Scaling your startup shouldn't offer more risks than potential rewards. The smartest approach to scaling is measured and metrics-driven, allowing founders to "accelerat[e] growth with confidence," as Care.com co-founder and MIT Instructor Donna Levin notes. Fueling your startup's functions — sales, marketing, customer support, development — requires entrepreneurs to predict revenue growth accurately while minimizing burn.
Failed startups often have a viable product and happy customers, but struggle to scale appropriately. In the case of Zirtual, an on-demand virtual assistant startup, overly aggressive scaling led to 400 employees being let go overnight and a shocked client base. Founder Maren Kate described an excessive burn of resources that quickly depleted their cash reserves, leaving her scrambling to raise funds, unsuccessfully, "until the 11th hour."
When You're Pressured to Show Results
First-time founders can fall victim to one of the biggest lies told to entrepreneurs: scaling fast is the key to success. Tyler Gage of Runa has witnessed the pressures first-hand, stating "investors often want scale and want to see results quickly. This can sometimes be damaging to the actual success of the organization."
Way back in 2011, Forbes' Nathan Furr shocked the startup world with his data-driven statement that the "#1 cause of startup death [is] premature scaling." Five years later, he's still most likely right. In a world where just 10 percent of startups succeed, recent studies reveal that running out of cash is the single most-common reason funded startups fold.
Buying into the myth of having to scale quickly can do more than just contribute to burn. A Noobpreneur survey of entrepreneurs revealed a host of risks from poorly-planned expansion, to a damaged customer experience, to poor hiring choices.
Looking for more tips and resources to help scale your tech startup? Check out The Silicon Valley Startup Guide.
Failed Founders Reflect on What Went Wrong
There's more behind a successful startup than just entrepreneurial passion and market demand. The post-failure essays written by entrepreneurs almost never reveal a lack of drive or care for customers. Instead, they often reveal poor decisions around growth, hiring, and expansion; some of which are listed below.
1. Minimum Viable Product
Are you trying to scale without a minimum viable product? There's more to an MVP than just functionality. Your product also needs to create value for your customers. Even if your product is absolutely great, you shouldn't scale if few people need it. That was the case for Hivebeat co-founder Jonas Bogh. In a reflective piece posted to Medium, Hivebeat co-founder Jonas Bogh wrote, "We never hit real product/market fit."
Assumptions about your customers, market, or product can be a leading cause of poor scaling decisions. With too little data, you could be investing in something that's just not viable. For Dropbox founder Drew Houston, serious proof of concept came when he released "a 3-minute video stuffed with geeky in-jokes and amateur narration" that led to 75,000 people on the Beta waiting list.
Attila Szigeti's failure with RateMySpeech involved serious investment in a product he ultimately realized only appealed to 5 percent of their initial target market. While Szigeti believes the fact that his startup had a very narrow market wasn't necessarily a dooming factor, the lack of demand coupled with poor hiring decisions was the end.
2. Planning Fallacy
Jonathan Zarra's GoChat, a social product complimentary to Pokemon Go, reached 1 million users within five days of launch. As Pokemon Go amassed more and more users, people downloaded GoChat a much higher rate. GoChat's servers soon felt the weight of this increased activity, pushing Zarra to hire a contractor to help maintain the back end architecture.
Thanks to the app's early success, Zara accepted funding, incorporated as a business, and was acquired shortly after launch.
3. Poor Hiring and Firing Practices
Entrepreneur Joao Romao blames poor data on the premature hiring decisions that led to the failure of his first startup, Wishareit. Their problem was too little actual knowledge of their paying customers, their market, and business model. Bad data resulted in excessive payroll expenditures that killed the project. Romao writes that overly aggressive hiring "cost us months of runway that we could have saved with a leaner strategy."
After being told she had a "bubbly burn," Mattermark founder Danielle Morrill slammed the brakes on hiring to focus on growing her monthly recurring revenue (MRR) and other basics. After reaching two break-even months, she advises other entrepreneurs to ask themselves "am I scaling up hiring because we have a real need, or am I stockpiling talent because people keep telling me it's an arms race?"
Making an Intelligent Decision to Scale
Failed entrepreneurs often have a different perception of whether their organization was ready to scale, based on hindsight. Scalability is defined simply by Forbes' Martin Zwilling as a "business [that] has the potential to multiply revenue with minimal incremental costs." While you may have proof-of-concept, a minimum viable product, and rock-solid growth plans, are you truly ready to scale?
Some startups are nearly impossible to scale. You can't cost-effectively scale consulting services or highly complex manufacturing. For tech founders, predicting the revenue growth you'll achieve from scaling is particularly complex. While some aspects of scale-readiness are strategic, many can be measured.
Develop Reasonable Burn Projections
Entrepreneurs are often familiar with Fred Wilson's burn rate analysis, which advises startups to calculate costs of $10,000 per month for each employee. Today, VC Marc Andreessen believes costs have risen approximately 67 percent, to a predicted cost of $16,666 per employee per month. With up-to-date, realistic knowledge of what your peers are truly burning each month, you can more effectively understand the impact of hiring on your funds.
Measure Product/Market Fit
Product/market fit is crucial before scaling. There's plenty of expert insight on what product/market fit could look like in the early stages of your startup. Pardot co-founder David Cummings lists the following as possible signs of a fit in the tech space:
- Customer sign-ons
- Customer adoption without customization
- Minimal bug reports
- Consistent customer results
- Emerging patterns in customer acquisitions
But can product/market fit be measured? In a Stanford lecture posted on YouTube, Facebook VP of Growth Alex Schultz proposed a method for understanding fit, based on user engagement and time metrics. By understanding whether your users are remaining active over time post-acquisition, you can understand long-term demand and retention for your product.
Be Smart About People
While you're trying to scale, or after a period of rapid growth, is not the right time to define your hiring strategy, your job descriptions, or your company culture. It's in the beginning. Without the groundwork for a hiring strategy, you're definitely not ready for personnel investment.
Social entrepreneur Abhishek Chakraborty writes that hiring strategy isn't about mining for the biggest brains. It's about "getting the right people on the train, the wrong people off the train, and the right people in the right seats."
Hiring strategy — at a minimum — requires realistic job commitments and leadership who understand what it takes to do a position. It requires you to commit to hiring as a "painkiller, not a vitamin." Finally, it requires you to be willing to pass on people who aren't the right fit — even if they have a rare skill set.
Ready to Scale?
Don't let the honest truth about your burn rate, product/market fit, and groundwork be swept away by pressure from your investors and the entrepreneurs around you. Not every startup needs to scale quickly. If you can't confidently point to investment as a confidence-driven tool for revenue growth, it's probably time to hit the brakes.
RocketSpace provides entrepreneurs with coworking space and access to mentors and community with a carefully-selected community of San Francisco's best tech startups. Everyone here is committed to building upon a minimum viable product and scaling intelligently. For more info on what to expect at RocketSpace, check out our coworking kit.