An overlooked key to successful scale-up

Many start-ups experience enormous popularity and runaway growth, but only a few become stable giants. What separates them from the pack? They all go through a developmental stage called extrapolation.

Extrapolation is the often overlooked but critical phase between exploring many opportunities and exploiting one.

In this article, Jeffery F.Rayport, Davide Sola, and Martin Kuppexplain the importance of extrapolation for the long-term survival of startups.

What is exploration?

Exploration involves the search for product-market fit. 

What is exploitation?

In this phase, the company aims to strengthen its competitive advantage by fine-tuning the business model and strives to achieve incremental long-term growth and stable profits.

During the extrapolation, stage start-ups pursue two goals.

•  Confirm the extent to which product-market fit shows a demand for the company’s offering. 
• Achieve profit-market fit—the key to profitable growth is that the venture can ramp up revenue rapidly and every new customer brings in additional revenue and incurs only marginal cost.

What is the key to successful extrapolation? 

It demands new ways of thinking about strategy, operations, financing, and speed. It also requires approaches to organizational structure, culture, and talent distinct from those of the other two phases. Start-up and enterprise leaders must consciously treat extrapolation as a specific stage in the development of any new venture or new-to-market offer.

Principles of Extrapolation

Research shows that ventures that succeed at extrapolation have three characteristics:

1. They understand and leverage the conditions that are critical for success.

• A Robust Market: Extrapolation requires a vast base of customers with similar needs and will pay for a product that meets them. 
• Solution repeatability and distinctiveness: The company’s product must be identical for each customer but differentiated from competitors. Homogeneity simplifies the business model and makes it easier to scale up.
• An effective go-to-market strategy: The venture must have a clear plan to reach users through direct or indirect channels, turn them into loyal customers, and persuade them to promote the products.
• A proven monetization approach: Scale is difficult to justify or support withouthealthy revenue sources,
• Network and density effects: Effective extrapolation usually requires strong network and density effects that enable economies of scale and limit defections to other offers.
• Increasing returns: The company must construct a business model that boosts revenue while reducing variable unit costs and containing fixed costs.
• Substantial capital resources: Successful ventures must raise significant outside capital to achieve the rapid growth in scale seen in extrapolation.

2. They follow a rigorous extrapolation process that involves:

• Articulate the growth goals.
• Define the critical assumptions underpinning the business model.
• Identify the business model constraints to achieve your growth goals.
• Develop a way to remediate the most significant constraint.
• Once the first constraint is no longer a barrier to growth, remediate the next one. Continue this iterative process until all significant constraints get addressed.

3. They have ambidextrous organizations that can manage strategic experimentation and disciplined execution simultaneously.

Elements crucial for ventures that aim to achieve ambidexterity:

• Modular organizations and autonomous teams: Ventures that successfully navigate the high-stakes transition from start-up to scaled-up keep their working units small.
• Swift reallocation of talent: Management must begin assigning its most valuable human capital to its highest-potential opportunities. 
• Cultural management: A culture is an essential tool for maintaining a firm’s focus, mission, and direction.
• Expansion of opportunities: Increasing the total potential market and unlocking higher-quality revenue growth.
• The embrace of inorganic growth: Ventures in the extrapolation phase often consider acquisitions to expand geographic footprints (and thus their markets), address talent gaps, add features or functionality, or augment reach in terms of audience, users, or customers.

About the authors:

Jeffery F.Rayport is a senior lecturer in the Entrepreneurial Management Unit at Harvard Business School.

Davide Sola is a professor of entrepreneurship and strategy at ESCP Business School 

Martin Kupp is an associate professor of entrepreneurship and strategy at ESCP Business School.