Startups have a tendency to fail. The percentage of startups that fail varies, depending on who’s doing the study and what they define as failing, but the sad fact is the vast majority of hopeful new entrepreneurs who venture into business will eventually close their doors for good. Sometimes it happens before the business even materializes, and sometimes it happens a few months in, before any momentum really starts to build. But a shocking number of startups fail after that initial warm-up period, when it comes time to start scaling.
The growth period is a critical time for any startup’s evolution, and that’s why it makes businesses especially vulnerable to failure. These seven reasons are some of the most common causes of this mid-growth destruction:
1. Targeting Inappropriate demographics.
When most new companies begin expanding, they start looking at new demographics to target. For example, a new B2B company could start with a niche industry focus and start expanding to other related areas. A B2C company might launch a new product to serve as a companion piece to their flagship product that targets a new gender, age range or socioeconomic status.
Unfortunately, many of these decisions are made hastily made. It is assumed that the new demographic will be interested in the same way the original was. Instead, it is vital that these demographic shift decisions be based on reliable, unbiased market research.
2. Expanding too quickly.
While expanding quickly is the dream of entrepreneurs around the country, there is such a thing as expanding too quickly. Purchasing more resources, adding new people and incorporating new products and services all means that you have more responsibilities and more moving parts to manage.
If you start adding parts before you have the capacity to oversee those parts, they are destined to fail. Even if there’s a bigger customer base available and you have the potential to serve them, if you spread yourself too thin, you’ll stumble in the attempt and you’ll never be able to recover.
3. Expanding too slowly.
It’s also possible that you expand too slowly. At some point, unless you’ve found a perfect niche to settle in that allows you to remain profitable at the same size, you’ll need to grow your operations. If you start acquiring new resources and developing new products at a snail’s pace, your competition will inevitably outpace you. What’s worse is you might spend too much time and money on development while still maintaining only your initial lines of revenue. In effect, you’ll be spending small excesses, but you won’t be building your revenue fast enough to make the effort worth it.
4. Juggling too much at once.
There are many types of expansion possible for young startups, and it’s certainly possible -- perhaps advisable -- to choose only one area of expansion and focus on that as an initial first step. Many business fail after trying to expand in multiple ways, all at once.
For example, it’s possible to expand in terms of your products, your services, your demographics, your geographic coverage or you could acquire or merge with another company. If you try to do many of these things all at once, you could jeopardize your focus and underperform in every area.
5. Losing focus on the customer.
Your customers are the reason you exist. Without them, your business is nothing. Still, many companies start losing focus on their customers when they move to expand. Rather than focusing on what their customers want, these entrepreneurs focus on what they want for their own business. They may envision a new operations headquarters and a bigger team of employees, but if those additions don’t make any difference to the customer, they’re not worth pursuing. Expansion is only effective if it yields a positive benefit for your audience.
6. Reckless investing.
Sometimes, a business will start expanding after a large round of funding or an unexpected influx of revenue. In the excitement of the process, it will invest recklessly, without caution or supporting research.
A company may jump head-first into a new marketing strategy that hasn’t been fully thought out, or it may hire a dozen new employees as quickly as possible without taking the time to vet those candidates. Taking on new costs before you understand the risks involved can quickly burn that extra cash and leave your business hurting.
7. Losing the culture.
“Startup culture” is a buzzword, but for good reason. Many businesses survive or fail based on the quality of the culture they live and promote. All too often, when a company moves to expand, it loses that culture to things like geographic distance, bureaucracy or even a simple shift in values. When that culture is lost, it’s almost impossible to rebuild it. Many of those companies either fail or lose the original teams that helped to build them from the ground level.
Knowing these common reasons for failure during the scaling period can help you better equip yourself for the inevitable challenges. Expansion and growth are exciting opportunities for a new startup, but don’t let your excitement get in the way of practical, objective decision making. When expanding your business, you need to strike a careful balance between haste and hesitation, risk and caution. Only through balance will you be able to scale successfully and continue building the business of your dreams.