Can the idea scale?

A recent Freakonomics podcast featured John List, author of The Voltage Effect, asking, “why do most ideas fail to scale”?  

The core idea is “how to achieve voltage – the power to take an idea from small to large scale” robustly and sustainably.  He answers that successful scaling is not the work of “one great man” but rather how you coordinate large numbers of people and stakeholders to collaborate effectively.

A specific example I found interesting was his work with Uber. Their innovation was not necessarily the technology, even though building a quality platform that replaced human taxi dispatchers is challenging but does not require new tech. The innovation was their business model: inventing a way to externalize fixed workforce costs – the drivers – radically reducing the firm’s cost structure and making scaling much more straightforward. It also could skirt around regulators and licensing authorities that would have slowed its growth. 

It was the idea that scaled, supported by the technology.

[Disclaimer: I am not a fan of Uber as a taxi replacement, but I do tolerate Eats…]

A lot of the focus of startups is on how to scale economically: customer traction, MRR, company valuation. The assumption is that more money helps build more tech capacity, which supports more customers. 

The issues discussed by John List have me thinking:

– What is the natural scaling limit of a business? 

Is the TAM-SAM-SOM framework a viable assumption to determine the ultimate size of the opportunity?

.. TAM = Total Accessible Market = worldwide potential

.. SAM = Serviceable Available Market = relevant segment of the worldwide potential

.. SOM = Serviceable Obtainable Market = realistic market share based on my  constraints and those of the market

Founders focus a lot on TAM, but maybe they should be much more aware of SOM, defining and tracking it from the start?

– How to establish the metrics for each scaling wave?

As a rule of thumb, I use the first $1M sales as the focus for Wave 1 (Credibility). “The path to $1M” is about establishing initial problem-solution fit and product-market fit, finding one’s place in the customer value chain and having an initial level of capability. There are still many assumptions and hypotheses to validate around the actual value innovation in this first wave, specifically identifying and quantifying the utility created for the end-user. Recognizing the value innovation leads to better pricing decisions.

Wave 2 (Capability): The venture is scaling to find its traction in the market. My rule of thumb is the next $3M to #5M of sales. Here, the questions put forth by John List become essential to address: fundamentally, can the idea scale?

.. “Watching for false positives”

.. “Does the success rest on the ingredients or the chef” (is the system itself scalable, or is it too reliant on the qualities of specific people)

.. Exploring the virtuous cycle: what is the flywheel mechanism that multiplies value and revenue, building the ecosystem to make the flywheel work

Wave 3 (Cashflow): At this stage, the business model needs a good overhaul to identify the real drivers of scale. In the Uber example above, its original focus was on the tech, and it was only when the firm reached a certain level that the realization was made that it was in the 

.. Where are the dis-economies of scale (this is a significant trap, where the pressure to scale causes customer acquisition costs to eat into long term customer value, and the whole thing becomes uneconomical)

.. Productivity of the next marginal dollar

.. Leadership of the virtuous ecosystem and leading the customer value creation chain.

I just bought the book and look forward to reading it to see how it connects with Momentum Scaling.  At this stage, I see a lot of aligned values, especially the end goal around robust and sustainable scaling.