Scalability
Sep 10
Most businesses can be divided into two categories; lifestyle businesses or scalable businesses. Neither is better than the other, but only scalable businesses are investable propositions. So picking up on the theme of “It’s a pitch“, I thought I would write a business angel blog about what I consider as scalable.
Most self-employed people are engaged as consultants. When I started in ‘business’ I ran a training business (as I still do!) which trains staff in sales skills and now in raising money. The problem with this business was always that it relied primarily on me selling my time. What I sell can only be sold once. Of course, you can buy DVD’s of my training sessions, but that really is not the same thing and most people I know would not want to buy a training video like that (please email me with a payment for £30 if you disagree!)
The key thing here is that if I am on holiday I cannot be earning. If I employ someone to deliver the training on my behalf, and they are good, they can end up doing the business by themselves as there are no barriers to entry. If they are not good enough to run the business by themselves, I do not want to employ them!
I first realized the strength of being able to scale up when I won a contract to do some non client-facing work. I was able to outsource most of that work for a fraction of the price I was being paid. I remember the sheer joy I felt when I was sitting down enjoying a coffee in the knowledge that I was still earning money!
If you are going to pitch to an investor you have to show them that your business can grow beyond you working all the hours god sends. I do see business plans which try to take businesses that exist at the moment and add scale to them. There are a number of issues with these business proposals. Some businesses are simply not scalable or there is only room for one scalable business - in other words a natural monopoly exists. The taxi business in London is a great example - and something I learnt at my great personal cost - (see the business angel blog on Blueback). I also constantly see business plans which try to roll out and drive efficiencies from scaling up dry-cleaning businesses. They miss the point which is consumers demand convenience and quick turnaround. Johnson’s are the only large scale operator in this space - and they struggle as scaling up brings its own costs which you may not be able to recoup.
A classic example again is food service. If you wish to build up a scalable business you need to have more than one store (unless you are building a fine dining restaurant). Having more than one store requires a head office cost. It is unlikely that the business will be able to make profits until they have at least five or six sites. That is why each additional site will contribute a much higher amount towards profit.
The point here is that if you are seeking external investment from people other than friends or family, they will want to know how they can exit from their investment - which will be from building a business that is sellable. To be sellable, you have to be scalable. Make sure you are clear about this and your business plan reflects that.
Hi and welcome to my blog. 
