Entrepreneurs think that their business idea is very good and will manage to attract VCs. For VCs, more than the idea its scalability that matters. Its a very common reason for VC to turn down your business proposal stating your business venture is not scalable. 90 out of 100 business plans are rejected citing lack of scalability, and questions hovering around scaling. So what is scalability and why is necessary to attract VCs.
Classic example i can quote is movie rental service. I worked in a movie rental startup company, they started with Bangalore centere and within 6 months started operating in Mumbai and Delhi, this is scaling. In order to run operations/stores in multiple location it requires a head office cost and costs to develop and deploy ERP/SCM/CRM solutions. Thats is why each additional center will contribure much higher amount towards profit. This movie rental service company scaled to 8 cities and successfully raised $21M.
The point here is that if you are seeking external investment from people other than friends or family, they will want to know how they can exit from their investment – which will be from building a business that is sellable. To be sellable, you have to be scalable. Make sure you are clear about this and your business plan should reflect that.
For dotcoms, the ability for a Web site to grow at a rate comparable to that of the business itself is known as scalability.The website should be able to serve all users request seamlessly with increasing volume of online traffic. For ecommerce its just not your technology but their complete business model has to be scalable as well by entering into new product category or new market.
So assess your business plan well on scalability factor before pitching it to VC.