4 Painful Realities Your Scaling Startup Must Accept in Order to Grow
70 percent of startups scaled too quickly in some aspect of their business.
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While growing a startup can be an exciting endeavor, it doesn't come easy. According to data from Statistic Brain Research Institute, over 50 percent of all companies in the United States fail within five years of when they first open for business. After 10 years, that number climbs to 70 percent.
How you scale can have an even greater impact than you'd expect…
The Startup Genome Report's coverage of premature scaling found that 70 percent of startups scaled too soon in some aspect of their business, directly contributing to their eventual failure. So what separates the successes from the failures? Part of the process requires that founders accept some of the painful realities of scaling a business:
1. Hire slow and fire fast
The business mantra "Hire slow, fire fast" may be popular, but not many startup founders actually follow through with this principle. Entrepreneur and former Apple Fellow Guy Kawasaki is quoted as saying, "When you're in a rush to fill openings to respond to growth, you make mistakes. Unfortunately, many companies adopt the attitude of, "hire any intelligent body, or we'll lose business -- we'll sort everything out later.'"
This mindset causes startups to overlook potential red flags during the hiring process, resulting in a bad hire that causes lost productivity and even a potential cultural drain that affects the performance of other employees. Startup founders must be willing to make the hard choices to eliminate under-performers. In reality, not hiring anyone at all will be a better financial decision than making and keeping a bad hire.
Bad hires don't just drain productivity while in the workplace. Replacing them will result in extra costs in onboarding and recruiting. Taking the time to make sure you've made a quality hire may slow down your ability to scale, but it can make a big difference for your margins.
Related: 8 Financial Tips for Entrepreneurs Launching a Startup
2. Continue to scale back your lifestyle
There are countless stories of entrepreneurs who lived on a diet of ramen noodles or slept on friends' couches as they tried to get their startup off the ground. Because of this, as soon as you start to see some measure of success, it can be tempting to immediately upscale your standard of living to match the improved business situation. This can be a serious mistake.
In an email conversation with Austin Godsey, founder of SocialBlerr, he explained, "Most people, when they start scaling their business, also end upscaling their lifestyle. They want to get back to the normal or average standard of living they had before. However, you always want to live below your means, or you'll end up there quicker than you'd like."
To maintain a startup's success, money needs to go back into the business — not yourself. Trying to live a more luxurious lifestyle when you first start scaling could undermine the profits you need to succeed in the long run.
Related: Want Your Seed-Stage Startup to Be Fundable? Check These 4 Boxes.
3. You'll move slower, not faster
Startups thrive in their early stages in large part because of their agility and ability to adapt to new circumstances relatively quickly. However, as you scale and your customer base increases, you will have to move slower and more methodically to avoid creating additional delays or losing your profits.
A case study from entrepreneur Derek Sivers' blog highlights why this is so important. If he wasn't "perfectly clear" when sending an email to his company's 2 million customers, he would receive close to 20,000 confused responses. Dealing with these responses would take his staff an entire week, resulting in at least $5000 in losses. This all came from a tiny mistake in a single email.
When launching a new software feature or product line, more customers means more potential problems. To keep your customers happy, you'll have to move slower to try to prevent these issues in the first place and respond to them when they arise. You'll be less agile, but this may be necessary to keep your customers.
4. More gross doesn't mean more net
As your customer base grows, you will naturally have an increase in your gross profit. But this doesn't mean that net profit margins will increase. Infrastructure expenses will also rise as you try to keep up with your ever-growing customer base. From hiring new talent to updating your back-end software programs, these costs will only continue to grow.
When evaluating the strength of your business as a whole while scaling, gross margins are important. They tell you whether a new product or service is profitable or not. However, you must also consider your net profit to ensure that revenue is growing faster than your expenses.
While net profit margins tend to decrease as a company scales, what is considered a "good" profit margin can vary wildly from industry to industry. However, in a blog post for Investopedia, Tim Parker notes that service and manufacturing brands that achieve gross sales of over $700,000 should typically target a margin of 15 to 20 percent.
Scaling a startup isn't easy, especially if you go into it expecting everything to work out perfectly. By understanding the new challenges and opportunities that scaling brings to your business and taking the time to prepare for them, you can ensure that your growth efforts bring lasting success.