Five reasons why startups do not scale up

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I have been a start up guy for a long time, started my journalism career with The Hindu Business Line when it had just started and was not established, particularly in Mumbai. It did not even have an edition in the city. Though it came from the house of Hindu it did not have an identity, a very crucial thing when you are cold calling some hot shot CEO for an interview. Seen hundreds of start ups while covering them for a pink newspaper. Started a newspaper in the heartland of India couple of years back. Working for one now. Here are a few lessons I have learnt about why 90 per cent of the start ups do not scale up and reach their true potential.

Reason 1: Most start up fail because of the founders, yes it is true its not because the product is bad, or anything else. Founders fail their start ups. And they do so because they are unable to change or move with the market, trend, or competition. They are not able to move beyond their own initial idea. As any successful VC will tell you that they look for winning teams in a start ups . A team that can is smart, intelligent and willing to swim ahead of the tide. Willing to change adapt and move before the market changes. Which is why the same idea or product is still funded by several VCs, each one is funding the founding team not the idea. If the founding team is not able to move fast, change faster, they are dead before they start.

Reason 2. Founders do not realize that they are out of depth as the demands of company grows. Used to micro-managing in the initial stage they just cannot give up control or even trust somebody else to do the job. Whenever they take back control from an employee they reduce his or her importance. They also break the rules of delegation and development. And this is where the penny falls they take away the control and effectively they are one employee less. If they keep doing it, they not have empowered employees but employees following orders

Reason 3. Most start ups are unable to attract employees better than the founders or different from the founders. They always hire downwards not upwards till such time a VC fund or Private equity funds starts hiring at the leadership level. When the founder hires downwards he or she creates a spiral of micro management and employees are continuously waiting for approval or clearances. This destroys all initiatives and prevents the start up from being nimble which is the biggest strength it has against an established competition. Matter of fact the success of any founder or any leader has always been established by the number of brilliant people they are able to attract. Founders forget this simple leadership adage, especially when they come from conglomerates where they hired mediocre to protect their positions.

Reason 4: The controls that worked at seed stage do not work beyond. As the funding comes in and demands from investors increases controls need to move away from the founders to systems. Founders cannot continue signing every cheque or clearing every due. Financial controls need to be managed by professionals and they should be capable of scaling up. Remember every employee hired is working for a salary, if his reimbursement is delayed by a day he gets concerned. He gets concerned about whether there is enough funding ? If a small reimbursement cannot be cleared will his salary come on time next month ? This is the beginning of disenchantment and best employees will start looking out very fast.

Reason 5 : Employees who join start ups are risk takers and potential entrepreneurs themselves. If they were not risk takers they would have not joined a start up. Respect this spirit , nurture it , harness it by enlarging their roles so that they can breathe this into the start up. Don’t stifle it so that they leave. If they want to do something independently give them time to pursue it, even fund it. Employees who have the entrepreneurship spirit are rare, they are the ones which will give the big breakthroughs. Don’t ever let them go as they are irreplaceable. Give them better incentives to make them stay, give them profit share if need be. Most founders fail at sharing rewards, they are stingy with sharing stakes in the company. They negotiate so hard on salaries and stakes as if it is something limited they are giving away. It is not limited as value of every stake is notional till such time it is realized, and paradoxically it grows by giving it to the right employee. So giving it away is enhancing its value and it creates a culture of co-ownership that is so crucial for any start up. Allow the employee to rise up if he has that rare gene to bring deals to the table. Most founders are so insecure that they never want to discuss rewards or performance if the employee has achieved the impossible. They see it as his job, yes it is his job. But what if he decided that instead of doing this job he will start his own business. Whenever a start up loses an employee to another start up, or when a rockstar employee leaves to start his own venture, something has gone wrong. If the founders have not been able to retain a rock star than they will never be able to attract one too.


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