If you’ve ever worked in a successful early-stage startup, you must be familiar with the euphoria of the first signs of growth.
It’s a phase that energizes the entire team. Everyone cheers the first big customer, the first time you get listed on a G2 Crowd quadrant. You don’t need to motivate anyone as the excitement is contagious. It feels like the hustle is finally reaping the rewards.
Until it isn’t.
It’s one thing to validate your idea in the market. It’s a completely different skill to scale it. Many startups struggle to carry the momentum of the initial growth spurt.
So, why do most startups struggle to scale?
Chasing Growth at All Costs
Growth is sacred for startups. For many founders, MRR growth towers over all other KPIs. While growth is certainly an important indicator of success, it’s not the only one.
You need to spend money to make money — Various startups have relied on this mantra to justify exorbitant operating costs. Unsurprisingly, running out of cash is a big reason behind the demise of most startups. Startups that don’t take unit economics into account spend proportionately more to sustain their growth as they scale. That’s why it’s critical to keep an eye on metrics such as LTV/CAC ratio. If the ratio is consistently less than 3, it implies you’re spending a bit too extravagantly to acquire customers.
The unit economics of growth plays an important role in attracting investment. Most experienced venture funds are more interested in the sustainability of growth rather than its pace.
Relentless pursuit of growth can also lead to overlooking other strategic aspects of business such as technical debt. In the race to grab market share, startups occasionally brush performance issues under the carpet to focus on new features. These issues often come back to haunt them later and drain significant resources.
When Andrew Wilkinson launched his task management solution Flow, it generated quite a buzz in the Valley. They jumped to $20K MRR in a few weeks and started growing by 10% every month.
In 2012, a competitor entered the market. It was clunky, complicated, and not an immediate threat to Flow at all.
One day, Andrew received a coffee invitation from the founder of this new competitor – Dustin Moskovitz, the billionaire co-founder of Facebook.
As Andrew reveals in a wonderfully candid tweetstorm, Dustin politely told him that his project management tool – Asana, would crush Flow. He mentioned Asana’s ambitious plans to hire top executives and how it’s just a matter of time before they outspend bootstrapped Flow on both the product and marketing.
This is exactly what happened. Asana is now a multibillion-dollar organization, and Flow is a shadow of its former self.
Early-stage startups often lack a strategic way to track competition. This can jeopardize their growth because no one is immune to disruption in today’s age, least of all technology companies. In industries with low entry barriers, startups can’t rely on first-mover advantage for long.
Ignoring Data Security
Did you know that the average cost of data breach is higher than the seed funding of an average American startup?
Startups are especially vulnerable to cybersecurity threats. Unlike big enterprises, they neither have the cash reserves to deal with penalties nor can afford expensive PR to restore their reputation.
Still, many startups ignore data security risks when they are scaling. They feel that they can fly under the radar due to their size and won’t alarm regulators or attract malicious actors. As a result, very few startups have robust policies around password management, phishing training, and data protection best practices for their staff. A startup’s security posture also plays a vital role in attracting funding as investors have much higher trust in startups with strong measures to protect user data.
To ensure that security doesn’t become a roadblock later down the line, startups must inculcate a security culture from the very beginning. That’s why DevSecOps has emerged as a popular philosophy among proactive tech companies. For them, security is an integral part of the entire software development life cycle and not an afterthought.
Not Investing in Individual Growth
In the early days of a startup, the focus is on execution. So founders like to hire a team that can quickly iterate on ideas and find the product-market fit.
As the company grows, it requires both specialists who can hone in on a specific craft and senior leaders who can bring strategic thinking to the team. According to a survey by Harvard Business Review, when it comes to senior roles, organizations are more interested in external talent than their existing employees.
On the surface, this seems reasonable. A senior leader can elevate the startup’s strategy with their experience and fresh perspectives. But, hiring external senior executives can also be extremely risky. If they aren’t the right cultural fit, they will cost the startup precious time and resources and cause an exodus of its loyal employees. That’s why startups must be cautious about hiring senior executives when scaling. It can be a big hit or a disastrous miss.
A safer approach is to invest in talent during the early stages of business. Most successful startups make a lot of their critical hires earlier in the process. They also invest in their existing talent and groom them for future leadership roles. Grooming internal hires creates a culture of knowledge sharing in the company, which helps improve employee engagement, retention, and lowers the cost of recruitment.
Again, this isn’t an argument against hiring senior leaders externally. For certain roles, at certain times, it’s the only option available. And various external executives create significant value for startups. However, startups must be cautious and aim to nurture leaders internally to minimize the risk.
Today’s entrepreneurs have access to the global talent pool to develop their ideas. At a time when there are more avenues to scale operations than ever before, these ideas still help us get the basics right.
If you’d like to learn about developing user-centric products with a distributed team, check out our remote product development guide.
- Why You Should Never Ignore Qualitative Data
I recently started listening to Jared Spool’s UIE Podcast during my morning commute into the…
- Why Jeff Bezos Bought the Washington Post
With all the speculation flying around about yesterday's announcement, I'd thought I'd add a take…