Reasons why startups fail when scaling

According to some estimates, around 75% of venture-backed companies fail to provide any return to investors. A staggering 30-40% of startups liquidate all assets before folding completely. For many teams, this high-growth period poses an extreme risk even as scaling also offers exciting opportunities.

Before you start to scale, it’s helpful to look at common reasons why startups fail—and how to circumvent these problems.

1- Founders and investors have incongruent visions of what the company should look like.

Many founders are so eager at the prospect of VC investment that they don’t evaluate investor fit with nearly enough rigor. But partnering with investors who aren’t fully aligned with the vision can ultimately be detrimental to a company. You will need to seek input and approval from your investors during the scaling process. If they have a fundamentally different vision for your company, scaling successfully is virtually impossible.

To avoid investor/founder misalignment, evaluate investors thoroughly before reaching an agreement. It’s usually helpful if investors have experience in your industry and can clearly define what they can offer you. Sound investing isn’t just about money. Make sure that investors understand your overall strategy for scaling. They may have useful suggestions, but it’s probably not helpful to partner with investors who want to fundamentally change the entire game plan.

2- The company doesn’t consider the customers’ needs when building the product.

Almost 42% of failed startups failed because there was no market need for the product. This problem is likely to become an issue when the founders become too focused on building a cool product without considering how customers will actually use it. To avoid this pitfall, founders need to stay customer-focused from Day 1.

Before investing in building a complex product, talk to your potential customers. Find out what they really need, and make sure your product addresses the need in a way that is clearly demonstrable. If your product is something that’s just nice to have, they’re unlikely to invest money in it.

3- Startups try to scale up too early.

Premature scaling is a common problem, with some analysts claiming that it accounts for 70% of startup failures. Companies scale too quickly when they bring on new people, spend money, and try to acquire more customers before they’ve really nailed down the product and business model.

Before scaling, you first need to know your product, customer, and basic sales process. You should have reliable data about customer acquisition costs, lifetime customer value, and how to acquire customers effectively. Ideally, you will have an established record of acquiring and retaining customers. This proves that there’s a market for your existing product before pouring more money into it.

If you’re still figuring out who your customers are, how to reach them, and what they really need from you, you’re probably not ready to scale just yet. That’s totally okay. Focus on developing the core business before trying to acquire new customers that you can’t effectively serve.

4- The founders fail to get the right sales team in place early on.

Having the right team in place is essential for startup success, especially when it comes to sales. The first members of the sales team will be the face of your company to prospective customers. Even for lower-level sales roles, you need to make sure that your salespeople represent your brand and can effectively communicate your core value proposition to customers.

Every hire should be evaluated in terms of fit, not simply their resume. Consider communication style, attitude, work ethic, and coachability. Industry experience can also be helpful. It all comes down to this question: Can this hire learn and execute our sales process?

5- The company can’t pivot when appropriate—or it tries to pivot without a good plan and rationale.

Pivoting can save a startup. If the business model isn’t working as planned, it’s worth considering whether to make major tweaks.

At the same time, pivoting just for the sake of pivoting can also be fatal. A successful pivot requires an accurate understanding of why the original business plan isn’t working and an informed hypothesis about how to address the problem.

Before pivoting, make sure that everyone understands the rationale behind the pivot. Create a blueprint for the pivot, and constantly evaluate how well the pivoting is working. Use empirical data whenever possible.

6- The company lacks expertise in marketing.

“If you build it, they will come” doesn’t work in business. Effective customer acquisition requires marketing expertise, so you should establish a marketing team early on. Even if you feel confident that you can attract organic publicity and attention, experienced marketers are crucial for helping you to capitalize on early success.

Your first marketing hires should ideally have experience in your industry. That will help them identify the best channels before you pour a ton of capital into ineffective marketing strategies. Of course, every business is a little different so you’ll still need to monitor customer acquisition costs carefully.

7- Another company is able to out-compete the startup.

Around 19% of startups fail because another company outpaced them in the space. One way to prevent the problem is to be first to market. However, this opens you up to the risks of premature scaling. Competing on price is also an option, but usually not an effective one for generating long-term profits.

A more effective method to address this issue is to create a product that provides superior user experience, greater functionality, or both. Over time, the superior product is likely to win out in the market if the right sales team is in place.

8- The company starts chasing new opportunities before gaining command of the existing business.

Opportunities to expand into a new region or vertical can be tantalizing, but they may also be a distraction from what you really need to be doing. It’s better for your company in the long run if you can establish a strong foothold in your core business before expanding in a new direction.  Diverting resources from your main mission too soon is dangerous. First, you want to establish a core customer base.

Source: Closer IQ website