Are they ready to scale?

Any new venture can project growth.  Before investing, check the practical realities that support the 10x, 100x, 1000x growth. 

All too often, the relatively mundane is ignored during the analysis process – the unexpected “snakes in the grass” often seriously derail business growth. 

In general, businesses which are manufacturing a physical product are much more challenging to scale.  This is, in part, because they are often more dependent on third-party vendors, supply-chain reliability and logistics (i.e., transportation).   

For example, Carofin has worked with a highly specialized fossil fuel company that produces material used, among other applications, in cell phones and solar panels.  The resource is abundantly available, and it is being mined and loaded onto trains for transport. What was not anticipated was a dispute in the ports that blocked shipments of the product to the buyers, slowing cash flows and reducing the projected acceleration of the business. 

Success in growing service businesses often hinges on finding enough people with adequate skills.  Two negative factors currently face new venturesthe low level of unemployment in the U.S., and the aging of societies worldwide.  Staffing and related training have increasingly become challenges, particularly for lower-wage positions.  Look for potential technology applications by the company, such as artificial intelligence, which reduce the need for a linear growth in headcount.   

Essentially, if the Cost of Goods Sold (COGS) for a manufacturing business, or the Cost of Revenue for a service business, is too high, the Gross Profit Margin (positive revenues left after labor and supplies have been subtracted from sales) will not be adequate to sustain the new venture or allow it to scale as projected. 

Once the fundamental components for success have been established — an adequate sales pipeline, good suppliers, enough customers, good management, strong financial controls and a well-established logistics process – here’s the next question: how fast should the company scale its operations?  Growing beyond available resources, both internal and with partners, can frustrate buyers and lower customer satisfaction ratings, lose distribution channels and, ultimately, induce failure.  

Keep asking additional questions, such as whether the entrepreneur has grown a business before in the same industry?  What about others on the management team? What is the critical path in product delivery, and how vulnerable are points along that path to disruption? 

You probably won’t be able to uncover everything that will challenge the company over time, but, by asking the right questions, you will at least begin to see how much planning the company has put behind delivering its product in higher volumes – and its contingency planning.   





In the interest of accessibility, here are some terms that any investor should be familiary with.