Why Successful Startups Stumble

Why Successful Startups Stumble

It’s a sad story that plays over and over like your least favorite pop song.

A booming, promising young brand has reached its tipping point. It’s ready to scale up for a bigger slice of the market…  but one wrong move and it all starts to unravel.

The most unsettling part: that fatal blow can infiltrate from any angle, from an oversight in your business plan to the wrong new hire. HBR lays it out flat:

One of the hardest acts in business is scaling a business rapidly and profitably… [It] requires enormous determination — it’s like catching lightning in a bottle.

It goes on to note that of all new registered U.S. businesses, only one in 500 will hit $100 million — and just one in 17,000 will grow to $500 million while maintaining profitable growth for a decade.

Bain & Company assembled a group called the Founder’s Mentality 100 to explore the challenges that businesses face when it’s time to scale up. Through more than 35 global events with more than 1,400 CEO and founder attendees, they found that only 15% identified their biggest obstacles as external: issues like market shifts, government regulations, and fierce competition.

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The rest identified their biggest demons as issues that are theoretically under their control...

So how can startups identify and avoid these issues? Let’s explore a few of the biggest perps.

When the “Do Whatever it Takes” Mentality Can Backfire

It’s that classically-romanticized depiction of any successful startup: grit, an unwillingness to compromise, and a lot of missed sleep — whatever it takes for an entrepreneur to actualize their goals.

While this is ingrained as a part of the American dream, the lean and flexible nature of this approach it has its limits.

Once a business reaches the tipping point and a certain amount of team members, the “no-holds-barred” outlook can become chaotic and even counter-productive, especially when it’s coupled with a laid-back company culture. It’s critical to start considering systems, protocols, and procedures. The business needs to operate efficiently and reliably, and this need exponentially increases with the size of a company.

Successful startups stumble

Via Novus Consulting

Take for instance Zenefits, a brand that essentially acted as a health insurance brokerage for its customers, helping to reduce costs by eliminating the middleman.

In 2015, the company became a boon for investors after announcing that its revenues would increase tenfold. It raised more than $500 million and was valued at $4 billion.

But internally, the company wasn't ready. With the massive influx in business, it couldn’t keep up with properly licensing all of its agents in each state they operated. In the same year, the public caught wind and a scandal ensued.

Its valuation collapsed by 55% and the CEO-founder got the boot. In a staff email, the new CEO David Sacks wrote:

"It is no secret that Zenefits grew too fast, stretching both our culture and our controls." Their relaxed, “frat-like” culture became dysfunctional against an industry with boundless regulations, and they got burned."

David Sacks, CEO, Zenefits

Savvy entrepreneurs will take this as a cautionary tale, and set up some guidelines for structure.

Create a Blueprint, and Live By It

To avoid the potential pitfalls that can stem from a lack of structure and direction, take some advice from Stephen Leguillon. He’s the cofounder and CEO of La Belle Assiette, a private catering booking platform that started in the UK but has since expanded to more than 600 registered chefs in 7 countries. Think of it as Uber for chefs.

When asked how he was able to successfully scale, he’ll tell you that his secret was defining his company’s core values and living them out in every single business decision.

As a founder it’s fascinating, but also challenging, to watch a culture evolve as your team expands, funds grow, and offices change… Yet you soon realise this culture evolves organically. You can’t expect to observe a team of 5 people living in the same way as a team of 25, or 500.

Not to mention all the benefits a positive business culture has on employee satisfaction, productivity, and performance.

Via Corporate Culture Pros

 

A company’s team members, partners, and investors should use this defined culture as a set of consistent guidelines. You should be so committed to your company’s core values that you’re willing to hire and fire based on them, assert Stephen and his role models (Zappos CEO Tony Hsieh and BlaBlaCar’s Frédéric Mazzella and Nicolas Brusson, to name a few).

Stephen and his cofounder Giorgio Ricco recognized that these values needed to be carefully thought out and based on a team consensus. They sent out an email to each team member asking to list 5 values that they believe should represent the company, along with a real world example of each. They then collected the top 10 and had a vote to pick 6.

The winning 6 were:

  1. Build trust
  2. Start by doing
  3. Require excellence
  4. Take food seriously
  5. Spread infectious enthusiasm
  6. Be a family

They plastered these values all over the office, conducted their recruitment based off of them, and continuously evaluate to make sure their everyday business model represents this concrete identity.

Now these values take centre stage, displayed looking out over the office. They have finally allowed us to determine our company culture and have become fundamental to our business, although they are not fixed and may evolve as the company does. 

Via Medium

Keep Your Evolving Team United

As you scale up, you’ll find a natural ebb and flow in the kind of roles needed. The opportunity for some new titles or positions may arise, while some of them might become obsolete. And as you grow, you’ll inevitably need specialization in key areas like HR, sales, marketing, R&D, and manufacturing.

It’s important to nurture the shift that comes with specialization. This may be especially true when new, specialized team members are brought on to relieve legacy team members from struggling as “jacks-of-all-trades.” Some growing companies find that this creates friction, even fear, in original team members, who may feel undervalued or inadequate at the thought of sharing or outsourcing their role.

Birchbox, a company that delivers beauty products to their customers’ door, is a great example of how to make this work.

In April 2014, the company received $60 million in series B funding and exploded from 8 to 300+ employees. When they developed the need to ship out a million boxes a month, they realized that their infrastructure needed a makeover.

Via HBS

To manage the complexity, founders Katia Beauchamp and Kayley Barna sought out domain experts that included a Carnegie Mellon computer science PhD as CTO and a former Booz & Company principal as brand campaign vice president.

The team at Birchbox cultivated a learning mindset, even encouraging legacy employees to become part of the hiring process so they could be involved and retain their voice in the company. Legacy employees viewed their new hires as mentors who could help them grow and develop their niches.

Katia notes in an interview with Harvard Business Review:

I think we do a really good job of showing people how valuable their skill sets are and celebrating the fact that we wouldn’t be here without their collective capabilities… We worked really hard to get people to believe that you can hire people better than you.

Mind Your Timing: Set KPIs and Scale to Them

Some entrepreneurs start running before the starting gun fires, and this can be a big mistake.

Startup Genome surveyed more than 3,200 high-growth tech startups and found that 74% of failures could be attributed to premature scaling.

To ensure that you’re conserving your valuable resources, take a more strategic approach. Dana Tobak is the cofounder of Hyperoptic, a UK-based ISP offering ultra-fast full-fiber broadband. Two years after being founded, the company secured an equity investment of £50 million to expand to 11 new cities and towns, growing their team from 25 to more than 150.

Instead of scaling full-steam ahead, the company set KPIs and scaled the appropriate departments when the time came.

“We decided to ‘scale-up’ our sales organization and used progress KPIs to determine when we needed to scale up the other ‘engines’ of the business. Some were faster to scale up than others.”

Ja-Naé Duane, co-author of The Startup Equation, describes the 3 Ms of scaling: milestones, metrics, and measurement. Start by identifying your company’s milestones, set key performance indicators (KPIs) to determine which are most important and when you’re meeting them, then set up dashboards to track and measure them for when the time is right to take action.

Milestones can include:

This methodical, numbers-based approach can be a hyper-targeted way to time your organization’s scale-up for when it’s truly ready.

Final Thoughts

The “tipping point” is called a tipping point for a reason. Even the most promising young brands can feel the pain of a lack of structure or strategy — one wrong move and your carefully-balanced empire can topple over.

There are a number of things to mind, but paying special attention to the company’s mentality, culture, roles, and timing can be the difference between a brilliant multi-million dollar explosion and your company’s implosion.

 

About the Author

Dan Virgillito is a storytelling specialist, blogger and writer who helps digital startups get more engagement and business through online content.

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