We have already discussed the criticality of the primary valuation drivers like Revenue and Revenue Growth. Track record of success is indeed a big part of enterprise value. In fact, they are prerequisites to scale conversation. However, there is also the conventional wisdom of “what got you here, will not get you to the next step.” This readiness to get to the next stage of growth is what we call readiness to scale. Investors like to invest in businesses that are ready to scale, and are willing to pay higher premiums if they see such traits.
What makes an emerging technology services business ready to scale?
While this can be a very long list, we view the following six as first-class signs that an ETS is set up to scale.
A clear vision
Differentiated offer and Deep understanding of a growing target market
A working sales engine where input efforts and spending correlates with sales
Operational leadership that knows how to operate at scale
Processes that are well-documented, measured, and automated
Data-driven Decentralized Decisions
Each of these topics are so critical that we can write a blog post on each. We will discuss the first three in this post today and the remaining three in a follow up blog post next week.
A clear vision: Knowing the destination is half the journey. A founder that can clearly articulate a vision bigger than where they are today gives the investors confidence that they have the ability to think bigger. For example, a vision that says that we are aspiring to change the way Enterprises use public cloud in their day to day operations is a good vision which will be considered large. However, merely having the vision is not enough. This is where being able to relate your current state and past journey to this vision. Using the above vision as an example, the story needs to be accented with “we have been on this path and have set the following intermediate 5-year goals, and then these 1-yr goals. Last year's goals were XYZ and we accomplished them all.” This type of narrative shows that you have a vision and it is more than just a slide. You have been working towards it. At Vixul ,we cannot overemphasize the importance of having a good vision and then marching towards it. We work with our cohort founders to sharpen their vision and develop 1-year goals, and hold them accountable on their progress so that such a narrative starts to get built.
Differentiated offer and Deep understanding of a growing target market: Knowing the customer is required for any level of scaling but particularly at larger sizes, scale requires a strong understanding of clearly defined customer segments and the credentials to close business in that segment better than the competitors. However the size of this target market begins to matter here. If you can close business for a target market which is not growing, it will naturally make it harder to scale but if its a market growing at rates comparable to your aspirational goals, you have a high chance of success. At Vixul, we help our founders pick target markets carefully, not too big for where they are, but one that is growing and can support future scaling. We also educate them on the fact that they will continue to change/expand their target market as they grow so the next step to scale is always there.
A working sales engine where input efforts and spending correlates with sales: sales are a prerequisite to scale. Having sales is good, but the ability to control sales is what's really needed to scale a business. A weak sales strategy is one where you may be selling successfully but still don’t fully understand what inputs on your end are leading to the sales. A strong strategy is where inputs correlate to the outputs, thus, if you need more or less sales, you can change the inputs. This is a critical component for scaling. Helping our founders build an intentional sales strategy (partner-led or direct) is probably the one topic we spend the most time on in Vixul.
When all or even some of these ingredients are in place, services organizations can not only scale, they can scale rapidly and gain revenue and enterprise value at the same time. As founders, always knowing where your bottlenecks to scale are and having soft goals to improve them continuously to achieve the next level is critical.
We will elaborate on the remaining three ingredients of readiness to scale in the next blog post. Subscribe to our blog or follow us on LinkedIn to get notified when it is posted.
Contact us if you are an ETS founder and want to discuss how to scale your business. We will be happy to give advice as this is our passion!
The other articles in our "Demystifying ETS Valuations" series are:
Demystifying ETS Valuations Part 4: EBITDA and the rule of 40
Demystifying ETS Valuations Part 5: Intelectual Property
Demystifying ETS Valuations Part 6: Addressable Market
Demystifying ETS Valuations Part 7: Revenue Predictability
Demystifying ETS Valuations Part 8: Team Loyalty
Demystifying ETS Valuations Part 9: Badges And Accolades
Demystifying ETS Valuations Part 10a: Readiness To Scale
Demystifying ETS Valuations Part 10a: Readiness To Scale