Tuesday, September 6, 2011

The No. 1 Predictor of Startup Failure: Premature Scaling

Posted on: September 5th, 2011
Joanna Glasner

…The Startup Genome Project … published last week, crunches data from a set of more than 3,200 companies, seeking to identify the qualities that make startups most likely to either succeed or fail.
… The most consistent predictor of failure, …was a startup’s propensity to engage in premature scaling.

What is premature scaling? The authors define it as “focusing on one dimension of the business and advancing it out of sync with the rest of the operation.” For example, a startup may overspend too early on customer acquisition, hire too many employees, or focus too much on engineering at the expense of customer development. …

Researchers at the Startup Genome project, an eight-month-old effort supported by a collection of startup industry insiders and academics, also churned out some other interesting findings related to startup success. Insights include:

Pivoters do better: Switching a core facet of one’s business model, or pivoting, is sometimes the only way a startup can stay competitive in a fast-changing market. …

Diagram of the typical financing cycle for a s...Image via Wikipedia… Researchers found startups that pivot once or twice raise 2.5 times more money, have 3.6 times better user growth, and are 52% less likely to scale prematurely than startups that pivot more than two times or not at all.

Co-founders scale faster: Researchers found solo founders take 3.6 times longer to reach scale stage compared to a founding team of two, and they are 2.3 times less likely to pivot.

Business and Technical Partners Outperform: Teams with one business and one technical founder raise 30% more money, have 2.9 times more user growth, and are 19% less likely to scale prematurely than technical or business-heavy founding teams.

Founders are ridiculously over-optimistic: Researchers found that startups need two to three times longer to validate their [market] than most founders expect. Startups that haven’t raised money, meanwhile, tend to over-estimate their prospective market size as 100 times bigger than it actually is.

Interestingly, while premature scaling is quite common, its opposite, which the authors call dysfunctional scaling, is quite rare. … Curious to see if you’re committing any of these startup sins? The Startup Genome Project has a tool for companies to test whether they are scaling prematurely.
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