Scaling bloopers

What can go wrong during scaling? Anything. As in any stage. With this pretty unhelpful opening statement, am I going to go all doom and gloom on you? No. Instead, let’s look at some of the most common mistakes and make them our own by repeating them, as most self-respecting startup founders do!

Oh-oh-oops-a-daisy in unit economics

I have talked about unit economics in The inevitable mess of scaling. So, I won’t repeat that. I’ll just add that there are many examples of companies that never got there. WeWork is (was?) one of the most famous, and there are many more. But there are some who got it right. A lot of internet startups have been exceptionally good at labouring to understand unit economics of an average user, cohorts, individual users, products, etc. It’s better to be like them, scaling something profitable rather than bleeding cash (dah!...). Or if you can’t reach good unit economics at the moment, aim to get there later. Tesla famously set a target of producing 5000 cars a week (a real stretch target when the production line could only do several times less) because this was the number with which the company was financially viable based on economics of one car. And they got there, good for them.

There is good scaling and bad scaling

Then, there is a bunch of mistakes that have to do with how companies scale. As you could infer from other posts for me the ideal scaling looks like this

The bars are the use cases. Vertical axis is the quantum they reach (revenue, units, profit, whatever you prefer). Horizontal axis is time (as in “one use case after another”), although it’s not a very strict axis and can be viewed as “we simply show different use cases next to each other at a point in time”. Dashed horizontal line signifies “reached scale” moment, after which you have a clear algorithm to grow a use case further.

So, the graph above shows that one use case has reached good state and is growing predictably, the second one is coming up behind it and one more is in earlier stages. That’s “one at a time” strategy working how it should.

Now let’s look at some other scenarios.

Too much too early or too little too late

This picture shows that several use cases are selling, but none of them reached critical mass. It´s a very common picture in earlier stage startups – it’s a natural continuation of “sell anything” from the earlier stages of a company.

In my experience it usually means one of 3 things:

• (harder problem) There is no product-market fit. In other words, sales are basically consultative sales with few enthusiasts buying, but the real customer demographic with real need has not been identified. So, there is either no real understanding of customers, or no real need, or the product doesn’t solve the real need – in any case the market is not validating any of the use cases strongly enough to focus on one. When I see this scenario in companies that have been selling for several years, it’s inevitably the problem with a flaky need for the product. Usually, there is some market pull, or they wouldn’t have survived for several years - but it’s not strong, so the management tries the second product or use case, then the third, and so on. Very often there is a “great new direction/channel/partner/story” appearing on a regular basis (coinciding with the increasing silence on the previous one). The company usually misses sales targets, board and investors are nervous, maybe some management changes have been made, … you get the picture. The only solution I know is to face where you are and go back a step to verify PMF. Not a cheerful moment for a company and not an easy one to swallow, especially after many years of selling and getting to some reasonable level of revenue.
• (medium hard problem) There seems to be the leading use case, but it’s too early to put the pedal to the floor. But everyone is so impatient to believe they can scale, that they start spending like in scaling mode. Yet, according to StartupGenome 74% of startups failed because of premature scaling (with about 3200 startups surveyed). The answer – really choose one use case, test it and then go if and when (!) it allows you to. If it doesn’t – back to PMF or cut down the burn or both. In some cases, things get better as time passes, especially in very new markets – buyers just need time to appreciate the new category and understand or “grow” their need. If that’s your case – you need to be able to stick it out for long enough to see that need materialising (while actively creating that need). If that’s not your case, you probably have to try to build the company slower and get to cash flow break even. Hence the need for lower cash burn in both case
• (easier problem) There are several use cases that work, but the company has not made a decision which use case to focus on and is wobbling in several areas in a suboptimal way. This may be out of fear, desire to hedge bets, excessive creativity (new ideas come and go and nothing sticks), or due to delusion of grandeur. The result is chasing too many things at the same time. In rare cases this could succeed and several use cases would achieve critical scale at the same time, but I would strongly argue for focusing on one or at least very few narrow directions and getting them across the line first. After that, doing the second use case would be much much easier – confidence, cashflow, processes from the first one are all things that not only help a company operate, they attract investors, so more and cheaper funding could become available.

One trick pony

This scenario could be a very successful company. The first use case (or several) really grew and the company may have reached a really good size. Then it struggles to get the next use cases going. In a way, it’s a quality problem to have, because there is a business here – in effect the company is trying to diversify from being a one-trick pony.

The obvious first question – do you really need to diversify or should you stick to what works. Both yes and no could be the right answer here.

• Yes – why not focus on something that works? If a dollar invested in existing use case brings X dollars back, while a dollar invested in a new case returns X/10 dollars because it’s much harder to sell – why not go for bigger scale with what you have?
• No – others would be trying to catch up, since you’ve proven that this use case is real and the market is prepared to pay for it. So, competition will go after the same use case, and hence customer targets. Consecutively, there is a likelihood of slowing or more expensive sales, commoditisation, loss of market share. Generally, you may want to diversify into other products/use cases for multiple reasons - to keep market position, to reduce risk, to upsell/cross-sell for bigger size, to achieve higher exit, and so on and so forth.

Assuming that the level of revenue is decent, this company can already be sold. It can demonstrate to the buyer its ability to scale and then talk up the synergies with buyer’s other products, channel and all of that.

On the other side of this process, big companies often diversify and expand through acquisitions - so the diversification question is often resolved on the level of a company rather than on a level of product lineup within a company. That includes both corporates and lucky startups that got big. If a lucky startup like this wants to build a really big company (say go public), being a one-trick pony (i.e. having a profile like this) limits its upside, potential to convince investors, etc. Here it’s easy to think of examples of known companies that have risen to fame with one main product and then put considerable effort in adding other areas – e.g. Dropbox (which sort of managed) or GoPro (which as far as I know kind of didn’t).

The answer here is going back to the “push-pull” concept and setting up structures that identify new use cases and test them – all with the aim of finding the next one to scale. Why are they not grabbing the market’s attention? Is it product? Is it price? Is it the ecosystem that objects to it? Or is it that you haven´t properly tested? There could be myriads of reasons. Essentially, it’s back to the product-market-fit and then going to the market drawing boards – but for the second use case. Or it’s to the acquisition trail to buy your next use case.

..... to be continued

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