August 2018 | Strategy
When Louis Borders founded e-grocer Webvan in 1998, he was already thinking of scaling. From one operation in California, the company planned to expand to 26 cities across the U.S. Investors loved the idea. Within its first few months, Webvan raised close to $800 million from VC funds and another $375 million from its IPO.
Wharton professor Gad Allon explains what happened next: “They burned through all of that money within a year by bringing in more people and serving one customer at a time rather than enjoying economies of scale. The cost to acquire and serve customers, rather than decreasing over time, actually increased over time. In 2000, they had $178.5 million in sales, and $525.4 million in expenses. They declared bankruptcy the next year.”
Webvan isn’t an isolated example. A study by the Kauffman Foundation and Inc. found that about two-thirds of the fastest-growing startups fail. And at California State University, researchers revealed that companies with fast revenue growth didn’t perform long-term as well as those that grew slowly. But if growth is necessary for survival, how can companies avoid that fate and instead scale sustainably?
Allon, Wharton professor of operations, information and decisions, says it begins with timing. The director of the new Scaling Ventures: Developing the Playbook for Profitable Growth program held at Wharton’s San Francisco campus says scaling at the right time (i.e., when your organization is ready) can help avoid common mistakes. “You should be asking, ‘Do we have a product that is differentiated enough?’ ‘Can we deliver this differentiation?’ ‘How do we measure that?’ ‘What are the right metrics as we grow that we know that we are growing in the right direction?’”
When the time is right, Allon says, a shift in mindset must occur. “Companies have to understand that whatever got them to where they are is maybe the next obstacle when they need to grow to the next level. They need to move from more opportunistic thinking to a more strategic mindset on the overall endeavor. Then, make a shift from short-term to long-term thinking. If you’re trying to scale globally, how are you going to move from local thinking to global thinking?”
With a more strategic mindset in place, leaders must then manage the organizational complexities of scaling. The new Scaling Ventures program, which includes curriculum from Wharton’s internationally recognized Scale School workshop series, addresses the key issues: financial, innovation, human resources, and implementation concerns. It brings together four Wharton faculty with expertise in each area, each sharing their unique perspective.
Allon says trying to scale without addressing each area (and bringing them together in a cohesive plan) minimizes the chances for success. “The first one is thinking about the financial point of view,” he says. “How do we understand the cash flow risk firms face as they try to grow? Then we look at growth in terms of innovation: how do I stimulate growth in an organization through innovation? We bring in a human resources/organizational structure person to think about culture and hiring, and we have an operations expert to think about how to build the infrastructure needed to scale. Together, these four perspectives help build the playbook for scaling that participants can use immediately as they go back to their firms.”
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