Prioritising sustainable growth over scale-ability, By Okupe, Beinisch, et al.

…the focus on scale obscures the need to focus on sustainable growth and the development of emerging business capacity. These skills are fundamental to scaling but are often overlooked. Even in technology, where scale through users is an important factor that determines the viability of a business model, we have seen many recent examples of the failure of companies due to structural weaknesses, lack of control and lack of management development of young entrepreneurs.

Scale and Sustainable Development

One of the biggest ambitions of the Sustainable Development Goals is the mobilization of private sector finance to achieve the seventeen social and environmental goals. The theory is that it is only through the private sector that the quantum of investment can be made available to create scalable solutions to address global social and environmental challenges.

Indeed, scale is a fundamental pillar in the investment chain. For venture capital investors, scale, in terms of capacity to generate profits, is a reward for taking risks in young and uncertain companies. For institutional investors, scale, in terms of ticket size, is the most efficient way to deploy capital. Businesses designed with scale capacity are therefore better suited to create opportunities for investors and efficiency in the market.

In addition to investment, we believe that businesses of this size add value to the economy and society for other important reasons. For example, business scale increases the potential for partnerships because it provides a platform for the development and testing of new ideas that can deliver value to customers in new ways. Industrial giants are university research centers, not only because of their potential as generous customers but also because they can provide distribution channels for the commercialization of experimental solutions.

The digital revolution has also shown how scale increases the spread of knowledge and access to technical solutions. Emerging industries such as ed-tech, tele-medicine and de-centralized manufacturing are changing the way people access information and develop technical skills. Only through the scale of these technologies can they become more accessible to the community.

…yes, the ability to scale is a poor criterion for evaluating the quality and potential of start-ups that build “sustainable” and “circular” businesses; are businesses that seek to create value while also delivering on the SDGs. There are three main reasons for this.

Scales Can’t Be Independent Optics

However, we argue that regardless of the fundamental benefits of business scale capabilities, it is inappropriate and even dangerous to use this lens only to evaluate the potential of growing businesses, especially those that aim to provide value in a way that is compatible with the Sustainable Development Goals.

We argue that in itself, size-ability is a poor criterion to assess the quality and potential of start-ups that build “sustainable” and “round” business; are businesses that seek to create value while also delivering on the SDGs. There are three main reasons for this.

First, the focus on scale obscures the need to focus on sustainable growth and the development of emerging business capacity. These skills are fundamental to scaling but are often overlooked. Even in technology, where scale through users is an important factor that determines the viability of a business model, we have seen many recent examples of the failure of companies due to structural weaknesses, lack of control and lack of management development of young entrepreneurs. The collapse of FTX and other bitcoin operators is a recent and unforgettable example of billions of dollars in damage, almost overnight.

In the context of Africa, specifically Nigeria, we argue that administrative and managerial capacity is more fundamental than business scale capability, compared to other contexts, as talent development is an important issue. For example, a skills gap assessment carried out by UNIDO in 2016, found that Nigeria’s labor productivity exceeds that of South Africa by a factor of five. These findings were confirmed by an employer survey conducted by Equinix in the IT sector, which found that 58% of employers cited the lack of skilled personnel as a threat to their business. Without relevant skills development, companies are not in a position to scale in the way they can, no matter how polished and promising their business models are.

It is very important that sustainable start-ups, especially those that work to generate value by reducing resources receive funding to grow, but we argue that the ability to scale should not be considered a priority factor to consider whether a growing company is ready. for funding.

Second, focusing on scale in the early stages of product and business development interferes with the production of products that actually add value to customers. From the perspective of the circular economy, consumerism produces negative consequences, with events related to climate change the most threatening. While it is true that we need large-scale game-changing solutions to overcome this challenge, in many cases the game must change in the other direction. In this regard, scale for scale does not necessarily produce the kinds of value that lead to better social and economic outcomes. For example, Candy Crush can scale but we need to realistically describe its value to society.

Finally, many business models are not scalable, even if they generate value. In the context of circular economy business models, many, such as industrial symbiosis, are by definition more closed. Sustainable tourism is another example, especially since tourism can be sustainable, visitor traffic must not compromise nature or society. This is an example of an important investment area that provides value and has growth potential but will not cross the scale-ability hurdle.

Investors Should Integrate Values ​​and Consider Talent Development In Assessment Models

It is very important that sustainable start-ups, especially those that work to generate value by reducing resources receive funding to grow, but we argue that the ability to scale should not be considered a priority factor to consider whether a growing company is ready. for funding. We argue that while the ability to scale is important, it is important to evaluate whether the founders are open and willing to develop themselves and others and aim to create value for customers and stakeholders. We also believe that an investment approach that recognizes that linear and long-term growth for some business models should be encouraged. We argue this focus will result in stronger companies and more stable returns for investors in the long term. What is important is that investors have confidence in the new approach.

Adun Okupe with Lagos Business School, while Yasmin Osaghae with UK Foreign, Commonwealth & Development Office (FCDO – Manufacturing Africa), Anastasia Guha with Redington corporation, and Obaloluwa Dairo and Natalie Beinisch with Circular Economy Innovation Partnership.