The easiest way to kill your start up

Scaling it before you’ve nailed it could kill your startup

This mistake could cost you about 12 months and £250k depending on how much you’re spending. I’ve personally done this and I meet lots of startups who I believe are falling into this trap. The trap is a startup falsely believing that they have achieved product-market fit and then beginning a process of ‘scaling’ too early. This process can be excruciatingly painful for everybody involved in the company, both emotionally and financially. It could kill your startup.

I made this mistake. I believed we had achieved a good ‘fit’ and that it was time for us to scale out and actively sell our product. Unsurprisingly, it came after we had raised our first seed round. In hindsight, I naively took our seed round as validation of our product and strategy and continued to scale our team and sales process under the false-pretence of product-market-fit.

More features, more verticals and more selling. I believe there is a natural entrepreneurial urge to want to move fast(er) and conquer. I continue to meet many startups with the same urges today, they usually have made some progress in one vertical, niche or customer segment. Then they want to raise a big seed round and quickly move horizontally. 

My advice is usually always to go deeper into one vertical, to genuinely question whether they are ready to expand and whether they truly have product-market fit.

Nail it, then scale it. 

This book is next on my read list….. 

How scaling too soon can hurt a startup

Focus

When the focus moves to scaling, a lot of the time that means selling. Focus can typically move away from product and existing customers in particular, any lingering issues are usually papered over with fancier pitch decks.

Sales mode

Now the focus is on scaling and selling then sales mode can take over. In sales mode, “No” can be accepted because “you don’t win them all”. Product feedback can get lost in sales mode. Product problems can be misinterpreted as sales problems and the answer to a sales problem is usually more sales. 

Illusion

The post-seed round slump. Paul Smith highlighted his thoughts on this, in a great and absolutely not controversial post, here. The illusion of product-market fit can lead to a startup getting comfortable, they hire a few more people, they get a cool new office and ultimately they believe their own hype. They maybe start working more ‘normal’ hours and generally just lose the hunger a little bit. 

Feedback

If sales people are hired too early then obviously this costs money, but also it means that a founder now has to become a ‘CEO’. Typically, one of the founders now has to learn how to manage people, an invaluable skill of course, but if product-market fit hasn’t been achieved then it’s premature. It also means that the founder isn’t on the front line anymore, they’re not quite in the trenches as they try to lead. Most importantly this means that they are one step away from potentially crucial product feedback from customers/users.

Ignorance

With full throttle on the scaling and sales pedal, existing customers/users often get overlooked. With company mindset on new markets/verticals, the early adopters can easily get less love. Yet, as Paul Graham says — making a few users love you, is better than a lot ambivalent.

Or not

It could be a good move of course, going all out early could pay off and the product could fly. It could just be a home run, even if the product is a bit rough around the edges, the problem could be so big that scaling as fast as possible is actually ok. I am struggling to think of an example of this but I am sure there are hundreds. Snapchat?

However, if the startup has begun to scale out before product market fit is found it can almost always be lethal. There could be a lot of work to be undone down the line. Here’s a likely diagnosis of the symptoms of this deadly mistake.

1. The commercial team will get demoralised. They may even question their own ability and suffer a loss of confidence. 
2. The product team will get frustrated — people won’t be buying or using what they have spent precious man hours building. 
3. The founding team will spend a lot of time ‘managing’, and when things aren’t growing, crisis talks will ensue. These are emotional and time-consuming. Lay-offs may follow and difficult conversations with the board certainly will.
4. Overall, this is usually a 6–12 month mistake that could cost at least £100k or more.
5. Therefore the result is a serious dent in runway and morale. Plus, it will probably feel like ‘starting again’ for the founders.
6. The company will probably need a bridging round, so if investor relations have been overlooked during the premature scaling, then existing investors will be unwilling to back it again and it will be difficult to create a story to raise new money. 
7. A bridging round could be pulled off, but it might be at an unfavourable valuation. Or the startup dies. 

A more measured, methodical approach

Ambition and enthusiasm are great, but scaling out too early/fast can kill a startup and demoralise it’s team. A more measured approach, where the startup absolutely nails it’s product for existing customers/users in a specific niche may sound more conservative, but overall it can prove to be much more valuable.

Validation

The ‘nailing it’ approach allows the startup and founding team to gain increasing validation from users/customers. Basically, this means nobody wastes time or money building things/selling things that people do not want.

Frugal

This approach is probably cheaper for the startup too, there doesn’t need to be a sales team, maybe just a few more engineers. A sales team usually comes hand in hand with a slick office, lots of expenses and a few conferences. Equalling a depleted runway. A careful focus on product for one niche or customer segment doesn’t have to be expensive and can give an extended runway.

Good feels

Nailing it feels good. Who doesn’t love absolutely nailing something? If a team focus on building something that a segment of people love, then they should be feeling very satisfied with themselves, leaving morale high.

Stay hungry

Without the extravagant concentration on scaling, it’s back on the founders to do any sales or customer development themselves. They are out on the road when necessary and on the phones when needed. They take all feedback and criticism directly, hopefully meaning things get actioned on fast. Plus, a sentiment of humility is fostered within the team which is always a good thing.

When the time comes

In this ideal product-market fit world, the team has been anchored around building a valuable product for a well-defined niche and the company has become dominant in that vertical. Now the time comes to scale out, the team are well positioned to do so, they should truly know their product inside-out and importantly the founders will know how to sell it.

Monopolise

A well covered strategy for startups is always to monopolise one niche/market. Think, Facebook — Students, Uber — Luxury cars and many many more examples.

It may perhaps feel odd to think that a slower, more measured and methodical approach to a startup is preferred to the ‘all guns blazing’ approach. 

It’s not about being sensible, conservative or even slow. It’s about being smart, focused and productive with limited time and resource.

Onwards

�� BIGGEST ANGEL SYNDICATE IN EUROPE ��
�� @jdroutledge1
�� angel.co/james-routledge
�� jdroutledge.com