The 13 Biggest Challenges Scaleups Will Face in 2022
Now’s that time of the year when it’s traditional to look forward and plan ahead. So we thought we’d collect together the biggest challenges facing scaleups, so you can be prepared for whatever 2022 brings.
Last year was a huge year for venture capital, with record-breaking investment in scaleups and more businesses searching for funding than ever before. This has created big opportunities, but also big risks.
In H2 of 2021 we surveyed founders across our ecosystem and found that, of those currently fundraising, 92% were running the process solo and receiving no help from their teams at all. With this trend for the founder/CEO to step outside of the business in order to focus almost exclusively on fundraising, it’s well-worth taking the time to take in the big picture – before you are swept back into the minutiae of BAU, or dive headfirst back into fundraising.
So, whether you are fresh from a fundraise, or simply getting to grips with the year ahead, check out our list of challenges and get ahead of the curve.
1. Building a great culture and team
Forbes and Inc. authors argue that your team is one of the top factors which determine if, and how much, funding your company will raise. Investors want to know that your company has talent at the top of their field who have ample experience doing what they do. If you can’t say with confidence that your business is being led by such people, you may need to reevaluate your staffing choices.
As your company scales, your hiring processes will have to change. Once your company reaches a certain size, it is no longer feasible for you to conduct every interview. Instead your hiring criteria and onboarding need to be designed to ensure that every member of your team – no matter when they joined your organisation – fits well into your company culture.
It is also important to review these policies to ensure you are hiring diversely. A common problem amongst companies looking to build a specific kind of culture, is that if they haven’t defined these values, they instead hire people like themselves. This prevents them from building a range of perspectives across the business, ultimately exposing the business to more risk. Scaleups that hire from a wide range of backgrounds tend to be better at predicting market trends and can troubleshoot more effectively.
You can work to prevent your business from falling into this trap by clarifying the values that your business is trying to encapsulate – so you can disengage them from the more abstract ‘gut’ feeling. This will not only improve the quality of the candidates, it makes the hiring process scalable across the business, rather than only practicable by the owner of the gut.
Often as you scale it can prove difficult to find the expertise you need. Instead of hiring new team members full time, it can often be more time efficient to use external advisory support to provide expertise on a more part time basis. For example, many businesses take on interim CFOs over challenging periods such as a fundraise, or engage mentors to help team members grow in experience and confidence.
2. Setting up a scalable vision
Depending where you are in your scaleup journey, you may well be still establishing whether your business model can actually be scaled effectively. With only about 2% of startups making it to IPO, there is a big risk that your business growth will stall after seed or series A unless you get your planning and market iteration right.
Spend the time defining your business’s value statement and brand, starting with the problem you are ultimately trying to solve. There is often a lot of trial and error at this stage, as you work through various iterations. This process must be guided by market research and customer feedback. It’s no use establishing a great looking brand if it mismatches with your market and has become disconnected from the actual product you sell.
Defining your value proposition should also take up a significant part of this process. This is not only a vital part in acquiring custom (and keeping it) you will need to pay special attention to ensure that it is scalable. It is not unusual for scaleups to take a higher-touch approach in the early stages, while they are getting established and attracting their future brand advocates. But ultimately, if your value proposition requires too many hands on deck, it is unlikely you will be able to grow fast enough to stay on the scaleup path.
Your business model and roadmap will be complementary, laying out a path towards achieving your vision. It’s no use just saying you will be a market leader, your roadmap will need to lay out the strategies you will take to get there, from thought leadership to research and development. You also need to build in flexibility and room for innovation, you don’t want to get left behind as markets change!
3. Improving customer acquisition, GTM and brand
Businesses that can accurately define how they will improve their go-to-market strategy, customer acquisition and brand find it much easier to optimize their sales and marketing channels.
Work out your goals, and then break them down into actionable steps. How does your current marketing strategy work towards this? How will it need to be changed?
Now is also a good time to revisit your own sales funnel and cast an analytical eye over your marketing channels. It’s tempting to spread your message as wide as possible, but a thorough analysis might reveal that your time and money might be better spent concentrating on a few specific avenues, rather than spreading yourself thin. Measuring returns on marketing initiatives can often be difficult, as some aims like brand awareness can be significantly harder to measure than lead generation. However, if you have spent the time analysing your sales funnel and establishing the most important aims, you should be able to properly measure and target your marketing.
You may also find that your content management platforms and strategies could do with updating, to match the needs of your business now and in the future. It’s easy to get locked in on a specific pathway as the administrative load of changing can be significant. However, it is always easiest to make any changes now before the business becomes any larger.
From customer personas to sales enablement to pricing, there’s a whole lot to get right here and you will likely want to keep updating these as your business grows and ages and your capabilities change.
4. Improving customer retention
Until now, customer acquisition may have taken centre stage. But if you want to make it big in the scaleup world, you’ll need to hone in on your customer retention strategy.
Source: Ocreative, data sourced by Forbes, Harvard Business Review, Bain & Company
Simply put, it costs a lot less to keep a current customer than it does to attract a new one. How much less? Five to twenty-five times less. Furthermore, by increasing your customer retention rates by 5%, your company can see a 75% raise in profitability
There are a variety of ways to measure this, depending on whether you just want a simple indicator (NPS scores) or are able to plug in the time and data for a business health score. But either way, these useful metrics can help you identify where you can add value to your business.
In addition to the direct financial incentives of successful customer retention, brand promoters are an excellent source of social proofing, feedback, case studies and testimonials.
Showing the market that you can provide ongoing value to customers is the easiest way to get prospects excited about what you could do for them. This reduces customer churn, improves lifetime value (LTV), increases customer satisfaction and can raise NPS scores. All crucial for sustaining growth.
You should also take the time to analyse and understand your current customer base. Until you know what it is about your offering that is drawing customers, it can be difficult to effectively capitalise on it. Then once you have a more clear understanding, loyalty programmes and product offerings can be potently targeted.
This data can also allow you to divide up your customer base, identifying high value customers and areas that can be profitably developed, and allowing you to discount those customers whose loud voices may have obscured their low value to your business.
5. Being a better leader
We tend to envision entrepreneurs as lone mavericks, tirelessly blazing new trails fueled by their own ingenuity. In reality, research has shown that on average, half of scaleups are started by a founding team rather than a sole founder. And a majority of scaleup founders have had experience leading teams in previous ventures.
Running a scaleup can be difficult and dispiriting at times and learning how to embrace failure and learn from your mistakes will be vital when things go wrong. Great business leaders tend to be customer oriented and have a clear idea of their own skills and weaknesses. Not everything needs to be done alone, and whether you are a sole founder or part of a team – finding people with complementary skills and the expertise you lack is a vital part of building a successful team.
Beyond this, to enable your teams to operate at scale, you will need to be able to let go. Teams need to be self-reliant, capable, and empowered and trusted to make business decisions. Micro-managing might be technically feasible now, but the bigger the business grows, the more it will constrain creativity, responsiveness and morale.
Improving your leadership skills enhances employee satisfaction and loyalty scores, encouraging stronger sales and growth outcomes across the board – not just in the areas you are directly responsible for.
6. Developing your products
As a growing scaleup, the ability to build an engaging and mature product that delights the customer is critical to both customer satisfaction and scalable growth.
Many scaleups find it challenging keeping their current, highly valuable customers just as excited about their brand as they were in the early days. To stay ahead of your competitors, you need to stay on top of market developments with in-depth and specialised expertise, so the product you disrupted the market with isn’t disrupted in turn. It is also vital that you continue to revisit and analyse your product and how well it matches customer requirements.
It is easy for many products, such as software packages, to become bogged down with features which don’t actually fulfill most customers’ needs. Instead, product development needs to be guided by customer feedback and any usage data, to ensure you are spending your time and money where it is most needed.
7. Scaling your tech
Founders enter an entirely new realm of technology demands and benchmarks as their companies scale. There are a few things you can bear in mind as you scale your tech.
Unless you are prepared to spend large amounts of time onboarding and training new members of staff, all your software needs to be accessible and intuitive. It’s no use paying for the most expensive and specialised technology, if none of your staff will have the required knowledge to find and use all of these features.
The other major consideration needs to be around documentation and risk management. The due diligence for fundraising or selling will require that you maintain up-to-date documentation of infrastructure, IT roadmaps and strategy and these are also key for ensuring a cohesive business strategy.
Building out the IT team is also important to reduce keyman risk – if only one person understands how to operate your technology then your business will experience significant disruption if they leave. Working out the appropriate cybersecurity and data security for your business is also a vital duty to prevent potentially disastrous IT or PR problems. Managing customer data properly is not only important for efficient business operations – going about this in the wrong way could open your business up to legal trouble.
The tech infrastructure needed to support a high-growth scaleup business is as unique as the business itself. Still, you need to balance the need for speed with the need for customisation. Spend the time looking into features like integration to make sure you are getting the most out of your investment and keep up-to-date on regulatory requirements for data in every country you operate in.
8. Optimising your operations
At the scaleup level, you need more than a successful business model. In order to adapt to market fluctuations and hit traction milestones, you need a highly responsive and flexible market strategy drawn from market expertise and business acumen.
Managing costs effectively so that your profit margins can grow, not stagnate, relies on a whole variety of factors. From computer systems to staff procedures, every element of the business needs to be adjusted to support growth. Moreover, those systems will still need the scope to change again as markets change and cause your costs to fluctuate.
Optimising operations can be a struggle, not just to design a process that can be scaled alongside your business, but then to implement this without damaging business continuity through any variety of teething problems. This is why it is so important that your strategy and organisation structure be flexible, so that you can continue to revise and fine-tune to maximise results.
9. Improving your business monitoring and financials
In order to ensure that your business is part of the 2% of startups that make it to round D, you need to keep costs to a minimum, maximise revenue, avoid risky market environments and seize opportunity the moment it arises. Easy!
The larger a business grows, the more expensive slip-ups can become, both in the moment and in the cost of repairing them. The time lost can be even more expensive, sacrificing business momentum to competitors and damaging consumer confidence. A vital part of preventing these issues is by developing strategies and procedures to monitor the business and pick up issues before they start to hurt your bottom line.
Budgeting and record-keeping will help you plan for the future and improve the accuracy of your business plan, as well as help your business conform to regulations. Investors will expect immaculate financial records that support your fundraising narrative, and a key part of this is making sure you are actually recording all of this information.
Detailed financial modelling can also help businesses predict difficulties before they occur, allowing preparations to mitigate gaps in cash flow or potential rises in costs.
10. Preparing for a fundraise
On the face of it, this might seem a little irrelevant to your business if you are just coming out of a successful fundraise. However, the drop off rates between rounds of funding are massive. This means that completing one, or several, rounds of fundraising is no guarantee of future success.
To avoid running out of runway while you try and get your business in position for a new round in however many months, start planning for the next round now.
Depending on which round of funding you will be applying for, the requirements of investors are likely to be very different – making it important that you have a detailed understanding of each part of the process. It is also worth bearing in mind that, just as with the normal running of business, your company will be in competition with a large number of other scaleups all chasing a limited amount of funding. Therefore, choosing the right time and investors will also play a crucial role if you want to secure scaleup funding at a favourable valuation.
A successful fundraise also requires a clear strategy, knowledge of the VC marketplace, and a well-structured plan regarding what you will do with the funds. After all, not only will investors be looking for evidence that their money will provide enough growth to eventually make significant returns – if you wish to progress to the next stage of growth every pound will need to be carefully spent.
Our website has plenty of articles explaining the fundraising process, from specific breakdowns of rounds A and B, to lists of common misconceptions and more.
11. Managing your risk
Roland Siebelink, author of Scaling Silicon Valley Style, argues that the reason why 54% of scaleups never make it through their next round of funding is that they failed to meet their growth targets. In fact, a mere 2% of all businesses survive funding rounds A-D.
Risk is an unavoidable part of business, but this only makes it more important that each business has put in the time and effort to ensure they have a robust risk management programme in place to identify, analyse and respond to the risks their business faces. Staying on top of upcoming compliance rules, analysing consumer trends and ensuring communication from the bottom of your organisation to the top are some of the wide ranging risks that scaling businesses need to manage.
As you grow, so too does the risk, and the number of people exposed to that burden. Where a small startup will only damage the founder and a handful of other people if it fails, scaleups have a duty to a much wider set of stakeholders – from investors to staff – to make sure that the business thrives. Fail to manage risk to the satisfaction of these stakeholders, and it is likely that you will lose many of them.
12. Manage your external counsel, board and investors
As an entrepreneur, time is always something you are in need of but perpetually lacking. Every aspect of your business is important but if you try and pay attention to everything, you won’t accomplish much.
Founders and senior execs need to be laser-focused on growth. However, scaling a business comes with numerous other demands, including managing external counsel, board members and investors – often a full-time job in itself.
Alongside their obvious benefits, these parties are all a necessary part of making the journey to IPO, but learning how to manage them and build productive relationships is a difficult skill to master. Many companies experience great difficulty setting up these structures in the first place, and if you find the wrong people, or fail to manage expectations and responsibilities properly, things can go wrong quickly.
Your board also needs to encompass a broad range of experience and expertise to lead your business. It’s not always an easy task, but making sure the composition of your board is appropriate to facilitating your business in achieving its strategic objectives is a key part of board construction and upkeep. The construction of a board is an opportunity to lock in a diverse range of expertise for the benefit of your business and you should make the most of it.
What is most important is that your board, external counsel and investors are people that you can respect and trust, and that they can have the same confidence in you. Well-managed boards do not only take up less of your time, good communication across these parties is a vital part of helping large organisations move decisively and in unison; improving company culture and morale; and the production of leads and cross-industry knowledge.
If you need help establishing or managing your external counsel, Invigorate may be able to help. We are the one-stop shop for all kinds of external support, helping you locate the people your business needs, without the fuss.
13. Preparing for an exit
While you may have developed an exit strategy in the early days, when you were still just a startup, your company will be a different place now. After all the business growth, increased traction, team changes and market fluctuations, it is likely your original plan is significantly out of date. And as is the case with most scaleups, things happen fast. When the time comes to exit, will you be ready?
Whatever form your exit will take, from making the leap to IPO to selling the company, there is a huge amount of admin and preparation attached to the process. This is both expensive and time-heavy, particularly as the markets and the moment are moving so fast.
The most important thing is that you have an end goal in mind and that the rest of your founding team (if you have one) are on board with this strategy. You don’t want to leave your business partners in the dark, particularly as doing so will materially damage your chances of a successful exit.
Once you have established your exit plan, you can start getting things in order. Starting continuous due diligence, hiring a team which will be up to the challenge, developing appropriate governance as you scale, and otherwise ensuring that when you exit it is with a favorable valuation.
Particularly if your plan is to be acquired, you will also need to look closely at the softer factors around brand and company culture. It’s no use being a high value business with great returns, if everyone you might sell to is put off by a low staff retention rate that stinks of a toxic company culture.
All of these factors take time to get right and are usually cheapest and easiest to accomplish if you build them into the growth of your business. If your plan is to exit the business within three years, exit planning should start now, or else you might well spend as much time getting things in order for your exit as you did growing your scaleup.
Conclusion
There are a huge host of challenges out there that your scaleup will likely face. Some of these you will no doubt navigate expertly, but sometimes it doesn’t hurt to have an external source of expertise to consult.
Whether you are looking to overhaul your GTM, preparing for a fundraise, or reassuring your investors, sometimes it pays to have help. Specialist advisors can seriously cut down on wasted man-hours and make your job easier by providing the expertise you need to make informed decisions.
So whether you need a business advisor, interim CFO, or some NEDs for a new board, Invigorate can help. We cut the stress out of the search for external support, by matching you with suitable advisors with the right expertise for your market, business, and strategic priorities.
Contact us today to get started. Got a particularly thorny problem? Book a consultation and see how Invigorate can help you.