Why many startups fail to scale?

Every entrepreneur aspires to grow the company to a significant scale. However, many startups fail to scale up beyond a certain level.

For scaling up, it is essential that the startup upgrades the company’s capabilities and resources on all relevant fronts – people, technology, processes, funds, etc.

Surprisingly, operational inefficiencies is just one of the reasons for not being able to scale. Many of the other reasons are quite within the control of the entrepreneur.

Here are some reasons why entrepreneurs fail to scale up their startups:

• Low aspirations: Often many entrepreneurs lose their initial drive on reaching a certain level of success and are not then as driven to scale up to the next level. Sometimes, they tend to take lesser risks and are less hungry for glory than when they were starting out.

Suggestions: Aim higher, keep the bigger goal always in view, keep reminding yourself and the team about the bigger goal.

• Fallout between the founders: One of the common reasons for issues in startups is disagreement between founders on the way forward. These issues and disagreements come up typically at two inflection points – (a) either when the startup is doing very badly and tough decisions are to be taken e.g. to further reduce the already low salary or (b) when the startup is doing really well and tough decisions are to be taken e.g. to sell out and take the cash or to stay on and grow even more.

Suggestions: Have a philosophical discussion and agreements with the co-founders on how different situations will be handled. What will be the decision in case of difficulties? What will be the decision in case there is an option to sell out? It is possible to build these agreements into the shareholder agreements or articles.

E.g. If there are 4 founders in a company with 25% sharses each, they may decide that this 25% will ‘vest’ over a 5 year period. This means that if one of them leaves ad the end of the 3^rd year, he/she will get only 15% equity and the rest will be shared between the remaining founders. This can be documented and formalized.

• No back-up team: As the startup grows, the founders have to switch roles from doers to managers. Their focus has to change from managing the day-to-day tasks to hiring the right persons to do the job. Often startups fail to do this and therefore are unable to manage the growth. They either then stagnate or become inefficient and whither away.

Suggestions: Keep looking for good people. Plan for growth before you reach the growth phase. Let go. Delegate.

• Absence of processes: At the startup stage there may be no processes or some loose processes, which eventually will have to get firmed up. However as the team grows the absence of processes creates inefficiencies and chaos as each team or person attempts to manage their part of the operations in a manner that they feel appropriate. Even with the most honest intentions, such chaos cannot be good for the company.

Suggestions: Once the initial challenges are out of the way, the CEO has to focus on creating the processes. It has to be someone’s key responsibility area.

Also, inadequate funding can be a significant hindrance. We have noticed some entrepreneurs shy away from raising capital for growth and attempt to scale up with the meager resources by applying the same ‘wear-many-hats’ approach during the starting up days. This is counter-productive. To scale up the organization, it needs to scale up the capabilities and competencies and hence need adequate resources, and capital.