Growing Up Is Hard: Lessons from Scaling Startups
One of the main words thrown around in the context of startups is growth. We all know about the success stories of Facebook and Whatsapp, but is scaling a startup really all that easy?
Unfortunately not, but the good news is that you can learn about growth and scaling, ensuring you don’t repeat the mistakes of others.
THE UGLY TRUTH OF STARTUP GROWTH
Perhaps the first lesson to learn about startup growth is the ugliest. According to Small Business Administration data from 2014, only half of all new US businesses survive the first five years. It’s a scary thought to let sink in – half of the businesses don’t get to worry about scaling, as they need to fight for survival.
In addition, a study in startups launched between 1999 and 2004 found similar results. The Rise and Fall of Startups: Creation and Destruction of Revenue and Jobs by Young Companies followed these startups for five years after launch and found that majority of them struggle to bring in consistent income or grow their employee base.
Perhaps more worryingly, the study found startups to struggle with growth even when they are able to keep going beyond the starting years. Only 7.5% of the startups were able to add jobs for three consecutive years. In the cases they did, some had to cut back these jobs on the fourth and fifth year. This suggests that some startups that are able to scale up and grow, won’t be able to maintain the scaling and indeed might witness reverse growth.
What about revenue? Growth and scaling isn’t necessarily just about employee numbers – you might wonder if these companies were able to generate increasing income. Unfortunately, the figures don’t seem much better.
For startups, one success story often means the end of another. 34% revenue for the startups surviving in their fifth year was pulled away from other businesses in the sector. The consistency of revenue growth also suffered. Nearly half of the startups that were able to grow revenue in the third year didn’t achieve the same in the fourth and fifth year. More shockingly, over half of the companies were unsuccessful in increasing revenue in three consecutive years.
The study’s findings suggest the obvious, yet ugly truth: running a business is not as easy and for each success story, there are examples of failure. Growth is not an easy thing to achieve, especially when you are essentially fighting for existence.
HOW TO MEASURE GROWTH?
Paul Graham, co-founder of Y Combinator, wrote in 2012 that a startup is “a company designed to grow fast”. Graham went on to state that growth is the essence of a startup and he identified three stages of successful startup growth. According to him, the phases required for growth success are:
- An initial period of slow or no growth
- A period of rapid growth
- A slower growth, as the startup scales to become a company
So, that is the aim – rapid acceleration that slowly becomes a more sustainable growth rate. How do we combine this aim with scaling and what are the ways to measure the growth – and eventually its success?
What does scaling mean?
Growth requires scalability. Scalability, which according to the Investopedia, is “a characteristic of a system, model or function that describes its capability to cope and perform under an increased or expanding workload”. A startup or indeed a business that is scalable has systems and processes in place that make growing seamless.
Scaling is essentially about attracting and enabling growth – since startups are built around growth, nailing down scaling is essential. Donna Levin, an entrepreneur behind successful ventures such as care.com, has said that scaling is about “accelerating growth with confidence”.
This means the startup is able to use its resources in a way that yields results, which are predictable and measurable. Indeed, the key to successful scaling is to find those processes and systems that work and which move the startup forward towards its intended goals.
Interestingly, you need to understand that scaling is not necessarily the use of extra resources or actions. Scaling doesn’t always require extra effort, but rather the proper use of existing resources. Indeed, it’s possible to generate growth without utilizing more processes – of course, this will become harder as the startup continues to grow.
Furthermore, the other key thing to remember about scaling is how it doesn’t come in a neat one-size-fits-all design. You, unfortunately, can’t Google the dream model for scaling – what works for one startup might not work for you.
However, there are certain lessons to learn from other startups that have managed to scale and grow. Startups can expand vertically, by diving deeper into their niche or market, and they can grow horizontally, perhaps venturing into new countries or new areas of business.
Different ways to measure growth
Before I outline those lessons, it’s auspicious to consider the different ways a startup can grow. If I asked you what is the best way to measure growth, you might give a different answer than the person sitting next to you. In terms of businesses, there are a few main measurements of growth:
- The revenue
- The profit
- The team size
- The geographical scope
- The number of customers
These are some of the most obvious ones but there are plenty of other metrics – some of which are essentially subsections to those groups.
Paul Graham suggests that for startups, the most important parameter of growth is the customer growth rate. It’s crucial to notice the difference between customer growth rate and what Graham thinks is the parameter startups tend to focus on most: the rate of new customers.
He writes, “what matters is not the absolute number of new customers, but the ratios of new customers to existing ones. If you’re really getting a constant number of new customers every month, you’re in trouble, because that means your growth rate is decreasing.”
In order to understand your growth and the success of your scalability, you need to identify the parameters you want to use. As I explained, there unfortunately, isn’t a magic model for scaling. This means that the parameters to show your startup’s growth can also differ from those of another business. You, therefore, need to figure them out first. To help you out, this video by Mat Johnson of 500 Startups is a great place to start:
You then need to benchmark them and understand what you are looking for and what constitutes as good growth.
For example, in terms of the rate of new customers, a rate of 5-7% a week is a target you want to reach. If you are below this, especially if the rate is close to 1%, you are not growing and your scaling is most likely not working. As your startup develops and matures into a business, certain growth rates might also slightly change.
As Graham suggested in his post, startups experience heavy acceleration after the initial period of no growth, yet as it matures into a company, the growth will start slowing down – this is good to remember when scaling your business.
4 KEYS TO SUCCESS
So, what about the more concrete lessons to learn about growing your startup. There are four keys to success in terms of scaling and these are:
- A shared belief in the mission
- Clearly defined roles
- Proper goal alignment
- Consistent communication
Let’s examine these in more detail.
Shared belief in the mission
A startup needs a vision; a mission to move towards with each action – in fact, no business in the world can survive or grow without some kind of mission.
You shouldn’t start your startup or launch a business venture without first analyzing your mission and drafting a mission statement. The essence of a mission statement is outlined well in the below slide from a SlideShare presentation about company missions:
|Component of Mission Statement|
|A Mission Statement describes how your business is going to accomplish its vision.|
|The Mission Statement describes the ‘what’ of your business. It states why your organization is in business and what you are hoping to achieve.|
|A typical mission statement contains three components:|
Your mission matters because it guides everything the startup will do. Your mission will help define goals, find the right processes and systems to achieve these goals, and measure and analyse whether the startup is moving in the right direction.
Essentially, with the mission, you are able to implement scaling because it is already part of your startup’s vision and state of being. Indeed, a mission statement should always be scalable – you should revise, update and refine it as you grow and develop. The more scalable your mission statement is – in that it leaves room for growth – the higher your chances of success.
The key is to ensure you aren’t the only one aware of this mission. Everyone in the team – the current and future members – has to be aware of the mission and share belief in it. If people are aware of the mission and they fully understand it, they are more able to adjust their own work and attitude to support this mission.
You can’t expect people to know what your acceptable level of growth is, for instance, if you don’t tell them that. Therefore, the mission statement has to be at the core of everything the business does.
Clearly defined roles
Another real life lesson to learn from startups is to ensure you define roles clearly. This is crucial for scaling because you need to know the systems are running appropriately and that people are focused on performing the roles providing the most growth opportunities for the company.
This can be tricky for startups to master because you often have teams where people need to work almost as jacks of all trades, trying to perform tasks they are not the best equipped to do. Why? Lack of resources is generally the biggest driver for this – startups can kick off with just two people where one does the programming, the accounting, the cleaning and so on! Yet, for effective scaling, you need to ensure:
- Limited resources, i.e. manpower, is directed to areas of expertise and the areas where they are the most effective
- People do what is expected of them without confusion over what is the role of the person
It’s essential to ensure people are putting their energies into areas they are most effective in dealing with. Concisely, you don’t want Linda making coffee if she has never used a coffee machine.
This doesn’t mean that at the start people only have one role or that people aren’t going to have to do things out of their comfort zone – every startup will feature people doing things they aren’t used to doing.
Nonetheless, there are certain parts of each mission that have to be decided at all times, right at the start of the project. These are:
- Outlining the objectives together and identifying the tasks that require focus.
- Assigning people tasks and ensuring every has an area of responsibility and a clear schedule for finishing tasks.
- Creating an understanding of what decisions are made by individuals, which are made by a specific person and what to do when faced with decisions.
- Ensuring proper communication channels exist, especially in terms of feedback.
The above ensures scaling is easier because it guarantees people are aware of the accountability and responsibility they have. You don’t end up in a situation where multiple people focus on specific roles or a situation where no one is making the right decisions – everyone is aware of where the authority lies.
Proper goal alignment
You also need to guarantee the team has better goal alignment. If all the actions are driven by goals, they are more likely to lead to growth. This is because you’ve set scaling and growth at the heart of the business and you, therefore, follow actions, which support this mission statement.
Think about it in terms of getting things done. If I tell you to break eggs and to prepare cheese in order to make the best cheese omelet, your every action is guided by the goal – you know what you are working towards. On the other hand, if I tell you to just break eggs, you won’t know what you are doing.
This can lead to two things: you make a mistake in how you go about breaking the eggs and you avoid taking initiative. This means I have to oversee your actions more closely since you can’t do anything without my help. On the other hand, since you know I’m making an omelet, you could whisk the eggs ready for the next stage.
Goal alignment should be at the heart of everything you do – each member of the team, as well as the customers, needs to be aware of the objectives. You need to first focus on what it is you are trying to achieve and then consider each action in the light of this objective. How does the action help you move towards your goal?
Finally, if you want the scaling to be a success, communication within the team must work properly. It’s just a rather obvious solution to many things: talking, that is. If you are able to keep people informed what’s going on, it’s much easier to keep things running smoothly.
How to set up a good communication? The Muse has provided five ways teams could communicate and get better results:
- Avoiding open-ended questions – instead, provide clear instructions. Quite simply, if you want something done, don’t ask for it, but make a statement.
- Don’t suggest but direct – in addition, you shouldn’t suggest people do certain things but direct them towards the actions and behaviors you are looking to take place.
- Becoming a confident speaker – know the things you need to know and trust in your own abilities.
- Create deadlines – your communication should be instructive and this often requires deadlines. It’s easier to keep things under control when things have a schedule: instead of stating, “Will you e-mail the clients”, you should say, “Will you e-mail the clients by the end of the day”.
- Don’t be afraid of repetition – people forget, people hear things the wrong way and people misunderstand. Repeating a point shouldn’t be done in a malicious way and it shouldn’t be taken as judgment. Sometimes reminding people of their tasks is worth it because it can ensure things are understood.
Confusion is the worst enemy of growth. As mentioned above, things like the mission, the goals and the roles are essential for growth and the best way to clarify them is through proper use of language and communication.
If people are able to talk and to provide feedback, the startup has more chances of succeeding. It guarantees the work environment is supportive and people feel appreciated. If you’re not yet convinced about the power of communication, check out the video below:
THE BOTTOM LINE
When it comes to startups and growth, nailing down scaling is essential for survival. But the things that might work for one business might not work for another – therefore, you shouldn’t search for the magic bullet.
However, there are certain things to keep in mind. First, you need to stay on top of your mission and ensure scaling is part of everything your startup does – if you’re not actively looking for growth, it won’t automatically come to you. Communication is another key – roles and objectives must be clearly outlined and decided.
You need clarity in the mission and in the actions. If people know what they are working towards and what their responsibilities are, they are more able to achieve things with success.
Finally, remember that scaling takes resilience – things won’t always go according to plan, but you just need to find ways to overcome the issues.