The Scale Up Report is out.

Scale up t-shirt picIt has been a privilege to work with Sherry Coutu as a member of the Scale Up Report Steering Committee. The launch of the report earlier on this week has been widely reported by the media (in Wired, The Guardian, the FT, etc.) and Sherry has posted an excellent summary here.

The report and its case studies are also available online at The ScaleUp Institute. I have no doubt that the report recommendations will contribute to shape positively the entrepreneurship ecosystem in the UK for years to come.

The impact of getting “scaled up” right in the UK is very significant. The impact assessment analysis carried out by Deloitte shows that between £70bn and £225bn  (and 45,000 to 150,000 jobs) could be added to the economy between now and 2034.

Business models scale differently

Scale-ups, often defined as businesses with ten employees or more that have grown by 20% of either turnover or staff year on year for at least three years, come from all sectors and geographies. But in this post I’d like to focus on companies for whom scaling is not just a laudable aim but rather a necessity for survival. I am talking about platform businesses.

These businesses act as catalysts between different customer groups who mutually benefit from transacting with each others (such as eBay with buyers and sellers, airbnb with flat owners and flat seekers or even Uber with car drivers and people looking for a lift).  We compared and contrasted them with traditional business is a previous post.

In fact a large proportion of the growth (and associated market value) that has been created globally over the past decade comes from such businesses. Apple, Microsoft and Google (three of the top five companies in the world) display strong platform characteristics and have managed to develop incredibly powerful platform ecosystems.

When a “critical mass” is, literally, critical…

For these platform businesses scaling is not a choice; it is simply necessary for survival. This is because the value they create is highly correlated with the scale of their different, and complementary, customer bases. An airbnb with only one flat is not a very attractive proposition, and neither is a game console with only a couple of games. In fact such platforms are simply not viable unless they reach a critical mass of users on both sides… and this often needs to be done within a relatively short time horizon.

Have you ever seen a “Tortoise platform business?”…

While in many walks of life the tortoise strategy may be valid, for platform businesses only the speed of the Hare  will provide the momentum required to achieve scale. This is because users will only become regular customers if they can find enough counter-parties to transact… and this requires that scale is reached quickly. The “minimum scale”, often referred to as “critical mass” will depend on the characteristics of the market being served (while this magic number may be quite small for some BtoB platforms targeting specific businesses, it can be in the hundred of millions of customers for CtoC exchanges).

The bowler pin strategy: why quality matters

It is not just quantity but also about quality. For example being able to attract a large number of members of a given community (like eBay did with collectors in the early days) is more valuable than attracting random platform users who would be less prone to transact. Often platforms target specific communities in sequence to attract individuals that would benefit the most from joining the platform.

Unique scaling-up strategies for platforms

Platforms have unique underlying economics that were first formalised by Jean Tirole, 2014 Nobel prize winner in economics, in a 2002 seminal paper. These economic characteristics are quite handy for enabling this critical scaling up process. For example, unlike traditional business models, platforms have enormous pricing flexibility since they can subsidise the services provided to some of their customers by charging customers on the other side of their market (e.g. such as advertisers paying for facebook or Google functionalities or restaurants subsidising rewards for platform users on Opentable).

As a friend working for high growth start-up TransferWise recently noted, this makes mastery of the ‘digital dark arts’ for viral growth (such as SEO, mobile acquisition, viral videos, killer content, analytics, retargeting, etc.) a unique savoir-faire that platforms absolutely require to reach a critical mass.

So while the ability to scale up is important for all businesses don’t forget that not scaling is simply not an option if your business model has strong platform characteristics. This, of course, has important implications in terms of design of the value proposition, marketing strategy, company mindset, financing, pricing, etc.

Happy scaling…

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