Startups Look to Avoid Pitfalls of “Premature Scaling”

March 6, 2017

Study examines strategies for startup success

Startup companies often operate on a razor’s edge: grow too slow, and you miss opportunities to dominate an emerging market; grow too fast, and you spend all your money before locking in revenue generation.

A new study by San Francisco-based startup accelerator Startup Genome reveals many companies fail because they fall into a trap of “premature scaling” or growing in anticipation of market demand, rather than growing in response to demand.

Startup Genome examined the growth of 3,200 tech startups and found nearly 70 percent of them scaled too quickly, leading to failure or poor performance. By studying the companies and interviewing experienced startup entrepreneurs and investors, the researchers identified several red flags indicating premature scaling. They also revealed smart moves that successful startups make.

Premature Scaling Red Flags

  • A large staff or high salaries without a clear understanding of cash flow.
  • The revenue model is proven, but the company fails to hire sales-oriented people to build upon the model.
  • Spending big on marketing without establishing metrics for success.
  • Sacrificing profit margins in pursuit of increased revenue.
  • “Too much” money is raised from investors, and the startup becomes undisciplined.

Entrepreneur Salim Ismail, Executive Director of Singularity University, pointed out some dangers of premature scaling, including “putting too many features into your product on day 1 … if you have more than six major features in your product, strip it down.” Ismail also warned startups against “living on the dream.”

“Often, startups are so bought into their own hype they don’t notice that no one is actually buying it,” Ismail said.

Indicators of Success

Startup Genome identified traits of companies that successfully managed growth. They include:

  • Startups that learn from experienced mentors raise 7 times more money and have 3.5 times better user growth.
  • Startups with founders that work full-time rather than part-time on the business experience 4 times greater user growth and raise 24 times more money.
  • Successful startups understand that they need two to three times as long to validate their market than most founders anticipate.
  • Startups that can “pivot,” or change as the market changes, are more successful.
  • Startups that keep their product simple to start are more successful than those that add more “bells and whistles” before the core product is perfected.

Entrepreneur Mick Liubinskas, co-founder of Pollenizer, emphasized the need to keep things simple in preparation for future growth.

“One of the most dangerous ways you can scale is through new features. Every feature you add is something else you need to maintain, manage, measure, market, understand and support,” Liubinskas said. “The same applies to markets. Too many segments and you’re juggling too many needs with too few resources and hours in the day.”

Managing Growth by Outsourcing

As the Startup Genome report notes, premature scaling often results in hiring too many managers and specialists, resulting in costly overhead. Many growing companies avoid this pitfall by outsourcing non-core business functions to service providers. Examples of functions that can be outsourced to reduce costs and burdensome levels of management include human resources, accounting, IT services and customer service. For example, DATAMARK has assisted startups by providing multichannel contact center services for inbound customer support and outbound sales. To learn more, visit www.datamark.net/call-centers.

The post Startups Look to Avoid Pitfalls of “Premature Scaling” appeared first on Outsourcing Insights.

 

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