5 Dangers of Growing Your Startup Too Fast
On a recent earnings call, Uber CEO Dara Khosrowshahi proclaimed that “the era of growth at all costs is over.”
Throughout the 2010s, we saw many unicorn startups grow and expand at alarming rates. Companies like Bird and Desktop Metal reached $1 billion valuations in under two years from the time of founding.
For many investors, growth has taken priority over profitability. However, when it comes to startups, hyper-growth can be as threatening as stagnation.
It’s exciting when you’re ready to deploy or scale your product to an enthusiastic target market. But, doing so poorly can set your business back tremendously. For some companies, expanding too quickly becomes their ultimate doom. They buckle under the weight of their success.
It’s important to channel your ambition appropriately so that you have the best possible chance of succeeding over the long term.
Here are five challenges that can surface from growing too quickly:
1. Poor Customer Service
Your customers are the lifeblood of your startup. Building a good reputation right off the bat can help you maintain healthy revenue streams and enable you to invest back in your operations.
Early on, you take care of each customer like she is the most important person in the world. Eventually, this level of customer service is impossible to uphold. Your customers become tasks in a queue that you have to address to keep the cash flowing. The positive relationship-building that used to characterize your brand evaporates in a matter of months.
2. Inefficient Operations
Needing to bring in new talent is a good sign for any young scale-up. It’s an indication that you’re doing something right. However, if you aren’t prepared for your organization to grow more complex, efficient operations can morph into productivity drags.
All of a sudden, the way you used to run meetings or communicate in the office no longer works. Information takes longer to travel from person A to person B. The flexibility you enjoyed early on won’t work for making sure that everyone has the resources and insights they need to do their jobs effectively.
3. B-level Talent Acquisition
When sales are skyrocketing, your small team will bear the weight of a much bigger business. People will work at burnout levels, sacrificing quality for quantity.
When ramping up, it’s easy to lower your recruiting standards. You need more bodies in the office to help with the massive amount of work on your startup’s plate. The intensive screening process you once had flies out the window to accelerate the hiring process. Before you know it, your A-level leaders are now managing B-level players.
It might make sense to outsource recruiting until you are ready to build a high-powered internal hiring function.
4. Inaccurate Reporting
When you’re an agile team of 5-10, every person typically has a sense of what's happening in the business, especially before products or services launch. Team members have visibility into other lanes and can easily gather information they need. The startup overall is much more straightforward and easy to manage.
During phases of fast growth, it’s easy to fall behind on reporting. If the market demands more than you projected, sales can escalate to the point where your finance team loses sight of key, simple metrics, such as revenues, expenses, and operating cash flow.
When this happens, bad months could trigger the end of your business or the need for an emergency cash injection. With incorrect information, you might make a poor investment decision or overlook a broken process that you could mitigate otherwise.
5. Waning Long-term Vision
In phases of hyper-growth, you are all hands on deck. Everyone is cranking through lists of never-ending tasks. All heads are down seven days a week.
When there’s so much to do, this is little opportunity to breathe. The vision-casting and long-term planning you did each month are easy to replace with the fire drills that pop up more often. When it’s most important to track your progress against your goals, you stop doing it entirely to keep the business running.
Walking the Tightrope
There’s no magic formula for how to balance growth with the integrity of your startup. Every company is different. You have to learn how to walk the tightrope based on your unique team and industry.
Obviously, you need to grow. You want to succeed, and your investors want their returns. But, you need to be conscious of how growth affects your organization. Expanding too rapidly can hurt your operations in many ways and add unnecessary complexity on top of everything else you have to do.
And, as entrepreneurs, we know that’s a lot.
How to get your startup funded
Two years ago, startups raised more VC funding than ever before. Early-stage companies pulled in a whopping $130 billion through almost 9,000 deals.
However, many would be surprised to learn that less than 1% of startups receive any funding from VCs at all. In some cases, founders don’t want to give up control. For others, the market may not be attractive enough to generate sufficient returns.
Before deciding to pursue VC funding, your team must be on the same page. Going after investor capital is a major endeavor.
Once you have clarity, it’s time to hunker down and prove you’re worth the financial gamble. Below are four key ways you can set your business up for fundraising success.
1. Build Relationships -- Lots of Them
Startup financing isn’t typically a one-and-done deal. Founders may raise funding on and off for years while their businesses get off the ground.
Therefore, it’s crucial to build relationships with many investors in numerous settings. Ask respected peers for recommendations on who you should meet. See if VCs are open to you providing updates on your startup’s success.
Perhaps more importantly, don’t burn any bridges. Always treat others in the startup community with respect, as you never know who will help...or hurt your funding efforts in the future.
Even if you write an investor off in your pre-qualification assessment, don’t speak badly about him, as he simply may not be the right person for your particular niche.
2. Get Your Story Straight
One of the most significant factors in a VCs decision around whether or not to invest is the strength of the founding team.
VCs want to know that their money is in good hands. Business models, products, and services change. Startups often have to pivot or tweak their initial ideas to align with market demand. It’s the founding team that gets the company through these transition periods.
Highlight why your background is especially relevant to your new endeavor. Prove that you are the absolute best person or group of people to carry out the vision with real-life examples of the ways you have succeeded in the past.
3. Provide Sound Financial Projections -- But Don’t Get Too Caught Up In Numbers
Obviously, VCs invest in early-stage companies to make money. They want to know what their potential returns are if they are going to place a bet on an unproven idea.
The challenging reality is that it is hard for startups to estimate their financial success. There are so many unknowns. There is also the added pressure of needing to prove you are worth the risk, which can cause you to be overly optimistic.
Yes, you need to prove that there is a substantial growth opportunity and market share available to win. However, don’t get too attached to data points or metrics that describe nascent markets.
Instead, find ways to emphasize the traction you already have. Use data that indicates what you are already doing solves a real problem for real people right now.
4. Practice and Refine Your Pitch Continually
Finally, you have to practice and refine your investor pitch continually. It takes time for you to master how you tell your story, display your passion, and convince hyper-intelligent individuals why your business will be one of the 10% of startups that is ultimately successful.
Practice by yourself, in front of peers, and in higher-stakes settings over and over. The more experience you have, the more confident you will be walking into a meeting with THE person who you want to impress.
As soon as you leave a pitch meeting, positive or negative, go back and evaluate how you performed. The moments immediately following a presentation are when you have a clear perspective on what worked and what didn’t.
Additionally, don’t get discouraged if you aren’t awarded VC money. You must continue to push forward and look for ways to improve. Get feedback from those who turned you down and address their concerns. The way you incorporate past pitch experiences will accelerate (or decelerate) your progress on the startup capital front.
There is no magic bullet out there for VC funding. But, by having a great idea, strong team, conviction, and a broad network, you will increase your chances of hitting a home run.
Ray Gibson is founder and CEO of Funded.club. He brings 20 years of experience in recruiting across Europe, North America and Asia and 5 years running his own startups.