Does it Scale?

I’m looking through financial projections provided by a startup. Year 1 revenue is projected at $300K, while Year 4 is $30M – a CAGR (compound annual growth rate) of over 360%.

The leadership team is mature. The product is tested, being a SaaS platform used internally at a university, now transformed into a commercial product. There is demonstrated interest from the target customers.

However, the story told by the projections raises a lot of questions:

Sales Scaling Questions

  • What is the trigger that scales sales?
  • What is the flywheel effect – how do more sales bring in more sales?
  • What is the initial customer acquisition cost (CAC), and how will this improve over time? What about other conversion metrics?
  • How will the business model evolve over time? Specifically, what is the profit proposition that will enable margins to scale?

Technology Scaling Questions

  • Where can the technology break as demand scales? (I always think back to Twitter’s Fail Whale in the fast-scaling days of 2008-2010)
  • What new functionalities will be needed? What is the release schedule? (This should be visible in a three-year horizon)

Organization Scaling Questions

  • How will the organization change over time?
  • How many are technical, and how many are in sales, marketing, customer success, and operations?
  • Where will you find people? How are you onboarding?
  • Where are the frictions in the organization?

For a SaaS offering, the scaling story could work. I’m confident that the startup can evolve from Horizon 1 (Credibility) to Horizon 2 (Capability) during the four-year projection period, primarily since the core product is already used in an internal setting and with some credible reference users. They are starting from a good base.

As I look at these numbers, my initial reaction is to discount years 3 and 4 (the most significant revenue increases) to have a CAGR of 100%, which is still very strong. This doesn’t detract from the potential of the venture.

My core belief keeps on playing in my head as I consider these projections:
Tech may scale, but people don’t.

The weakest link in any fast-growing organization is the team. Therefore, optimism towards growth needs to be tempered with pragmatism on how you can achieve this growth.