Why many startups fail to scale?

Every entrepreneur aspires to grow his company to a significant scale. However, many startups fail to scale, beyond a certain level.

For scaling up, it is essential that the startup upgrade the company’s capabilities and resources on all relevant fronts – people, technology, processes, funds, etc.

Surprisingly, operational inefficiencies is just one of the reasons for not being able to scale. Many of the other reasons are quite within the control of the entrepreneur.

Here are some reasons why entrepreneurs fail to scale their startups:

  • Low aspirations: Often many entrepreneurs lose their initial drive on reaching a certain level of success and are not then as driven to scale up to the next level. Sometimes, they tend to take lesser risks and are less hungry for glory than when they were starting out.

Suggestions: Aim higher, keep the bigger goal always in view, keep reminding yourself and the team about the bigger goal.

 

  • Fallout between the founders: One of the common reasons for issues in startups is disagreement between founders on the way forward. These issues and disagreements come up typically at two inflection points – (a) either when the startup is doing very badly and tough decisions are to be taken e.g. to further reduce the already low salary or (b) when the startup is doing really well and tough decisions are to be taken e.g. to sell out and take the cash or to stay on and grow even more.

Suggestions: Have a philosophical discussion and agreements with the co-founders on how different situations will be handled. What will be the decision in case of difficulties? What will be the decision in case there is an option to sell out? It is possible to build these agreements into the shareholder agreements or articles.

E.g. If there are 4 founders in a company with 25% shares each, they may decide that this 25% will ‘vest’ over a 5 year period. This means that if one of them leaves at the end of the 3rd year, he/she will get only 15% equity and the rest will be shared between the remaining founders. This can be documented and formalized.

 

  • No back-up team: As the startup grows, the founders have to switch roles from doers to managers. Their focus has to change from managing the day-to-day tasks to hiring the right persons to do the job. Often startups fail to do this and therefore are unable to manage the growth. They either stagnate or become inefficient and wither away.

Suggestions: Keep looking for good people. Plan for growth before you reach the growth phase. Let go. Delegate.

 

  • Absence of processes: At the startup stage, there may be no processes or some processes, which eventually will have to get firmed up. However as the team grows, the absence of processes creates inefficiencies and chaos as each team or person attempts to manage their part of the operations in a manner that they feel appropriate. Even with the most honest intentions, such chaos is never good for the organisation.

Suggestions: Once the initial challenges are out of the way, the CEO has to focus on creating the processes. It has to be someone’s key responsibility area.

Also, inadequate funding can be a significant hindrance. We have noticed some entrepreneurs shy away from raising capital for growth and attempt to scale up with the meager resources by applying the same ‘wear-many-hats’ approach during the starting up days. This is counter-productive. To scale up the organization, it needs to scale up the capabilities and competencies and hence need adequate resources, and capital.

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Author: Prajakt Raut

Prajakt Raut is the founder of Applyifi.com, and author of the book for startups - ‘Starting Up & Fund Raising’ Prajakt personal goal in life is to encourage and assist a 100,000 people to become entrepreneurs. _____________ Prajakt is the founder of Applyifi - an online platform that provides startups a 36-point scorecard and assessment report on the venture's investment readiness [www.applyifi.com], and helps them improve their odds of getting funded. Prajakt is also the founding partner of The Growth Labs, a platform where growth-stage companies get sharp, incisive advice from senior professionals and experienced entrepreneurs. [www.thegrowthlabs.in] Before starting Applyifi, Prajakt was the head of operations at IAN, founding member of a leading incubator, and the Asia-Director for TiE (2004 - 2007). Previously Prajakt had co-founded Orange Cross, a healthcare services company, and was part of the founding team member of Idealake Technologies. While in college Prajakt had founded a printing business and has spent over 10 years working in leading advertising agencies. Prajakt’s book, ‘Starting Up & Fund Raising’, helps startups understand an investor’s perspective, and helps them improve their odds of getting funded. The book also helps entrepreneurs understand the building blocks of a business.

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