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Product scalability is, naturally, one of the key aspects of a startup which will most interest an investor. After all, the more customers a product can be sold to, the more money that could be made. Yet what is product scalability, exactly? How do you determine a product’s potential to spread throughout a marketplace and into other ones?
Some products have the potential to transform the world and be sold to practically everyone – such as the smartphone. Others are most relevant to a specific type of customer such as a key decision-maker in a university, hospital or other organisation. In this article, our investment team here at Bure Valley Group address how investors can effectively judge the product scalability of startups which they may be considering for their portfolio.
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Product scalability – an overview
If a startup’s product is highly scalable then it has the chance to increase sales volume – even dramatically and rapidly – without requiring huge, additional overheads which eat into the profit that it makes. Consider the following examples:
- A startup offers a bespoke service designing and building high-quality watches for men. Each sale has the potential to make a large margin. Yet the designer (e.g. the owner) can only make X number of watches within Y amount of time. More could be made and thus increase sales volume, but this would require training another designer. Not only is it difficult to find someone with the skill, passion and commitment to do this; it would take considerable time to train them up. Once they are ready to work (perhaps after years), they come with a high cost – a good monthly wage, for instance, and equipment to build the watches. As such, this startup’s product has comparatively low scalability – limiting its appeal to an investor.
- A startup offers a technology solution which allows any user to search for content they want on the internet, using a search engine portal. This, you may have noticed, describes Google! Anyone with an internet-cable device can access it for free, making its reach near universal. Money can be made by offering advertising space to companies in the search engine results, who can bid again each other in an “auction-style” system for the top positions (i.e. Google Ads). As more users adopt the service, the startup begins to expand – e.g. employing new staff to handle support queries and develop the search algorithm, to improve the experience for users.
How can investors spot scalability?
Identifying a scalable product amongst a line of startups vying for your investment isn’t always easy. This is especially the case if the idea is new and not yet tried in the marketplace. Yet there are some wise guiding principles to help you sift through your options:
- Look for a minimum viable product (MVP). One of the downfalls of many startups is that they spend so long trying to finish their “perfect product” that it never actually makes it to market. For investors, therefore, it will be important to establish whether the startup owners understand this. Do they have a core product which solves an important problem for the customer, and which has the potential to expand and develop later?
- Look for wide applicability. In short, how big is the marketplace that the startup owners intend to sell the product to? How much revenue and profit might that represent? If the marketplace is eventually dominated, moreover, how many other marketplaces might the product also translate into? If it is a software solution that can be sold to universities, for instance, then how easy would it be to adapt and also sell to healthcare companies?
- What’s the potential for automation? Take the bespoke watchmaker example once again. Much of her work cannot be automated. Yet many other products can be. A software subscription service, for instance, may only require customers to interact with staff at the startup when a support issue comes up. The rest of their activity can be managed via a website, an app or a monthly newsletter.
- Look at licensing and franchising. Does the product hold the danger of treading on other ideas and intellectual property already in the marketplace – particularly patents and also trademarks? If not, does the startup have the means to attain these rights, thus taking up the empty space and squeezing out new entrants from competing for market share?
- Identify open-endedness. Sometimes even the most promising products fall to waste. If so, does the startup have the maneuverability to pivot in a new direction? A one-trick pony is less likely to be scalable than one which can adapt to new market conditions.
Conclusion & invitation
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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