Scalability is a system’s readiness to handle growth. It demonstrates a startup’s ability to increase production or accommodate more customers when necessary. Startups that prove they can scale up as they grow are more attractive to investors, who see these as less risky investments.
You can think of scalability as a rubber balloon. If you blow in more air (customer demand) the balloon must be able to adjust and increase in size.
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Scalability is one of the primary characteristics that investors look for in a startup company. To be specific, what they seek is a business model that would pave the way for an increased profit margin. Mainly, the startup’s sales should keep rising even if its product prices remain as is or do not increase substantially.
Here’s a perfect example of scalability in a software company: The first output would require a considerable amount of money to buy the necessary equipment and pay for labor. However, the succeeding software should require minimal costs. Because of that, the profit margin of the said software developer is high, and so it can attract more investors. After all, the goal of any investor is to gain more money.
In contrast, most service-oriented startups are rarely scalable. Consider those that offer marketing and advertising services, for example. Replicating services would mean hiring other experts or investing in artificial intelligence (AI) to automate processes. Both options are costly, and so investors tend to shy away from these startups as they don’t see incremental profit margins.
Examples of Scalable Startups
To illustrate how vital scalability is to the success of a startup company, here are a couple of examples. Because of the scalability of these startups’ business models, they found success in terms of funding from investors.
Timekettle is a startup company that develops products that can translate foreign languages into the users’ chosen one. Its flagship product, the WT2 Real-Time Wearable Translator, is an ear device that lets its wearer understand the language of the person he/she is talking to.
On Kickstarter, the company set a funding goal of US$50,000. Amazingly, it was able to hit 553% of the target (US$276,869), with 1,640 backers or investors.
Aside from being innovative and the first of its kind, the startup attracted several investors because of its scalability. The AI powering the device can be replicated at minimal cost, ultimately increasing the company’s profit margin as time goes by.
Paytm is an e-commerce payment application developed by a startup based in India. Since it is a software product, only the initial development required a huge capital. This scalability is one of the things that attracted big-time investors, including SoftBank and Warren Buffet’s Berkshire Hathaway. It also didn’t hurt that Paytm’s business model is quite in demand as the world moves towards online and mobile payment.
Since it started in 2010, Paytm has received the following funding from different investors:
- Sapphire Ventures invested US$10 million in 2011.
- Ant Financial (an Alibaba Group affiliate) bought a 40% share of Paytm’s stocks in 2015.
- Ratan Tata invested an undisclosed amount to the company in 2015.
- Mountain Capital invested more than US$5 billion in 2016.
- SoftBank invested US$1.4 billion in 2017.
- Berkshire Hathaway invested US$356 million in 2018.
- Discovery Capital, SoftBank, and Ant Financial put in another round of funding amounting to US$1 billion in 2019.
Paytm’s success in securing billions of dollars in funding lies in the fact that its business model is scalable. The investors see a lot of promise (aka “profits”) from the company, hence they were willing to fund it.