For founders, there’s nothing like the adrenaline rush of explosive growth. When you’re at the helm of a fast-growing startup, and your company is in growth mode, you feel like nothing can slow you down. You’re bringing on new talent, inking new deals across the globe and moving forward rapid-fire with a slew of new ideas.
While growth is good, a “too fast, too furious” approach can create cracks in the foundation that can slow down your business later. In a landmark study, Startup Genome found 74 percent of high-growth startups fail due to premature scaling. Evidence has backed up those numbers ever since. For every success story, there is a cautionary tale (or two, or three, or four).
“Premature scaling” doesn’t sound all that sinister. It sounds, at the very worst, like some little business snafu — an easy mistake that’s easy to fix, right?
If you think that, you’re dead wrong.
What is premature scaling?
In order to understand premature scaling, one must first understand scaling itself.
Scaling is the point in the existence of a startup where it experiences positive growth. The kind of growth depends. Most of the time, scaling up involves acquiring more employees, seeking more capital or spending more on marketing. Usually, it’s accompanied by more sales.
Scaling is a good thing, as long as it’s done right. Scaling is the result of a startup’s growth. Too often, however, scaling is intended to drive a startup’s growth. That’s where we have a problem. That is premature scaling.
According to The Startup Genome Project, premature scaling happens when entrepreneurs start “focusing on one dimension of the business and advancing it out of sync with the rest of the operation.”
One reason why premature scaling is so dangerous is because it is so deceptive. Scaling is a good thing, hiring is a good thing, funding is a good thing, growth is a good thing. As Nathan Furr explains, “most startups are dying and they are dying because they are doing good things but doing them out-of-order.”
What are the signs of premature scaling?
The broad strokes of premature scaling can be summed up in the aphorism too much, too soon. When any one scalable business feature is on the fast track, beware. You are advised to let up on the gas just a bit.
Here are the most common signs of too much, too soon:
1. Too much money.
Business financing has built-in stages precisely to avoid overspending on a premature project. At the seed funding rate, you’re only expected to prove your idea. In the startup funding phase, it’s time to build on that idea. And by Series A, you should be satisfying a customer base and seeing steady returns.
If you gain more funding than your business warrants at its specific stage, it can produce undesirable side effects. In essence, it can cause you to expand your operations beyond what is manageable. This is premature scaling in its most common and nefarious form, and it is going to destroy your startup.
One venture investor described the problem of too much money as “putting a rocket engine on the back of a car.” You’ll go fast, but you’ll also get destroyed. A startup must be strong enough to sustain that level of acceleration, which few nascent businesses are able to do.
2. Too many employees.
If a startup is in the hiring phase, you should be at your most cautious. Taking on employees is risky, because it is a massive commitment and a major drain on resources. Hiring will come, but if it’s coming early, you should be on your guard.
3. Too many early adopters.
Early adopters are typically a good thing. When your business gains a rush of new users, it’s a legitimate cause for excitement — and caution. The problem isn’t necessarily with the number of early adopters themselves, but rather with the startup’s response to these early adopters.
Many startups confuse early adopters with an existing market. Early adopters are not a market. They are curious. They are quick. But they are also fleeting. Early adopters leave as quickly as they arrive, leaving you with a phantom market and a ruined startup.
How do you avoid premature scaling?
Premature scaling is bad. You know the warning signs. What should you do?
1. Your customers are the canary in the coal mine.
When you start a business, it’s all about the customer. But, there’s something about scaling that forces founders to look inwardly. That type of tunnel vision is good, in that it allows founders to focus on internal processes. But, it also allows founders to shrug off or eye roll away rumblings from customers as one-offs, instead of recognizing them as the wake-up calls they are.
Customer service should drive your ability to scale, rather than take a backseat to it. Don’t excuse away growing pains as something customers will understand as you expand. They won’t. And they shouldn’t. Keep a close eye on your Net Promoter Score score and build a customer feedback loop to understand what your customers value and what you can do better — then deliver.
2. Don’t “try” to scale.
It seems counter-intuitive at first glance, but this subtle shift in mindset will save you a lot of headaches down the road. Instead of a looking at scale as an outcome, look at is as a natural extension of the work you’re already doing for your customers. Don’t force it. If you’re scaling as it’s needed, you’ll set your company up for success; if you’re scaling before you’re ready, you’re putting your company at risk. After all, scale isn’t the end game. The end game is building something your customers want and, in turn, creating a strong, sustainable business. Scale is just a means to that end.
3. Stay as lean as possible for as long as possible.
In today’s startup ecosystem, venture capitalists are on a unicorn hunt — buoying the tech sector with cash, hoping to find the next billion-dollar disruptor. For bootstrapped companies suddenly confronted by an influx of funds, the temptation can be to over-staff and over-spend. The trick is to spend and staff based on business need, instead of available funds. That way, you’re watching your cash flow, while allowing enough runway for growth.
4. Learn to respond instead of react.
When you’re leading a high-growth startup, venture capital money is an incredible accelerator. It’s also an incredible source of pressure. The bigger the round, the bigger the expectations. Founders feel like they have to move quickly to show results. Usually, that means dialing up marketing and sales to drive user acquisition and building out an infrastructure to support new business when those leads are converted to sales. All of which is great — as long as you’re taking the time to really understand the customer pain, and then solve it.
Stay close to your customers and respond to their needs, instead of reacting to the need to fill your funnel. Your decisions will be strategic and calibrated, instead of scattershot.
5. Pivot early. Pivot often.
In business, “pivoting” refers to a business’s ability to completely switch directions. Pivoting is more than a slight shift. It is a total change of course
Let me give you some examples. Twitter started as a podcast subscription service. Groupon was originally a social activism funding site. Nokia used to be a paper mill. Flickr was originally a RPG. Nintendo used to sell instant rice. And Pinterest entered the startup world as a retail update site.
What took these companies from struggling startup status to multi-billion dollar household brands?
It was the pivot. A business pivots in response to customer feedback, competitor displacement, market changes, technological shifts, product innovations, and just about anything else. Businesses that pivot are able to “raise 2.5 times more money, have 3.6 times better user growth, and are 52 percent less likely to scale prematurely.”
Keep in mind that your best pivots will be your early pivots. It’s difficult to pivot a large company, just as it takes a long time for an aircraft carrier to change directions. Pivoting a two-person startup is a whole lot easier than pivoting a 200-employee company.
6. Take your time.
Don’t rush things. Startup entrepreneurs are a starstruck demographic — brimming with enthusiasm and contagiously optimistic.
Sometimes such enthusiasm spills into unhealthy hastiness. If you’re hasty, you’re likely to scale prematurely. Instead, take your time with funding, take your time to validate your market, and be content with slow gains.
Your best move is to grow strong before you grow up. That may take some time. And that’s OK.
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