Why startups fails & what is premature scaling?

What is PreMature Scaling?

The 2012 Startup Genome analysis, which investigated 650 Internet startups, found that “premature scaling is the most common reason for startups to perform poorly and lose the battle early on by getting ahead of themselves”.

Similarly, a complementary report on 3200 high growth startups revealed that “74% of high growth internet startups fail due to premature scaling”.

Premature scaling, thus, is a startup killer. But what, exactly, is premature scaling? And how can you prevent it from leading to the death of your company?

In this article I’ll provide detailed answers to these two questions as well as outline various key strategies for successfully growing your business.

What Is Premature Scaling?

In simple terms, premature scaling refers to an effort to grow your business at a rate faster than you can afford to sustain.

Or,

“Premature scaling is an attempt to massively expand and grow your new company before you have successfully hammered out the intricate details of a repeatable and scalable business model.Failing to nail down the specifics of your CAC and LTV can facilitate premature scaling and, thus, cause startup failure”.

Trying to scale your company without the adequate resources to do so is virtually guaranteed to produce a negative cash flow situation in which your startup will run out of money.

Startups that fail because of premature scaling share one or more of the following characteristics in common:

They build and try to scale products before having adequately tested and validated their problem/solution fit.

A Startup Genome analysis of 3200 high growth startups found that 80% of successful startups focus on discovering problem spaces (i.e., uncovering a problem/solution fit in the market) during the first 3 stages of the lifecycle rather than concentrating on customer acquisition tactics.

They overspend on customer acquisition efforts before successfully establishing a solid product/market alignment.

Failed startups have a tendency to try and overcompensate for their absence of product/market fit by spending lots of money on public relations and marketing strategies.

This is an example of what might be called the entrepreneur’s vision fallacy wherein an entrepreneur builds a “revolutionary” product that’s “guaranteed to succeed” and tries to convince her customers to buy it rather than intentionally building something that her extensive research and testing prove out what customers actually want.

They hire too many people too early!

Including expensive “consultants” who might add little if any concrete value to the businesses, raise too much money resulting in a loss of financial discipline (i.e., a dedication to efficiency), and/or try to generate high earnings at the cost of every other aspect of growing a company.

The following Appster infographic outlines the major focal points, business actions and strategies, and approximate time scales for each of the 4 broad phases involved in building a startup:

While dealing with several facets of business, marketers often fail to streamline the process in the right way. As a result, their business aspirations get shattered in due course of time.

Sounds critical, right?

With the right kind of planning, you would be able to prevent such unwanted situations with ease.

Basically, it starts with being methodical from the very beginning of your business venture.

This includes mainly:

• Having good knowledge of the market

• Adequate funding

and...

• Fulfilment of customer needs

It’s very important to know the market context in which a business operates. Perform competitor analysis to know where to improve. It helps to bring necessary improvisations into your working procedure.

On the other hand, you need to focus on the promotional strategies. Unless your services reach the maximum number of customers, you won’t be able to improve your brand image.

Think about it:

Am I catering to customer interest with something different?

If not so, chances are you will end up getting lost in the competitive market.

To outshine the competition, your brand must make a unique identity. With a customized approach, do something special to separate the wheat from the chaff.

Maintaining cash flow is another thing that plays a major role in the long-run. Start your business with the right amount of capital. As you progress further, look whether you are gaining more than the expenditures. If it goes the other way, you’ll be burdened with the pressure of negative cash flow.

In course of your marketing, always make sure that there is an adequate profit. Unless you gain business profitability, you can face significant financial pressure. So, always pay heed to your financial aspects. Moreover, don’t ever forget to secure your business activities with sufficient coverage. It helps to reduce the risk of unforeseen damage.

Now that you know how financial aspects play a major role in your business, it’s time to concentrate on the customer needs.

Remember:

"Without customer satisfaction, there is no business success."

Therefore, always listen to your customers. If they get happy, you would definitely earn more from your services.

Thanks for reading...

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