There are two miracles in startups: companies invent wholly new things the world decides it wants, which makes the companies grow. And the companies themselves survive their extraordinary growth. A company experiencing explosive growth can expect both revenue and headcount ramping at 100% plus per year. Being in that environment, and managing it, is both a blast and an incredible stress.

Before I joined ScaleVP, I worked in a startup with a revenue trajectory that went $1M-$16M-$140M in 1998-1999-2000. We were always bursting at the seams, and often it felt like our rocket ship was about to explode as we tested all the boundaries of recruiting, hiring, training and managing. Now, as a board member, helping a company think through scaling talent, whether recruiting new executives or articulating goals, is critical to both the company and ScaleVP realizing the promise of our mutual investment.

So what does explosive growth from a talent perspective look like?

Here’s the headcount growth over three years for six classic “scaling” companies, startups that we backed when they were early in revenue and beginning to ramp.

These companies together added 1500 net employees in three years, an average employment growth rate of 84% per year. Assuming 20% of net additions churned (I don’t have the data on this but hope to explore it later), these six companies recruited and on-boarded 1800 new employees. If you add just two of ScaleVP’s later stage companies, another 1000 net new jobs were created and filled in the same time frame.

Where does this growth happen in companies? Across the board. There is not just a single function the company can focus on when growing. Here’s an example, this company grew from 15 employees in early 2009 to 107 at the start of 2013. Even though we often focus on “scaling” sales and marketing, most of the departments grow rapidly, especially in that early scaling phase. As companies approach later stage and their steady state operating margins, “scale economies” kick in, and G&A and R&D become more like fixed expenses, while sales & marketing grow.

So, just as sales management must “ABC” Always Be Closing (NSFW classic movie), founders, executives and managers in startups must ABH: Always Be Hiring. CEOs must be magnets for talent, attracting top executives who share the vision and will do the early work hands on. This doesn’t mean CEOs pass out offer letters like Halloween candy. Leaders must be looking at the horizon, understanding talent needs to come and who is best and most likely to fill those needs. Strong leaders cultivate relationships with people whose skills lie in the company’s next new need, whether strengthening security, expanding sales channels or professionalizing HR.  As companies grow, management fans out at middle layers, and the hunt for talent percolates down as well as across the organization. Be sure that you, and the leaders you bring in, continually attract the best.

How to scale a business is a perennial question in entrepreneurship circles. Not only is the answer different for every company and every industry, it’s also fairly tricky.

Growth leads to increased revenue, profits and valuations. But spending aggressively on scaling – anything form adding staff, regions or new products — can lead to pitfalls, pains and sometimes the end of a business.

As a young entrepreneur, knowing when to grow can play a major role in your company’s long-term sustainability. The key is to find the right balance of acceleration to maximize the business and capture market share without breaking the bank.

Check out my contributed column in Young Entrepreneur for more tips for how to grow your startup.

The power curve is stark: Silicon Valley has always had a massively disproportionate share of VC deals.  I spoke on a panel recently to review 2012 financings, which following a 20-year trend were mostly in Silicon Valley.

Today, I met with an entrepreneur who recently returned to the Bay Area after 2 years trying to scale companies in Austin, TX. He moved there looking for a lower cost, family friendly startup zone. Now he and his family are re-ensconced in the Bay Area. From him I got a taste of why the Bay rules in VC.

Californians are generally allowed to change jobs in a fluid labor market.  Nationally, it’s common to have a “non-compete” clause as part of an employment agreement, restricting employees from joining another company or starting one of their own in a competitive space.  In California, non-competes are not only unenforceable, they’re illegal. In other states, they can reduce labor flexibility. Texas in particular generally enforces non-competes, sometimes with limitations. Is Governor Perry going to change that law in his quest to draw high techs to Texas? Harvard Business Review says non-competes cause brain drains.

The founder told me that Austin has a smaller pool of super-talented execs than the larger Silicon Valley, but the bigger problem was that getting someone to leave a job for a startup in an adjacent space was very hard. Incumbents, whether existing employers or investors would threaten a lawsuit and keep people in place. Interestingly, non-competes signed in other states can’t be enforced in California, so if someone moves OUT of Texas, they’re free and safe.  The other states that are most employee-friendly on non-competes are Louisiana, Alabama, Florida, Oregon and Michigan.

The two largest venture capital regions outside Silicon Valley, New York and Massachusetts have far more restrictive (for employees) non-compete laws. Massachusetts considered changing their laws to enhance job mobility coming out of the recession, but left the proposals un-enacted in 2010. ScaleVP has had great portfolio companies built in a variety of environments: ExactTarget (NYSE: ET) in Indiana, virtually bans non-competes, Omniture (Acqd: ADBE) in Utah allows restrictions on employees and Vitrue (Acqd: ORCL) in Georgia which recently changed to reduce non-competes.  Law firm Beck, Reed, Riden conducted a useful survey of where each state stands on non-competes.

A non-compete isn’t the only reason why the abundance of VC $$ remain in Silicon Valley but it is an important item to consider.  In the technology landscape, talent can make or break a business and the more fluid the resources, the better the chance of building a viable business.

The first e-commerce wave brought incredible convenience, endless choices and great prices to our desktops. It revolutionized the retail industry, first by disrupting and then annihilating traditional retail of commodity products such as electronics, books and CDs. Soft-goods retailers had a bit more breathing room to figure out their e-commerce strategies, but now, for example, clothing and home goods are the two largest e-commerce verticals, and retailers that have innovated are thriving, but those that didn’t adapt are dead. The recession of 2008-2009 accelerated extinction of merchants with undifferentiated product and channel, see Mervyn’s and Linen ‘n’ Things for detail.

Now, with more than half of America using smartphones and tablets, we don’t even have to step to our desks; stores are in our hands round the clock, and new technologies make shopping even easier. Phones fully equipped with high-resolution screens, real-time notification and easy-to-use interfaces, browsing and fulfillment …shoppers’ budgets best watch out, the shopping experience is good. I spent last Black Friday curled up by the fire with my iPad rather than in a parking lot at 5am, and I wasn’t alone. 18.3% of all 2011 Christmas Day shopping came from mobile devices, which was 8.4% higher than 2010. (Source: Retail Industry)

There is no doubt that mobile commerce will continue to rise dramatically. We are more likely to leave the house without our wallet then without our phone. It’s predicted that by 2015, mobile shopping will account for $163 billion in sales worldwide, 12% of global ecommerce turnover. (Source: ABI Research, 2010)

So how are consumers using their mobile devices to shop?

Content to Commerce

Mobile shopping, especially on tablets, mixes the lean-back leisure of flipping through a magazine with the lean-forward capabilities of search to help a shopper buy both the items she knows she needs with the delight of surfacing things she didn’t yet know she wants. As retailers have taken the mantle of defining style by mixing in editorial content, as for example, at Net-a-Porter or StyleMint, they close the cycle between consideration and purchase.

Appointment Shopping

Flash sales and auctions have spurred the use of mobile to catch the deals. Hot mobile apps like Gilt and RueLaLa have seen more than 20% of sales coming from mobile (Source: Internet Retailer) and master auction site eBay attributed $5bn to mobile sales in 2011, more than 2x the previous year (Source: Mobile Marketing Watch). Consumer shopping habits can be stoked at the stroke of the hour, even during a pesky meeting or long commute.

Show-rooming

Are mobile phones turning into the new sales clerk? 66% of US smartphone owners use their phone to aid in shopping. (Source: Leo J. Shapiro and Associates, 2012) Whether that is reading reviews, looking at competitive prices or seeing if it comes in another color, consumers are turning to their phones and tablets to make an informed buying decision.

Coupons

Clipping coupons has gone mobile. 21% of consumers search for a coupon on their mobile device while in a store (Source:Mobile Audience Insights Report from JiWire, 2012) and 55 % of consumers express an interest in mobile coupons but only 10% have actually received one from a merchant (Source:Mercator Advisory Group, 2012). Missed opportunity? Definitely.

These innovations are driving emerging opportunities for mobile commerce, mobile marketing, mobile commerce infrastructure and mobile payments. Perhaps this Black Friday, I’ll be curled up with my iPad, DocuSigning a termsheet for a company leading the way in mobile commerce. Or sooner.

ScaleVP invests across a broad spectrum of a company’s lifecycle, and sometimes it’s hard to explain what we’re looking for within “in-revenue tech deals in our sectors.” We co-led an investment in BeachMint in June 2011, and that team just earned a new round from Accel, Goldman Sachs, New World, and others in January of this year. Our original investment is a great example of how we work.

First, we focused on emerging ecommerce opportunities in the first half of 2011. We thought that with major product categories coming online at scale, there would be numerous new companies and categories spawned in the next generation of ecommerce. ScaleVP spent months meeting startups and incumbents, companies with mature business models and hypothesized ones, in narrow categories and broad horizontal markets. We studied financial and market share trends. Internet Retailer is a great resource as was our network of industry contacts at eBay, Amazon, Wal*Mart, Guthy-Renker, and in BeachMint’s case, Columbia House and Bertelsman’s subscription businesses.

Throughout our research, a few themes emerged that we wanted to tap into, which are described in more detail here.

1. Curation. The value of Web 1.0 e-commerce was availability. Amazon won by having tremendous choice. In many categories, the choice is overwhelming. See The Paradox of Choice
2. Subscription business models. This is the part of BeachMint’s story that matured rapidly in the six months between the two rounds.

Of course, we also were keen to find entrepreneurs who were right for the job, and Josh Berman and Diego Berdakin at BeachMint bring a unique combo of access to both celebrity and technical talent. Who else has Joe Green and Joe Simpson on speed-dial?

We invested in BeachMint after their seventh month of revenue. To us, that is early in the “scaling” phase, just our sweet spot when those seven months provide a strong trend. BeachMint showed consistent progress in their metrics. We cared not just about “up and to the right” total revenue, but more about the underlying drivers of long term growth: cost of customer acquisition (CPA) and lifetime value (LTV). Both those were headed sharply in the right direction. Our analysis caused us to pour over their detailed monthly results, and to compare them to industry benchmarks, see this related post. But to really see the LTV, you need more time; since BeachMint sells a subscription; the certainty of “lifetime” value grows every month. By December 2011, they had twice as much information about the value of a subscriber as they did when ScaleVP first invested. That knowledge became incredibly valuable in attracting later stage funding, because the marketing spend and company scaling became much less risky. In a matter of six months, BeachMint jumped from being early in revenue to being a predictable later stage grower.

BeachMint proved another big upside between the two rounds, that they could scale multiple categories. At the time we invested, JewelMint was their only live site, but they had plenty of product in the hopper. They launched StyleMint three months after we invested, then later that fall launched ShoeMint and BeautyMint within a couple of weeks. These new sites launched with strong metrics, leveraging the expertise they’d built on JewelMint.

Josh and Diego not only attracted celebrity talent to build the new “Mints”, they dramatically built out the management team in those six months. New people joined to analyze results, acquire consumers, seek out and secure new “Mints,” build the technology and service the growing customer base. ScaleVP typically invests when key members of management are still to come, but we need to see that the leadership team is going to be a magnet for quality talent across disciplines.

BeachMint’s round ScaleVP led had classic hallmarks of our investment strategy and process:

1. We had a “prepared mind” on the space before working on the investment. (Great term from Accel.)
2. We’d sought out the team early, before they were raising a round, and had got to know them and their business outside of the intensive investment process.
3. We knew what data we needed to make an investment decision, were time efficient for BeachMint, and asked them questions they were just asking themselves. Those analyses later became
   standard reports.

ScaleVP is delighted to see BeachMint thrive, along with other portfolio companies we selected through similar processes, including Box, Axcient and uTest. Those founding teams have what it takes to scale.

When we looked at BeachMint, we wanted to compare it’s customer economics to other subscription services to benchmark BeachMint’s current performance, and see what it’s model might evolve to over time. We chose three public companies to analyze, Ancestry.com, Netflix and GameFly because they are pure subscription models, and they provided information in their public filings about their cost of customer acquisition. We also tried looking at Nutrisystem (diet food products delivered as a service), but marketing expenses isn’t broken out in a useful way.

This analysis pre-dates Netflix’s changes to it’s subscription plans, so is subject to change, but represents 12 years of it’s financial performance, and 4 years for each of the others.

The answer: in these successful companies, a subscriber’s stream of gross, margin dollars is worth 4-6 times it’s marketing cost. For example, an average sub at Ancestry costs the company $96.87 in advertising and other marketing costs, but churns slowly at 3.9% per month, and with the 80% gross margin, yields $377 of margin over his or her lifetime on the service. Netflix and Gamefly each have lower LTVs based on higher churn and lower gross margin, but with lower CPA, they also make the same return multiple.

A new commerce model has emerged called curated commerce. This model helps shoppers discover great items that they were not explicitly searching for, and provides superior service by cutting through the clutter of the thousands of items for sale on the web. A customer typically starts by creating a style profile from a series of images and then items are curated and offered to her based on her style.

This model helps surface to shoppers a handful of items likely to delight her, and delivers the feel of high-end personal shopping service that only the wealthiest shoppers can access offline. This model is exciting to ScaleVP because it brings that service level to the mass market on the web by using automation, and often, community, resulting in a large market and attractive margins.

Curated commerce companies also frequently operate a “continuity”, or subscription, service. Each month, members are shown targeted merchandise and given the option of buying that piece, selecting another item, or choosing not to purchase. The continuity model was popularized by the big “…of the Month” clubs, and many execs from those prior companies are now in industry – leading curated commerce companies like BeachMint.
 

Several Trends Propelling This Model

• Overall increase in ecommerce vs. offline sales: Fashion is now the largest commerce category on the web.
• Curation: With the rise of ecommerce comes a tidal wave of product that is difficult to sort and find what you like. This search on Amazon for “earrings” yields over 375,000 hits. Consumers today look for edited, filtered selections. People can now get the feel and personal care of a boutique with the price and convenience of the web. These new commerce models have proprietary product, a relatively narrow selection, and push specific styles to individual consumers. It makes the choice easier and feels personalized. Several new ecommerce models have emerged that leverage curation, but most have focused on smaller niche markets.
• Continuity models: Subscription or recurring revenue models allow for higher CPAs as the likelihood of a stream of transactions is highly predictable. This model was mastered by Columbia House and Guthy-Renker on television and is now being brought to the web where managing a subscription is easier for consumers than intercepting the monthly postcard on time.
• Celebrity brands: Celebrities are making more money from product deals than their main career in some cases. Jessica Simpson’s merchandise sells $750M/year, and the Olsen Twins move over $1B of clothing at price points that range from JCPenney to Barney’s. They each make millions of dollars in royalties on those lines. Consumers have developed an intense fascination with celebrities, who have generally taken over the face of fashion magazines from models. Newer magazines like Lucky showcase merchandise and celebrities, not style advice from a fashion editor.
• Private labels. By manufacturing their own products, companies like BeachMint have products that are unique and not available in other retail or online outlets. This reduces price competition and introduces managed scarcity, increasing margins. The same strategy has been used by department stores for the past few years.

Applicability and Attractiveness of the Subscription Model

Companies operating in this space have taken a model that’s proven to work in “consumable” categories and put it to use in discretionary fashion and related categories. Furthermore, with web customer acquisition costs being lower, smaller category/product segments (under $100M in revenue) could be profitable. In traditional models, most customer acquisition is via TV infomercials, which have multi-million dollar production costs, so the total subscriber base has to be large to amortize the upfront content cost.

Finally, a big insight has been vetted through this model. Discretionary/vanity consumer products can be viewed as monthly regular purchases by women and women are eager to receive new products relevant to them on a monthly basis. New shoes, shirts, lingerie, bags, earrings and the like are small “feel good” purchases a woman might consistently make for herself, much as she buys skin care, or many of us buy books or music. This continued demand and ability to make monthly purchases will serve to propel this generation of push-commerce business forward in what we believe will be a very big market.

Complexity is increasing rapidly in the online services. The current proliferation of devices, screen sizes, browsers increases the combinatorial problem that in-house teams face in development and QA. Mobile is where complexity is hitting hardest (and represents the greatest opportunity for uTest).

For example, world wide the growth in mobile data is predicted to be in excess of 100% per year out to 2014.  Growth is driven primarily by smartphones and portable devices (tablets, notebooks).

While this represents an opportunity for online businesses; it is something which they appear under prepared for. Based on reports, fully 90% of US online retailers did not have an explicit mobile strategy and very few online resellers have sites / experiences that are optimized for mobile. The shift to the mobile web will create a natural demand for appification/mobilization services. Given the fragmentation of devices/browsers/carriers QA is likely more important in the mobile context.

In 2008, ScaleVP wanted to learn more about the crowdsourcing business model and investment opportunities it might provide. We wanted to figure out:

• How the model works
• Where is it best applied
• What makes a good crowdsourcing company
• Which are the good investment opportunities, eg, what specific companies?

To answer the last question, we needed to know what companies exist. The model was new. Many companies were bootstrapped, so not findable on other VCs’ websites, so we had to find a good way to surface the companies to evaluate them.

Enter the NAICS code (formerly known as SIC codes). We started looking at all service sector codes. A complete list is here (http://www.naics.com/search.htm) but we discarded many, like Automotive Transmission Repair, as unlikely for venture returns.

We took the list of likely service sectors and started looking for relevant companies in those markets.

In the end, we found about 200 companies across the 35 sectors listed below. We keep adding to the pool of interesting companies; we added another 50+ companies in 2010 and 2011 so far.

Service Sectors ScaleVP Investigated in Crowdsourcing Research

Aggregated Services/Worker Sourcing
Application and Game Testing
Blogging
Business Contact Directories
Call Center
Concierge/Virtual Assistant
Cooking Consultant
Crowd Funding
Educational Services
Financial Services
General Business Information
Graphic Design & Media Creation
Innovation
Legal
Management Consulting
Marketing/PR/Advertising
Media Production
Media Sharing
Medical Coding & Transcription
Mystery Shopping
Nursing/Medical Advice
Photography & Art
Platforms
Prediction
Search/Online Guides
Social Causes
Tasks/Pooling Individual Contributors
Technical Services & Customer Support
Telemarketing
Transcription
Translation
Venture Capital
Verification
Virtual Juror
Writing & Editing

ScaleVP likes to do primary research in areas we’re considering for investment.  When we did this Crowdsourcing work, we were looking for the next new business model, similar to SaaS, that would create multiple exciting startup investment opportunities. We decided to look at Crowdsourcing, as we’d seen a couple of companies pursuing that model that had caught the wave and were growing well. Crowdsourcing as a trend was also aligned with major shifts happening in society: a move to a free-agent attitude of employees, the need for companies to make more costs variable, and globalization of the talent pool.

The research got us even more jazzed to pursue investments in the sector. “Precise Procurement” and “Self Management” became our litmus tests for interest, along with good old-fashioned traction in the companies we looked at, and of course, market size. As a result of this work, we found and later invested in uTest. And many of our portfolio companies leveraged our work to use Crowdsourcing in their own businesses, either providing services directly to their customers, or as a replacement for traditional in- or out-sourcing.

See the research report here.