Every behemoth brand starts small. Google was initially built from the confines of a dorm room, while the Amazon headquarters was once a garage attached to a three-bedroom house. But how does an organization go from an idea hatched by a few people in a cramped space to one of the most valuable companies in the world?
The answer isn’t easy, and it varies by startup, but you need to know how to successfully scale.
Founders typically aspire to build that next big brand. They often have an idea of what success looks like and a long-term vision, but a lot needs to happen before achieving that final milestone.
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DOWNLOAD NOWWhat Is Scaling in Business?
To properly prepare for growth, it’s important to have a clear understanding of what it means to scale your startup so that you can set realistic expectations.
In business, scaling refers to the process of increasing revenues at a more rapid rate than costs. Scaling allows a company to grow larger at a rapid rate because a relatively small investment is able to yield outsized returns, which can be reinvested to scale the business even further.
Growth vs. Scaling
While scaling involves a business growing revenue more quickly than its costs, growth refers to the process of increasing revenues and resources at an even rate. This can become expensive and hinder expansion in the long run, as it limits a company’s ability to increase profit margin.
Consider a sales team at a startup that’s about to take on new clients. Hiring five salespeople to manage the new accounts would be indicative of a growth period. The cost of hiring all these new salespeople at once, however, is likely to offset the revenue brought in from the new accounts.
Scaling, in contrast, would require a solution that allows the team to successfully handle a larger client base without significantly increasing the resources needed to do so. Due to the cost of growth, entrepreneurs now typically favor incrementally expanding resources to support growing operations.
Related: Tips for Scaling Your Business
Challenges to Avoid When Scaling Your Startup
It’s in that scaling phase where most startups fail. According to research by Harvard Business School Professor Shikhar Ghosh, the failure rate of US companies after five years is more than 50 percent and climbs to over 70 percent after 10 years.
If you want to escape a similar fate, here are four challenges to avoid when scaling your venture.
1. Scaling Too Fast
You might already have customers calling, begging for your product, or brands clamoring to partner with you. Although solid signs of growth, that doesn’t necessarily mean you’re ready to scale.
The main reason startups fail is because they can’t find product-market fit, according to research by CB Insights. You need to ask yourself: Is our company solving a market need, and will that need be the same—or big enough—once we scale?
Dave Sloan, founder of the now-defunct e-commerce company Treehouse Logic, described this very problem in a Quora post about why the startup failed, writing: “We were not solving a large enough problem that we could universally serve with a scalable solution. We had great technology, great data on shopping behavior, great reputation as a [thought] leader, great expertise, and great advisors...but what we didn’t have was technology or a business model that solved a pain point in a scalable way.”
When you start gaining traction, it’s important to stop and take stock. You need to not only have a product or service that a growing user base wants, but the business systems, infrastructure, and employees in place to support that demand. Can you still deliver on your company’s promise once you start to scale? If the answer is, “No,” now isn’t the right time.
2. Hiring for Quantity, Not Quality
When you hit a rapid growth phase, it often feels easier to hire just any employee, but having the wrong team in place is among the top reasons a startup fails.
The U.S. Department of Labor estimates that a bad hire costs 30 percent of the employee’s potential first-year earnings—which adds up fast when you’re a resource-strapped startup. It’s important to hire individuals who believe in the company’s vision and have a specialized skill set that can help the organization grow, such as sales, human resources, marketing, or manufacturing.
Given it takes an average 42 days to fill a position, you should prioritize roles that will have the most impact. From there, focus on finding the right fit. It’s reported that Instagram only had 13 employees when Facebook bought it for $1 billion, supporting the idea you should hire for quality, not quantity.
Ensuring that you’re hiring people who align with your mission will also help you maintain your organizational culture at scale and ease future growing pains.
3. Losing Focus
As you scale, it’s easy to get distracted, but you need to fight the desire to add on new features or products too soon. If you’re not solving customers’ primary pain point, the additional bells and whistles won’t matter. It’s important to stay focused on the big picture and the work that will ultimately drive success.
Keep your mission in mind as you scale. What was working to get your company to where it is today? What do customers say they want? By regularly asking those questions, you can more easily eliminate distractions and be strategic about when and where you invest your already limited resources.
4. Still Trying to Make All the Decisions
When you’re in a rapid growth phase, it’s important to find and develop leadership. You can’t make every decision anymore. If you try, you’ll not only become the bottleneck on projects, you’ll get in the way of your employees’ professional development. You, yourself, aren't a scalable resource.
“If the founder continues to be the chief problem solver, the people he hires to run—say an operation in a new city—will never become effective leaders,” said Ghosh to Forbes. “The founder should accept that as you create a new subgroup, there’s a V-curve. You will initially get less efficient. But after the subgroup makes mistakes and learns, it becomes more efficient and reaches a limit. If you intervene, you do worse.”
Preparing to Scale
As brands like Amazon and Google prove: massive growth is possible. It’s how you handle the transition from three to 30 to 3,000 people that determines whether you’ll see success.
Being prepared is an important first step. Knowing what to avoid will help you organize your efforts around the key pieces of strategy that will take your startup to the next level.
Do you want to master a proven framework for building and financing new ventures? Explore our four-week online course Entrepreneurship Essentials and our other entrepreneurship and innovation courses to discover how you can learn the language of the startup world.
This post was updated on February 19, 2021. It was originally published on February 14, 2019.
