When startup experts talk about why startups fail, they talk about every other reason apart from one which is premature scaling. According to Startup Genome Report over 90% of startups fail, in most cases due to self-destruction rather than competition. But perhaps the greatest insight was that 74% of startups fail due to premature scaling.
Now I believe your next question will be; What exactly is premature scaling?
Before I delve into defining what premature scaling is, I want us to have a quick run-through of the startup life-cycle. The startup life cycle is broken down into 6 stages:
These 6 stages are critical to the progress of any startup. Any founder who disregards any of these stages is at the risk of getting ruined by premature scaling. The first three stages are where premature scaling will most likely occur: The first set of funding comes somewhere around the first three stages which cause most founders to – Get ahead of themselves, blow money on what seems to be the right things, etc
Now let’s critically analyze the first three stages and why they are prone to premature scaling:
1. Discovery stage, the focus is usually on searching for the Problem/Solution fit. The constant question that will be asked at this stage is: is there a big problem worth solving? In addition to really nailing down the target market size, the ultimate test is positive early adopter reaction to a minimum viable product (MVP). usual mistakes founders make here are:
(i) Building out a solid MVP without being sure if the opportunity (market size & timing) is even worth it
(ii) investing too much in what you believe will be the best product in the market without adequate early adopter feedback.
2. Validation stage, you are seeking to confirm Product/Market fit and test the Business Model assumptions, such as price. Usual mistakes founders make here are
(i) scaling the commercial team before the product is ready
(ii) investing in production capacity that exceeds early scaling volume requirements.
3. Efficiency stage (also known as the Customer Creation stage), founders must be confident that their Go to Market strategy is working, i.e. a reliable sales model has been found enabling initial scaling past the early adopters into the early majority.
Usual mistakes founders make here is ramping market development activities in new sectors or territories before securing their initial target market
Signs of Premature Scaling
It is usually difficult to identify premature scaling in your startup when things are seemingly going well. However, it is critical for founders to be able to analyze every aspect of the business to identify areas that might be showing signs of premature scaling.
Some of the indicators are:
1. Overwhelming Stress on the Team: Scaling will normally increase the workload on the employees, and they might soon start to burn out. This will affect the performance, quality, productivity, and almost every aspect of their work. In turn, your startup might start to lose reputation and customer base.
2. Hiring more employees than needed: When there’s less amount of work and too many employees in the startup it creates unnecessary stress on the finances and other resources. You must be careful while hiring employees for your startup. The number, skillset, and offered benefits are all significant for the growth of your startup.
3. Unachieved Goals: The whole concept of premature scaling revolves around unachieved goals. The false idea of growth leads us to scale the business before the right time. Therefore, it is important to have goals in place for every process before scaling the business.
4. Relying on early adopters: Your early adopters are majorly your first set of customers. They are quick decision-makers. They can decide to leave your product for another in no time. Don’t get me wrong, their feedback is valuable but, you should not rely on them.
5. Inconsistent profit: You must attain consistent profitability before you try to scale your startup. Inconsistent profit is an indicator that you are not ready to scale.
How to prevent your startup from premature scaling
1. Find your correct customers before channeling resources into customer acquisition: We often find startups allocating large sums of money to their marketing budget in an effort to acquire more customers. This is a great move when you have a proven business model. But, in a situation where you are not too sure about who your customers are exactly, it wrong to invest a lot of money into customer acquisition. it will only bring you a bunch of unqualified that aren’t useful to your business.
2. Don’t sell a product that does not provide value to your customers: Many founders are guilty of this. They try to sell products or solutions that don’t necessarily solve any existing problem. Especially when they are keen on developing additional unnecessary features and investing heavily in the product before the market is ready. This has led to the untimely end of several startups. Founders should focus more on building products that solve specific problems not MANY problems.
3. Don’t hire staff you don’t need: Founders should not be in a hurry to build a “formidable team”. You should allow your team to reach their limit before adding new members. Hiring hastily most times lead to lower-quality talent. If there’s anything that can make or break your business, it’s the quality of talent you hire.
4. Don’t center your business model around maximizing profit alone: Designing your business model with the singular goal of maximizing profit is bad for any business. It makes the company lose its mission in an effort to squeeze every penny out of customers which will ultimately prevent your team from recognizing the potential that is hidden by the immediate opportunity for gain and from ever reaching maturity with lifetime customers.
5. Don’t mismanage your funding especially when it comes early: In as much as this might seem harsh but, quite a number of startups become financially reckless when they get funding. Especially when it comes early. Throwing money at problems hardly solves them long-term. Founders should learn how to prioritize what they spend funding in the order of long-term impact.
Premature scaling is a major startup killer. It usually not spoken about as often as it should. Many founders need to be very aware of the signs and symptoms of premature scaling and its effects on startups.