Don't get too big, too fast. (Via Willie Wonka and the Chocolate Factory)

Startups can blow up for any number of reasons: bad hires, overspending, lack of capital. In fact, a new study from the Startup Genome Report finds that 90 percent of startups fail primarily because of “self-destruction rather than competition.”

And what’s the biggest reason why? The study of more than 3,200 high-growth technology startups pinpoints the issue on what it calls “premature scaling.”

That’s the idea of companies expanding before they are ready. In other words, getting the cart before the horse. The concept can take many forms, hiring too many employees too fast, spending too much on customer acquisition before the product is ready or boosting marketing spending without analyzing core metrics.

About 74 percent of Internet startups fail because of premature scaling, while those who scale properly typically see growth that’s 20 times faster, according to the report. Those companies that scale properly also attract more capital and customers, and eventually hire more employees. In fact, none of the startups that scaled prematurely passed the 100,000 user mark.

The authors write:

A startup can maximize its speed of progress by keeping the 5 core dimensions of a startup Customer, Product, Team, Business Model and Financials in balance. The art of high growth entrepreneurship is to master the chaos of getting each of these 5 dimensions to move in time and concert with one another. Most startup failures can be explained by one or more of these dimensions falling out of tune with the others. In our dataset we found that 70% of startups scaled prematurely along some dimension. While this number seemed high, this may go a long way towards explaining the 90% failure rate of startups.

As the charts below show, those startup companies that grow their businesses in a consistent manner get higher valuations and attract more customers. (Full report here).


Comments

  • http://blog.calbucci.com/ Marcelo Calbucci

    That’s baloney! 90% of startups fail because the grow too fast? What a wonderful world this is. The study is flawed because it pre-selected the startups who were high-growth and concludes that most of them failed because of growing too fast. 

    Next up: Startups who fail to reach the customer fail because the lack of customers.

    • Victor

      I think the author is saying growing the size of the company too fast as oppose to growing the revenue. I thought the basic premise of the article is sound. I have witness others die because they try to get their capacity up before there is real sustainable revenue to support it. My own business almost died a few times with my own over zealous optimism in the early days. 

    • Devin Miller

      I think the point of the article is that startups fail not because they scale too fast but they attempt to scale before they have a scalable business. 

      The job of a startup team is to discover a large collection of potential customers with a problem that can be solved in a scalable way.  90% fail because they prematurely think they have reached that point and thus “pour on the gas”.

      The fail comes when they spend gobs of money only to find that they did not actually have a large customer base with a problem those customer were willing to address that could be provided in a scalable way.

      • http://blog.calbucci.com/ Marcelo Calbucci

        Victor/Devin, I agree with both of you, but still, he got a subset of what we call a “startup” and did a study on that subset, and it wasn’t a random subset.

        Either way, from pure observations on my own world, 90% of startups die even before they see the light of day, because the founders quit, because the product never gets finished, or because the product gets finished but the founders are afraid of committing to it and selling it.

        • Anonymous

          I agree. I think the startup genome categorized its startups as only ones that actually launched, not the ones half made sitting behind a launchrock site. I would guess at least 25% of startups don’t even make it to the point where they can scale, let alone scale too fast.

        • http://twitter.com/shobe Matt Shobe

          Yep. #1 on my list is still “failure to execute on the original vision.”

          • H.a.w.k P.h.i.l

            Disagree. How about “failure to use the right growth metrics and adopt to new knowledge”

        • Devin Miller

          Marcelo, fair point, there are plenty of ideas that people tinker with or even push quite far that they kill because they realize the idea was no good, the timing not right or something else.

          This study seems to be more about startups that raise capital or otherwise devote heavy resources.  I think the authors were mor curious as to why the majority of startups WITH CAPITAL, failed. 

          If you do not have capital, it is pretty hard to fail from scaling to fast.  You just can’t do it. 

          • http://twitter.com/RyanHamze Ryan Hamze

            The only reason startups fail is because they self destruct. the founders lose their courage, or their funding due to lack of consistency.

    • Matthew Everhart

      I believe he’s saying they fail because they scale too fast – not because they GROW too fast. They scale themselves in anticipated growth rather than actual.

  • http://blog.calbucci.com/ Marcelo Calbucci

    That’s baloney! 90% of startups fail because the grow too fast? What a wonderful world this is. The study is flawed because it pre-selected the startups who were high-growth and concludes that most of them failed because of growing too fast. 

    Next up: Startups who fail to reach the customer fail because the lack of customers.

  • http://blog.CascadeSoft.net @CascadeRam

    “hiring too many employees too fast, spending too much on customer
    acquisition before the product is ready or boosting marketing spending
    without analyzing core metrics.” all amounts to saying that these companies were spending too much money.

    Of course, summarizing it as “self-destruction” due to “premature scaling” seems a lot more interesting that saying that these companies spent too much money :)

  • Ruper

    The message is clear – don’t be lazy and don’t take external capital too early.

  • http://www.markevanstech.com Mark Evans

    To be frank, premature scaling is far down the list on why start-ups fail. From working for and with start-ups, the biggest factors for failure are a bad/uninteresting/crappy idea and terrible usability, which leads to not having enough users/customers to succeed. 

    Most start-ups don’t get the chance to prematurely scale because they’ve already failed. Here are some thoughts in response to your post: bit.ly/qP67ij 

  • Wilson

    Obviously, the article was referring only to startups that actually get off the ground… I don’t know how virtually everybody missed that.

  • Wilson

    Obviously, the article was referring only to startups that actually get off the ground… I don’t know how virtually everybody missed that.

  • Wilson

    Obviously, the article was referring only to startups that actually get off the ground… I don’t know how virtually everybody missed that.

  • Anonymous

    100% of failed startups go bankrupt because their expenses were larger than their revenue.  News at 11. 

  • Anonymous

    100% of failed startups go bankrupt because their expenses were larger than their revenue.  News at 11. 

  • Anonymous

    100% of failed startups go bankrupt because their expenses were larger than their revenue.  News at 11. 

  • Anonymous

    100% of failed startups go bankrupt because their expenses were larger than their revenue.  News at 11. 

  • Anonymous

    100% of failed startups go bankrupt because their expenses were larger than their revenue.  News at 11. 

  • Rgrowley

    It’s essential to have balanced development of the business model.  Many Startups believe it’s all about the product and neglect the organization of the company.  In addition is the importance of focus, because performing one’s role keeps concert of the players in the company, as mentioned in the book E-Myth Revised.  It seems many entrepreneurs try to do it all in bean counting, production, sales, etc.  For example I’ve been with startups that look for perfection in innovation and they run out of money, while I’ve been with others that move too fast in sales and production wasn’t ready for those delivery dates, thus leaving disappointed customers with undeliverable promises.
    Premature scaling and not knowing whether the product is a scalable stand-alone product is another problem of an egocentric entrepreneur.  Knowing whether it’s best to sell at a certain point to a larger company is a worthy target of Start-ups, as much as is going public.  Many times the complimentary products or services from another company are needed if the passion is truly to deliver a market driven idea, service, or product.  After selling a fledgling Start-up, a gifted entrepreneur will dream up another idea, service, or product.  Creativity doesn’t stop with one company, but it does stop while the entrepreneur’s time is tied with their current Start-up responsibilities.

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