To Scale Or Not To Scale? … that’s probably not the question …

Anybody who has been around startups for a while, pitching to investors, potential acquirers and generally just hanging out with other startup people would know full well the question “so … can your business scale?”

It’s just about the most important question a founder needs to answer as they start, grow, accelerate and maybe prepare to exit a startup, especially an online services marketplace. Or is it?

I don’t think it is.

I used to think it was.

Why I used to think the most important question was “can you scale?”

Founders of online service marketplaces lie awake at night worrying about supply and demand. Do they have enough supply capacity to service their customers? Do they have enough customers to keep their service providers busy? It’s a constant battle made all the harder by leakage or churn on both sides.

The answer surely lies in scaling up the acquisition process of both customers and service providers until you get to a magical level of critical mass and then the planets align as your customers are all ecstatic from being matched to service providers, who in turn are loving their new found busy-ness.

Hence, my main focus when helping these marketplaces has in the past typically been on rapid growth to scale as quickly as possible. It was a strategy that served us quite well, especially in the heady days of 2013–2014 as the ‘Uber for X’ hype prevailed.

Then 2015 happened.

• I met a guy called Avin Rabheru, founder of London cleaning service startup,Housekeep, who advocated high quality, customer engagement and loyalty, sensible margins and a bunch of things that just seemed to fly in the face of scalability, but has enjoyed huge growth and success.
• HomeJoy, the hugely funded US home cleaning service, crashed and burned as it embarked on a massively floored customer and cleaner acquisition scaling strategy that struggled to keep its customers and cleaners.
• VC’s and media started to turn against the sector.

I was starting to re-think online service marketplace growth strategies, but struggling to conceptualise things exactly, when I recently came across a quote byAndrew Chen, Uber Growth Guru, in regards to growth hacking, but I found applicable to the whole rush to scale philosophy.

“Growth is a magnifying glass. If you have a tiny diamond and you put it under a magnifying glass, then you’ll make something big and great. But if it’s just kind of a tiny piece of shit, then it’s just going to be a big piece of shit, right?”

And that helped things make sense.

Quite simply, you can’t grow or scale something that is inherently crap.

So this question of scale, that has been a startup fundamental for so long, is not entirely relevant. The questions that are more relevant are;

• Do we have a service that sufficient volumes of customers are going to need, want and love?
• Do we have a business model that is going to make us more money as the business grows?

If you can’t answer yes to both those questions then no amount of scaling can cover over the inevitable. The unfortunate thing is that founders and VC’s often don’t think like that. Hype wins as the belief holds that the rush to scale will drag a booming army of loyal customers and service providers along for the ride in a kind of compounding interest type dynamic, guaranteeing success.

Hence, the high-profile failures like HomeJoy, casting a dark cloud over the whole sector, overshadow the many, many sensible service marketplace businesses quietly going about their business. Those businesses ensuring they do have a growing band of loyal and loving customers and service providers, generating a healthy margin in the process. For them, scaling is an opportunity to amplify an already successful business, not something to merely amplify a piece of excrement, to paraphrase Andrew Chen.

So, if to scale or not to scale is not the question then what makes up the questions that are?

Do we have a service that sufficient volumes of customers are going to need, want and love?

We all know the importance of creating your MVP, testing product-market fit etc. It is critical to pick a large enough market so that you don’t have to take a large initial market share to succeed, and to have a product that customers will need and want.

Beyond that though it is critical to get your customers to love you. Growth hacker extraordinaire, Sean Ellis has said “In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product.”

And this is especially so with online services marketplaces where disintermediation, or customers and service providers cutting you out of the transaction, can cause critical leakages to your business model.

How do you get your customers to love you?

There are lots of ways. But these days it really is about quality. Remember customers don’t really care how flash your technology is, how cool you are, how funded you are, or how amazingly you scale. They really care about quality and how well you look after them.

This is where Avin Rabheru and his team at Housekeep stuck to their guns, shunned rampant scaling for the sake of scaling alone, and focused on providing a high quality service in order to get their customers to love them. When I first met with Avin and Housekeep in early 2015 I have to admit that I was a little skeptical as I could not see how this quality obsession and their associated practices could scale.

These practices at the time included speaking with every new customer before their first cleaning appointment and hosting physical trial cleans as part of the recruitment process for new cleaners, amongst other ‘high-touch’ actions, designed to create quality and loyal customers who love the Housekeep service.

I quickly realized that I was wrong.

And that Avin was a trailblazer in regards to how these online service marketplaces should be approaching growth in future.

18 months later, Housekeep has grown enormously, won lots of awards and cemented a spot as one of the market leaders in the highly competitive London home cleaning services market, with a fraction of the funding of its main competitors. In the process, they have actually managed to scale well, but without ever having compromised on quality.

Interestingly, another recently launched London-based startup, HOMYZE, is pursuing a similar strategy with their home services app, via which customers can”gain access to London’s fastest growing network of trusted tradespeople” to book services like plumbers, electricians and handymen.

Founders Adam Edgell-Bush and Andrew Jaques, who have together developed some of London’s finest homes, have spent years building a network of high quality tradespeople that “they would be happy to hire for their mothers”. Like Housekeep, Homyze are focusing on quality, customer engagement as a solid foundation for growth.

It does seem that after the hype of 2014 and the ‘Uber for X’ excesses, the trend for online service marketplaces is now moving quickly towards quality and high engagement, rather than an unbridled sprint to scale.

Do we have a business model that is going to make us more money as the business grows?

Similarly, there is a movement towards sensible business models that can indicate success on its own merits. Online Service marketplaces operating with the kind of operating margins that are not reliant on investment to subsidise their mere survival.

It is obvious that scaling an inherently unprofitable business is just going to burn the cash faster. So it’s imperative to get the business model right at the start.

As mentioned before, scaling should amplify an already strong business to accelerate success, not to cover up financial deficiencies.

Online service marketplaces should be aiming for minimum gross margins around 20–30%, and certainly should not be passing almost every dollar earned from their customers onto their service providers, which has been the case for some of the more scale-obsessed players.

Similarly, there are many online service marketplace businesses that are quietly growing, often self-funded, dodging the hype and earning these types of margins.

Conclusion

We’ve all been grilled on the “can it scale?” question in the past in relation to our startups, and we fall over ourselves to show that they can. We push our startups too fast too early before we’ve done our homework to answer the more fundamental questions relating to product and market, establishing engagement through quality, and ensuring that our business model is robust enough.

By answering these other fundamental questions we will know whether our business will scale. If we rush to scale, however, without getting the right answers to these earlier, truly critical questions attempts to scale will simply be amplifying something that is going to burn our cash faster.