An Inside Look At The Path To Scaling

Last week, I said that having too much money can be tricky for founders.

But there’s a greater sin.

It’s pleading poverty as the “magic moment” arrives – when traction and everything else comes together.

As I said last week, this magic moment is when you can win big. And winning big is the name of the game in the early investing space.

But companies can do this only if they’re scaling or if they’re on the path to scaling.

Scaling is not just another way to describe explosive growth. It’s a very particular kind of growth.

It happens only when your marketing and sales costs stabilize, allowing these costs to decrease significantly as a percentage of revenue. (See my post here for a more detailed treatment.)

Scaling does not guarantee success, an IPO or another company buying a startup out.

But a company unable to scale usually generates mediocre returns or worse.

So how do all the issues I talked about in my last post – cash reserves, fundraising, valuation, product/market fit, large growing markets and the ability to scale – mesh to determine a startup’s upside?

Well, rather than explaining the process, let me show you instead, via a company from ourStartup Investor portfolio: Privy.

Granted, it’s just one company. It won’t explain everything. But I hope you’ll learn how these issues are linked, so you can begin connecting the dots yourself when researching a startup.

Navigating the Journey From Pre-Traction to Scaling

We put Privy into our Startup Investor portfolio last August. It gives retailers tools that tell them when their customers redeem their online offers.

Privy had only 30 customers – definitely pre-traction. And that’s not so unusual for seed companies.

We thought it had some interesting building blocks – the idea, the pain point addressed, and its customers’ quick 30% uptick in redemption rates.

But what really got our attention was how completely broken the retail digital marketing space was.

Unbelievably, stores and restaurants had no way of tracking customers who redeemed their online offers or coupons. So they had no way of following up with them.

Worse, they couldn’t even tell which advertising channel (Facebook, Google, email campaign, etc.) they came from.

We thought that was pretty ridiculous.

It meant that even if a digital advertising campaign was successful, a store couldn’t leverage it.

Of course, a store couldn’t even be sure if a campaign was successful. All it could do? Compare the period of its online marketing campaign to the same period of the year before.

Yikes. Talk about operating in the dark.

Privy offered an easy-to-use platform that gave stores and restaurants tools to track when a customer redeems their online offers. Shoppers sign up with their email addresses and Privy does the rest.

Not only does it track where customers came from, it also adds geographic, Facebook and Twitter information, providing a rich profile of every customer to clients.

Our deep dive into Privy led us to believe it had an excellent chance of effectively disrupting this market and being able to scale, given time.

How much time? Well, that’s always a bit speculative. But we thought it would take several years.

Progress to Date

A year has now gone by. So, how has Privy done?

It has growing revenue and product/market fit. Customers also rave about the app. Here is some feedback…

This is what we said in our latest update on the company to our Startup Investor members…

Privy should have over 5,000 businesses on its rolls by Christmas [and 30,000 the following year]. It’s still early, but [Founder] Ben has shown that he can grow a company.

Sometime next year, Privy should begin scaling. If everything goes according to schedule and it can do another successful round of fundraising, it should hit 50,000 customers in 2017.

At that point, I believe it will become an attractive buyout candidate.

I had lunch with Ben last week in Boston (where Privy is based). We discussed his road map to reach the scaling phase. It makes sense and is very doable.

We believe Privy’s “magic moment” is coming sooner than we expected… possibly as early as one year from now.

It’s a critical milestone, when (in the words of Mark Suster of Upfront Ventures) you “back up the truck, load on $20 million to $30 million and blast the market with all you’ve got.”

As an early-stage investor, it’s when you can begin to dream of 1,000% or more returns on your investment.