90% Of Startups Never Even *Compete* They Self-Destruct (Go Broke) From Premature Scaling

Startup Genome had some shocking findings in a couple of recent studies. To wit: startups get ahead of themselves with infrastructure and personnel hiring and administrative complexity. Companies with revenue from sales can survive this challenge.

Startups don’t typically fail from losing to competition. They fail most often from getting ahead of themselves, or ‘premature scaling’. We’re not exulting in this fact – we’re former starters ourselves; we love the innovation founders and starters display, and we understand the tendency to spend on infrastructure, operations, and personnel ahead of demand, often at the cost of opportunity that could bring profits.

We are but messengers to founders and principals alike, and our message is simple: you can pinch pennies and wonder if you can afford the expenses you like, or you can start selling – start making profits – and neutralize these concerns, from the door. 

So, GTM with your MVP, ASAP. Period. 

What, exactly, makes scaling ‘premature’?

  1. It co-opted funds that could have helped them make money;
  2. It co-opted funds that could have kept the doors open, proverbially (kept them ‘alive’). 

Either of these causes for failure – money that comes at the expense of opportunities for profit, or that came at the expense your doors open – would have been forestalled if the startup in question were making its own money. Greed isn’t necessarily good (apologies to Gordon Gekko), but profitability always is. 

  • Investors, Incubators, Accelerators, Advisors And Regulators Give Them A Wider Berth. A startup in the black – making more money than it spends – has the upper hand with its other interested parties.
  • They Get Influence When It Most Counts: On The Front-End: In the early days of a company, where decisions’ impact is magnified over the longest timeline, having control is arguably more valuable than having money. It certainly matters for the morale, authenticity, and ultimate mission and purpose of a startup. It’s difficult to jealously defend a vision with ‘money people’ telling you what’s what, in the early days. If you’re making money, there’s less of that.
  • They Get To Stay Alive, Living The Dream. Have you ever heard of a company that was making money hand over fist, that failed? No. No you don’t hear about that. Unless maybe they were breaking laws. 

Another way of phrasing the problem is that most startups run out of other people’s money before they become viable and can make their own.

If you are selling you can afford to make other mistakes. You can spend too much on lunches. You can spend too much on travel. You can hire marginally-competent college or childhood friends (believe it or not, this is another common cause of failure, according to Startup Genome). 

Any way you cut it, with profits being the raison d’être for a company, if a company is meeting that requirement, they get to stay in the game, often with the perquisites of added respect and relative autonomy. 

So, learn from the Startup Genome study: focus your startup on making money as soon as you can.

True story: we’ve consulted at startups on the cover of national newspapers with toxic relationships between founders; we’ve seen startups in seedy parts of San Francisco with embarrassing absentee rates; we’re pretty sure at least one startup we helped was a front for a mob operation, but guess what?

They all survived these colorful and significant problems, as long as they were selling; there could be no ‘premature’ scaling, because scaling is only premature when it’s done with (other people’s) money you can’t afford to spend.

Out of love for starters, below are some great books on how to get started, and get ‘in the black’ with your company.