, the growth of the corporation multiplies because more and more people are coming in contact with new opportunities (including the old members). There is a limit to this (all the remaining non-customers) but in theory, the business can scale quite quickly.

When it comes to profit-driven businesses, one of the oldest is probably StoraEnso. It was founded in 1288 in northern Sweden and back then was called Stora Kopperberg, named after the large copper mine the company dug its riches from. The mine became so powerful that, in the 1600s, it was supplying two-thirds of European copper needs with roofs of royal palaces from Versailles in France to Stockholm in Sweden being made from the versatile material.

The approach of this corporation was similar to that of the church but less effective. To mine more material, more people were employed. In this case, each person simply added a fixed amount additional business and growth simply scaled additively. Basic tools and machines to assist with the work increased the level of scaling but the company wasn’t built around these machines; they just made certain jobs simpler.

It wasn’t until the industrial revolution and the entrance of machines dedicated to taking over a significant portion of a company’s core business that increases scale became more meaningful. As companies such as textile manufacturers built their business around efficiently combine machines and people, a new type of scaling entered the picture. This kind of scaling meant businesses could quickly achieve the benefits of economies of scale and, with a modest capital investment, they could become massively profitable businesses. All due to their new form of scaling

The manufacturing industries initially dominated this form of scaling. Human-machine mixes became the basis for a new way to grow a company and explore new forms of profitability. With the appearance of electrical machines, conveyor belts, mass production and other improvements, the scaling just got better and better. In spite of the improvements, the type of scaling was still the same. It wasn’t until our digital lifestyles began that we experienced new explosive and exponential scaling which would redefine profitability. It would become possible to have thirteen man teams running businesses worth over one billion dollars.

Digital businesses have ushered in an unforeseen growth phenomenon. Powered by the Internet, companies are no longer restricted by proximity, transport or factory space limitations. They are open to the world and exposed to billions of customers – on day one. The profitability of these businesses is on a different scale to manufacturing ones. Even as manufacturers try to get in on the game, leveraging the internet to sell their goods, they are still unable to achieve the same level of scale due to having their scalability limited by their production capacity. Higher revenue per employee for Internet babies is the norm.

Digital companies have shown us a different way to scale and a different way to measure productivity. This is why a company such as Uber which owns no cars but only code and apps can be worth more than one of the world’s largest car manufacturers, GM, which makes the cars so that this business can even be possible.

What digital companies are showing is that the old yardsticks to measure companies are no longer applicable. It is no wonder so many people are left scratching their head after hearing how much a new tech startup is worth. The 21st century’s digital business’s biggest asset is its powerful, cheap scaling. And we still haven’t seen the end of it yet. As the introduction of electricity to manufacturing made production that much more powerful, similar things are happening for tech startups with platforms like the Apple App Store and Google Apps Marketplace. We have begun the second phase of more profitable scaling.

If we look beyond this and remember the mind boggling profitable companies the Internet connected world has given us, then we can only wonder what this will mean for the next revolution in the ability for companies to scale. Thirteen man teams running billion dollar companies will become common and boring. As it starts people will scramble to take advantage of it but the billion dollar question is, has it already begun?

image credit: equipe integrada/flickr

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Evan Shellshear is a technology and software expert working as the Point Cloud Manager at the Fraunhofer-Chalmers Centre in Sweden. His work focuses on turning cutting-edge research into successful industrial solutions across numerous industries. Connect with him @eshellshear

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