How Startups Can Deal With Scaling Problems
In the USA, more than 50% of businesses fail within the first 5 years of operations, though the rate changes depending on the particular industry. Premature scaling is the leading cause of failure, but businesses with two founders are 19% less likely to scale prematurely, as well as raising 30% more money and enjoying 3 times more user growth. This indicates that choosing a good partner early on could solve a lot of problems down the line.
But scaling is a unique phenomenon which needs to be constantly managed. The startups that scale the best are the ones that will be the most successful. There are ways to tackle the plethora of scaling difficulties facing startups and they need to be given serious consideration.
Automation is going to become the defining characteristic of 21st-century business. Automation technology has already permeated the digital marketing and online business models. There are automation tools for email marketing, social media management, paid advertising campaigns, chatbots, scheduling, data analytics and more.
Automation is perfect for scale because it leads to the routine completion of tasks without any extra cost. There are also many online tools that can assist when collaborating with large global teams, such as Slack, Trello or Asana. Of course, it is important to be very selective in what you choose to automate. As per Bill Gates, “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.”
Freelancers are another way to scale a business without breaking the bank. Hiring an employee is a very expensive process. It requires an interview and vetting system, negotiation of terms and conditions, expenses, healthcare, insurance, mandated holidays and many other complexities.
In contrast, it is possible to hire a freelancer to complete a job in as little as 24 hours and then go your separate ways without any hassle.
Another advantage is that with a long-term employee the skill set is limited to that particular person. But it is possible to hire a freelancer with a specific skill set for a short time period and hire another one with different skills for a different task.
In short, freelancers offer flexibility and efficiency. Startups should investigate the benefits of using freelancers for jobs that need to get done as they arise. They can often constitute a low-cost means of expansion without being tied down for the long-term. Good freelance platforms include UpWork and People Per Hour.
Be Prepared to Change
Studies have indicated that businesses that change their model frequently have a far better chance of success compared to startups that stick to the same business model. In other words, adaptability and flexibility are core components of success. Startups will need to take opportunities as they arise.
There is a big jump from a startup to a medium-sized enterprise and the thinking and business model may have to change. This will nearly always mean a significant shift in terms of the hierarchical structure of the company as well as new departments. Streamlined managerial reporting and a compartmentalized system are very important to scaling a business so that the flow of information is as smooth as possible.
Scaling is not optional and change is a prerequisite. According to James Penny of JC Penny, “No company can afford not to move forward. It may be at the top of the heap today but at the bottom of the heap tomorrow, if it doesn’t.”
Scale Sensibly and at the Right Time
Scaling too early has been identified as the number one cause of startup failure. A study undertaken by Startup Genome indicated that 70% of startups were guilty of scaling too early.
The way this takes place is that firms scale in an area where it is not necessary. They complete this scaling ineffectively, and also completely fail to scale in the necessary areas. Startups often scale with known product errors believing that these can be fixed with time.
They also have a tendency to scale without understanding their customer base. These are grave errors and it is best to wait for the right moment to expand. The comprehensive study also demonstrated that startups that were willing to change their business model once or twice were far more successful in the long-term.
Despite all the hype about information companies, they are the ones most likely to fail with only 37% surviving after 5 years. The best industries include finance, insurance and real estate where 58% survive past the 5-year mark. The total average across industries is 50% after 5 years.
Changing Roles or Cutting Back
As a business scales, it can become necessary to bring in new talent while sometimes letting other employees and third-parties go that are no longer a fit. Cutting back what no longers works is equally as important as expanding in new directions, though this point is often not understood by business owners.
While removing people from the startup can sound harsh, sound business choices do need to be made. Before letting staff go, consider in an agile startup environment if their skillset may fit another area of the business better. If that’s not possible then restructuring the workforce may be necessary. Startups and small businesses can make use of outplacement services to assist in transition and reorganization.
According to Pavel Krapivin, Founder of VelvetJobs, “Businesses that plan to scale sometimes need to restructure while aiming to attract new talent. Instead of leaving a former employee displaced we match their skills to new jobs and connect them with a large number of support services such as counseling, interview preparation, resume writing and upskill initiatives. This can improve the reputation of the startup and bolster productivity of the existing workforce with the knowledge they will be looked after in future.”
Identify Scaling Errors and Focus on Smart Scaling
Scaling needs to be looked at in a realm of its own as opposed to something that takes care of itself while building a better business. This means that startups need to look at the different aspects of scaling. Everything needs to scale in tandem, so your sales, product improvement, hiring, customer service, testing, marketing and networking needs to grow together as much as possible.
If any of these are focused on too much or too little, it can lead to imbalances. Try to isolate what needs to scale the most right now and don’t focus too much on one area of scaling. This mistake is often made when businesses place too much of an emphasis on profit maximization and blow budgets on sales and marketing.
It can also be very helpful to identify what typically goes wrong in terms of scaling a business. The most common errors made in relation to incorrect scaling as per a De Gruyter research paper are:
- Spending too much on customer acquisition
- Adding unnecessary features just because they are “nice to have”
- Hiring too many people too early
- Not adapting the business model to a changing environment
- Hiring managers instead of functional specialists
- Scaling the product before its a market fit
- Investing in scalability before the product is ready to scale
As a business grows, it becomes necessary to compartmentalize so that there are specific people working on specific roles and functions. The startup culture is just not a fit as the company expands and it becomes more important to be professional and detailed across all aspects of the business. This means more clearly defined roles for all people and an efficient reporting process. Everybody who comes into the company needs to know what their roles are and communication needs to become paramount.
Taking a startup to the next level requires a delicate mix of systematic and cautious experimentation with some innovation and risk-taking. There is no standardized path to success and as per ‘Scaling Up’ author Verne Harnish “There are no straight lines in business or nature.” This means that startup owners will have to follow certain trends and patterns while choosing to be innovative and creative in others.
In a perfect world, people make rational decisions and the best idea always wins. But as we all know, things don’t always work out this way.