Posted on January 15, 2016
SCALING ALREADY? DON’T YOU DARE!
Premature scaling is the #1 cause of failure among startups.
I love the enthusiasm founders have for their startups and I totally understand that each of them is eager to grow the hell out of it in order to become successful. But that more and more startups are talking about scaling as an all-encompassing success strategy is really alarming! Why? Since roughly 90% of startups aren’t ready. In most cases there simply isn’t anything there to scale. What’s more, most startups will never reach the stage where they can actually scale. Startup Genome found that 70% of all startups scale prematurely and that 74% of those scaling are failing! So why the hell is it that startups are always talking about scaling??
Let’s take a closer look at the problem of scaling with an example:
A mobile B2B startup raises EUR 500k in seed capital after hitting early traction, an MVP. Now in the venture game, the startup focuses on sales and therefore hires sales people to grow its funnel and spends money on PR campaigns and paid acquisition.
There is little focus on product development or on the business model, so the revenue it should be generating doesn’t flow in. The startup doesn’t fully understand the needs of its customers and has found a distribution, but not one that can actually be scaled.
So, the customer is not satisfied with the product, development cycles increase, the hired sales people are focusing now on customer service and there is no capacity left to handle the requests coming in from the PR campaign.
As a result, the startup shifts back to product development, tries heavily to find a business model since their road map indicates that they should be preparing for their series A round. In addition, their existing investors are putting their foot down, raising concerns about the chosen strategy and requesting to focus on delivering the numbers they want to see.
Sound familiar? Then it’s high time to face the music.
Lesson 1: Scaling isn’t even possible for most startups.
The bulk of knowledge shared these days on this topic – from great articles to whimsical posts – all too often lead founders to believe that they must scale in order to grow their business. Or even worse, lead them to believe that they can scale their business at all.
Whether you’ve already begun scaling or are just thinking about it, lesson 1 is a crucial checkpoint. Scaling may not be possible in the way that your business is handled at the moment. It may not even be desirable for your business.
Scaling is only right for your business when you’ve developed a product or service offer that truly scales, which means that it can generate revenues by consistently serving many customers. A startup must have found a scalable business model: a model that can be easily expanded, repeated or upgraded on demand. This doesn’t require all business processes to be efficient or automated. However, if your business is not able to consistently deliver revenue while catering to many more customers, then you have no business scaling!
A common example is the e-book that can be paid for and downloaded directly from a website. A sudden peak in demand won’t cause a bottleneck in production. Suddenly producing more hardcopy versions, however, is limited by factors like printer availability, resources for packaging and posting, delivery time, etc.
Lesson 2: Scaling is a RESULT of growth, NOT A DRIVER of it.
What if I told you that scaling does not lead to growth? It doesn’t. It’s not even a growth strategy. Does this surprise you?
The scalable business model presents a way of organizing business operations so that the startup can deliver its product or service quickly and effectively, regardless of whether demand is high or low. A business grows when it can create and cater to increasing demand consistently at every step of operations: development, distribution, marketing, production/service and generating a return for the value delivered. This can happen with or without a scalable business model. A scalable model, once in place, simply means that business operations will expand (or scale) more easily as the business grows.
Lesson 3: Time it right, or die trying.
Nathan Furr analyzed that ‘most startups are dying and they are dying because they are doing good things but doing them out of order’. In the startup scene, this failure phenomenon is called premature scaling. And since every startup is trying desperately to scale, it is no surprise that premature scaling is the No. 1 cause of startup death.
So once you’ve established that your business model is in fact scalable, then you’ll want to know when to scale. Usually, the time to scale is just after a startup has hit its MVP and is then working towards product/market fit and beyond. Startups, in the B2B sector typically go from serving 100 customers to 1,000, generating from EUR 10,000 of early revenue to EUR100,000 monthly. In the B2C sector, startups have usually found their first 10,000 users by this point and are generating EUR 1,000 in monthly revenue from their core of active users.
Another sign that the time is right for scaling is when startups experience increasing active user growth and retention rate during a period of 6 months. It is highly likely that these startups have figured out a customer acquisition channel that works for them, enabling them to deliver the value to an increasing number of users.
Lesson 4: Scaling isn’t a strategy; it’s a way of life.
There are certainly more signs and metrics that can signal to founders when it is time to scale their business operations. But most importantly, as a general rule: Don’t set your focus to scale; otherwise you’ll fail!
If you scale one area only, then your startup becomes imbalanced and inefficient. So, for example, when startups attempt to scale only by increasing the marketing budget – but they neglect to factor scaling into the production process or distribution channels – then it’s no wonder that they fail.
Much like meditation on the path to mindfulness, if you only focus your mind from the comfort of your sofa, then you can’t expect to be feeling zen at the office right before the deadline. As a founder or founding team you need to focus on ‘becoming zen’ in all areas of your business – customer, product, team, financials, business model – with equal attention and commitment.