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Fast failures – how scaling prematurely can kill your company

Date
February 27, 2023
Hot topics 🔥
Entrepreneurship
Contributor
Mario Grunitz
Fast failures – how scaling prematurely can kill your company

Almost 90% of startups fail. Of the remaining 10%, only 1 in 10 survive the first year of operations, and a further 70% dropoff rate is common within 2-5 years. 

However, if there is a statistic that shows the unwavering spirit of entrepreneurship, it’s this: despite these incredibly slim chances of success, over 305 million startups are created globally each year. 

Startups fail for many reasons, from naivety to insufficient market need – and everything in between. But a major culprit is founders falling into the trap of scaling too quickly. 

Let’s take a look at the factors which contribute to a startup’s rapid growth and how to avoid falling into the ‘fast and furious’ scale spiral.

How fast growth occurs

Growth speed for startups is pivotal – too slow and you lose market momentum, too fast and it will crumble like a house of cards due to its poor foundation. The perfect middle ground ensures long-term success.

But for all their excitement and fever to be the next unicorn, startup founders are commonly responsible for why their businesses scale too quickly. Founders often experience a ‘sugar growth’ phase, similar to the effects of a sugar high where the peak comes quickly and is followed by a crash. The excitement peak from initial success makes founders impatient for more impressive results, creating a peddle-to-the-floor mentality in the hopes of quick scaling. 

Sometimes this approach pays off, but this is an exception rather than the norm. Most find themselves in a situation of trying to match early-stage successes by throwing more resources at the problem, and quickly finding out the money tap runs dry quickly. While growth is good, this is considered unsustainable growth, which is damaging.

Signs you’re scaling too quickly

Being able to identify key areas of your startup that drive unsustainable growth is the best way to prevent the situation from becoming out of control before it’s too late. Here are some of the most common signs of premature scaling:

Team and product-related:

  • Losing track of your North Star Metric
  • Teams experiencing burnout
  • Unclear or poor hiring strategy
  • Decline in quality of customer support
  • Premature market or product expansion

Finance related:

  • False projections based on early adopters
  • Imbalance between profit margins and expenditure
  • No path to a positive gross margin from your primary product
  • Lack of reserve liquid capital
  • Loss of focus on profitability

Luckily, if you can be honest with yourself to see that you are experiencing any of these signs then you still have time to make necessary adjustments. Finding scalable solutions that prohibit these issues from standing in the way of your growth is key.

Unsurprisingly, most of them can be thwarted simply by slowing down. Try to keep a real-time overview of your business and create a solid business infrastructure that is stable to withstand initial shakes, and can be scaled.

Dangers of the growth spiral 

When a startup scales too quickly, it creates a domino effect throughout the entire business right through to the customer.

The business model

Premature scaling impacts the business model when teams get too fixated on maximising profit. When the business mission gets lost in favour of monetary gain, there is no guiding principle navigating the path to longevity. Often, startups see initial dollar signs and lose sight of the North Star metric – the key guiding principle/figure/goal which acts as a decision filter –  in the pursuit of short-term gains. While this might appeal to profits initially, it does not breed lifetime success as hitting your key metrics indicates whether your business model is working or not.

Funding

When young fast-scaling startups receive an influx of cash it often breeds the temptation to spend as quickly as it was loaned. For undisciplined or inexperienced founders, having access to quick money can be disastrous as many think that issues can be resolved by throwing cash at them. Some unseasoned entrepreneurs tend to play with investors’ money in a more carefree manner than they would their own, which results in the mismanagement of funds and poor business decisions.

The product

Premature scaling can lead to quickly developed products that have little demand and don’t provide value to customers. This is due to an insufficient focus on the primary target audience and their needs at the early stages of the business. When some businesses try to scale too quickly, they might lose sight of the key demographics and might try to appeal to everyone (rather than their target audience) to ensure more success. This also results in overworking concepts and adding more features/functionalities than required in the name of scalability. When the product suffers, the customer suffers.

The customer

When startups scale too quickly, their customer base usually grows with them, often faster than expected. Having an influx of customers that you aren’t prepared for puts strain on your ability for proper customer care, leading to a lot of customer frustration when you can’t keep up with handling their grievances. Even if customers are happy, if you have too many consumers too quickly it puts strain on your entire team to provide quality service for everyone.

The key concept of Businesses 101 is keeping the customer happy by providing value. If you fail in this regard, your business fails as a consequence. Knowing who your target customers are and how your product/service can add value is intrinsic to success. Often, startups plunder capital from other business areas into premature marketing initiatives or adding new features to a product in the hopes to attract customers. But spending money on this before establishing a solid customer support system can lead to disaster.

The team

The final casualty of the rapid growth spiral is your team. One of the first things a lot of startups do is go on a hiring spree when there is no need for specialist roles. Rush-hiring often leads to lower-quality talent and getting the wrong fit for the company culture, which ultimately jeopardises growth at a critical stage of development. 

Much like the idea that throwing cash at a problem will somehow fix it, some founders feel the same with employees – the more you have the fewer issues you will encounter. This is quite the opposite, as having too many people who aren’t the right fit and not having a defined role will lead to chaos and confusion while draining valuable capital. 

This can result in high staff churn with either people being laid off due to insufficient need for their services or talent leaving due to a chaotic working environment caused by the business’s inability to cope with the impact of fast growth. High staff turnover affects the team as inconsistency breeds uncomfortably, and also negatively impacts the image of the business. Spikes in new hires put pressure on management who might find it hard to lead large and growing teams, resulting in workers feeling uneasy and quitting. 

Additionally, rapid hiring impacts company culture. Ensuring new talent is the right fit and embodies the company values takes time and proper vetting from HR. Fast hiring can lead to a team full of vastly different characters who might clash and not work well together at all, hindering productivity.

Start slow, finish fast

Sustainable growth is vital for any business and the pace at which this is achieved will vary according to your business and market. Both scaling too slow and too fast have detrimental consequences so ensure you maintain a healthy pace by being aware of the signs of both.

Focus on understanding who your customers are and how you can add value to their lives before spending money on acquiring new ones. Ensure your product meets your business objectives and continuously refine it without complicating it. Be sure to hire the right amount of quality staff you need, and don’t chase profits at the expense of your business values and mission. 

Do this all while spending your money wisely, and you will be able to beat the growth spiral and ensure your business lands in the 10% of startups that succeed.

Mario Grunitz

Mario is a WeAreBrain Co-founder. With more than 15 years of experience in the tech space, he has worked all over Europe and held countless leadership positions in corporate, startup and agency spheres.

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