5 Reasons Promising Startups Don't Scale

Business.com / Starting a Business / Last Modified: July 19, 2017
Photo credit: Syda Productions/Shutterstock

Many promising startups struggle to utilize growth capital effectively. Change needs to start at the top. Here are five pitfalls startup founders should avoid when growing their companies.

A startup generating some revenue and closing its B venture round would seem to be on its way. But many founders struggle to turn their startup into a high-flying growth company. After the demanding work of getting the company off the ground, a string of hard-won successes gives way to almost constant frustration.

Founders start the firm to validate that a problem or need exists and that people will respond to a proposed solution. Once you build the offering, test-market it and respond to market feedback, then a startup should have the validation to seek growth capital. That validation can come in the form of revenue, users, network effect or whatever other growth-driver fits the business. The next fundraising round focuses on growth and scale.

At this stage, talk centers on the size of the market or the scalability of the solution. But there is surprisingly little talk about the scalability of the organization. The argument to investors is that capital put into the business will be converted into growth. Switching from startup to growth company is a major milestone that should be reflected in all company operations. Surprisingly, founders are often the worst at changing their behaviors and continue trying to grow a company like it is still a startup.

Five examples of this are …

  • Product development as a sales strategy
  • Implying a culture, not driving it
  • Confusing evangelism with alignment
  • Hero worship as performance management
  • Focusing on management instead of managers

Using product development as a sales strategy

A lot of founders are product visionaries who were motivated to launch the company because they saw a problem to solve or a need to fill. Founders fill a lot of shoes. Product-obsessed founders love to spend time on product and technology.

If the firm has proved out a market and its argument for scale is valid, then lots of potential customers are out there. So, the growth company needs to go close them. Without great marketing, the company doesn't reach the right prospects. Without great sales, the firm doesn't convey the benefit and close the deal. In this case, the product-focused founder falls back on what they know and love – product development.

Founders at this stage use customization and feature creep to close deals, and that cycle never ends. The weak sales talent that founders like this attract can credibly blame the product to avoid accountability. The founder keeps pushing the sales team to deliver more but lacks the deep understanding of sales program development and KPIs to see what is really happening. 

Implying a culture, not driving it

Great cultures support performance and execution. They help people to do their best. Great cultures are substantive, not superficial, and cannot emanate from a single person. Culture is not kegerators and open floor plans. If the company's culture is just a reflection of the charisma and energy of the founder, then it is personality, not culture.

Culture is the sum of the organization's values, beliefs and behaviors. Culture represents targets that should be expressly defined. Leaders need to actively manage to it and measure it. Culture must drive who is hired and how people lead, not the other way around. Do not let the culture be implied or it will be misinterpreted and incorrectly applied. In the case of Uber, we see the consequences of a culture that was implied through the behaviors of deeply flawed leaders.

Evangelism instead of alignment

The founder is also typically the evangelist-in-chief for the firm. They convey goals, status, enthusiasm and well-deserved recognition. In a small group, this can provide the alignment and execution to get by but not to scale. Effective strategy alignment means more than understanding the firm's mission and goals. It requires each person to understand their role in fulfilling the mission and accomplishing the goals. The company's official strategy may be written in PowerPoint, but the organization's actual strategy (or emergent strategy) is the cumulative effect of the decisions made every day by everyone in the firm. Strategy needs to drive planning, initiatives and projects. Managing those requires goals, measures and metrics. These should be managed in regular business rhythms with feedback and accountability.

Hero worship as performance management

Startups are romantic endeavors. We idealize the creative geniuses and workhorses. But a sustained culture of heroics is a sure sign of dysfunction. Ask startup founders who their best employees are. Then ask the founder how they know it. Too often the founder can only cite examples of the person saving the day from calamity or pulling through a win at the last moment. Companies get more of what they celebrate and reward.

A client of mine had a tech lead who was "critical" to the company. The founders said this person was indispensable because a critical piece of software infrastructure he designed failed periodically and the star swooped in to fix it every time. The technology was deemed too complicated and too advanced for others to touch, and its working were treated like a state secret. After apocalyptic warnings, I swapped the role of the critical techie with a humble developer who quietly sat in the corner, hitting every goal with little fanfare. In two days, the quiet developer made changes to the product, and the company never had a single bug again from that piece of software. The developer even went back to taking on his old work too and did both jobs very well.

You get what you incentivize. Success and recognition in a firm should come from superior performance against target that are strategically aligned and objectively measured. Whenever you hear a story about a developer, salesperson or small team burning the midnight oil to pull victory from the jaws of defeat, ask yourself how you got there and if you are rewarding the right behaviors.

Focusing on management instead of managers

As a company grows, the relative impact of the founder decreases. One person doesn't make a company, so the founder and other leaders must make it a priority to make sure the organization scales effectively. Building a leadership structure is a critical element of this. Developing responsive individual contributors into leads and effective mangers is not easy. Some mix of internal promotions and outside hiring will be necessary. The first job of a leader is to get the best out of the team. To build an effective organization, the company must attract, train, develop, and incentivize leaders and provide them recognition and feedback.

The transition from startup to growth company requires more than just capital and new staff. It requires founders to lead the way by adopting new behaviors and implementing systems to scale the organization. If this is done the right way, the startup can get scale and achieve the founder's dream.

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