Mastery 6: The Warning Signs of Premature Scaling

“More than 90% of startups fail, due primarily to self-destruction rather than competition. For the less than 10% of startups that do succeed, most encounter several near death experiences along the way.”  – Startup Genome

This week, we take a closer look at the causes of startup failure. Considering that 70% of failures are attributed to premature scaling, it’s imperative that entrepreneurs understand the startup framework as well as the red flags and warning signs of premature scaling.

 

Talking Points

The definition of a startup:

“Startups are temporary organizations designed to scale into large companies. Early stage startups are designed to search for product/market fit under conditions of extreme uncertainty. Late stage startups are designed to search for a repeatable and scalable business model and then scale into large companies designed to execute under conditions of high certainty” – Startup Genome

The 5 categories or core dimensions of a startup.

  • Customer
  • Product
  • Team
  • Business Model
  • Financials

CBinsights.com released the following report giving insight into the top 20 reasons startups fail. It’s interesting to see how each of these correlate with the 5 dimensions we discussed and how they lead to premature scaling.

Two key insights for your approach to prevent premature scaling:

  1. First you need a framework – When you understand the process, it’s easier to identify the blindspots and follow the process to successfully reach defined milestones. “Its really simple. You are in discovery until you reach an problem solution fit (PSF) or MVP. You are in the validation stage until you’ve achieved product market fit (PFM).”
  2. Most of the issues entrepreneurs encounter have the appearance of success. Like Paul Ahlstrom said, “doing goods things out of order.” Occasionally, you will see two companies start at the same time and one will appear to be off to a better start but still be prematurely scaling. Eventually the inconsistencies catch up and they fail. The key is to be aware of the warning signs.

The signs of premature scaling within the 5 dimensions:

  1. Customer – Spending too much on customer acquisition without PMF or a scalable model. Or masking an undeveloped problem with heavy sales activity and marketing – like slapping some lipstick on a pig. A great example that we’ve discussed is pets.com
  2. Product – Building a product before you have PSF or creating a solution that your customers don’t need or want. This was the #1 cause of failure in the CM report. Your product can’t sell itself and until your customer has validated, you can’t scale.
  3. Team – This hit #3 on our list at 23% – The issue here is hiring too many employees too quickly, focusing on managers instead of performers.  This is a common issue when companies are highly funded.
  4. Financials – There are two issues here. The first is raising too much money and becoming undisciplined. The second, is running short on capital and making rash decisions or skipping essential steps of validation to get to sales growth.  The studies show that inconsistent startups raise substantially more money – which means there is less of the pie for the founders.
  5. Business Model – Focusing on revenue too early, failing to adapt to feedback and market shifts, failing to create a scalable business model that can support growth.

The Effect of Premature Scaling:

Sometimes premature scaling looks like traction. Consider these statistics:

  • No startup that scaled prematurely passed the 100,000 user mark.
  • Startups that scale properly grow about 20 times faster than startups that scale prematurely.
  • 93% of startups that scale prematurely never break the $100k revenue per month threshold.
  • In discovery phase 60% of inconsistent startups focus on validating a product and 80% of consistent startups focus on discovering a problem space.

Call to Action:

  • Study and learn. Download the startup genome report here.
  • Bring in help from time to time just to check the math and make sure you aren’t operating on troubled assumptions.
  • Listen to your customers and get in front of them.
  • Read the lean startup, startup owners manual, Nail it then Scale it
  • Identify the indicators in your organization and re-evaluate often.
  • Become a scientist who understands how to learn, validate, and adapt.

 It is not the strongest species that survive, nor the most intelligent, but the ones most responsive to change. – Charles Darwin

Source: Startup Genome Report Extra on Premature Scaling

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