I’ve recently been re-reading Jessica Livingston’s ‘Founders At Work – Stories of Startups’ Early Days’. If you haven’t already read it, then go get a copy. One of the interviews (there are 32 in total) is with Joe Kraus, who co-founded the search engine Excite in 1993 with 5 Stanford classmates. (As an aside, the Excite story from garage start-up to the dizzy heights of a $6.7 billion merger with @Home and back down to bankruptcy is a sad but telling story of the dotcom era – well worth checking it out on the web.) At the end of the interview, Joe points out that one of the important lessons he learnt from the Excite years is that you really need to ‘get the legs of the business underneath it before you run terribly fast’. And that got me thinking about the Startup Genome Project.
You see the stated goal of the Startup Genome Project is to increase the success rate of startups by turning entrepreneurship into a science. So it’s really about looking at the patterns of success and failure and understanding those patterns in terms of entrepreneurship. The original Startup Genome Report was released in May this year (get a copy of it here), but only last month the guys behind the project released an extra report on premature scaling (get a copy of it here), one of the major reasons high growth tech companies fail. It talks about the need to have the 5 core dimensions of a startup – customers, product, team, business model and financials – in balance and found that prematurely scaling along some dimension and progressing it out of sync with the rest of the company was evident among 70% of the startups they have gathered data on (they have data on more than 3,200 startups).
The key findings of the Premature Scaling Report
The team essentially came up with 12 findings from the research and analysis of all the data gathered. I won’t list them all (because that would just ruin all the fun of you actually reading the report) but here are just five of the findings for you to think about:
Almost ¾ of high growth internet startups fail due to premature scaling;
Before scaling, funded premature scaling startups are on average valued twice as much as successful startups and raise about three times as much money;
The team size of startups that scale prematurely is 3 times bigger than the successful startups at the same stage. However startups that scale properly end up having a team size that is 38% bigger at the initial scale stage than prematurely scaled startups, and almost surely continue to grow. Startups that scale properly take 76% longer to scale to their team size than startups that scale prematurely;
93% of startups that scale prematurely never break the $100k revenue per month threshold;
The following attributes have no influence on whether a company is more likely to scale prematurely: market size, product release cycles, education levels, gender, time that cofounders knew each other, entrepreneurial experience, age, number of products, type of tools to track metrics and location.
The report is interspersed with some great stories of premature scaling from serial entrepreneurs and investors and advice on how to possibly avoid it.
Anyway, there’s plenty in this extra report which is worth spending some time reading through. It will definitely make you stop and think and re-assess where you are in terms of customers, product and the rest of the core dimensions of a startup.
The below is an infographic of ‘What is Premature Scaling?’
Startup Genome Compass
Some of you might like to try the Startup Genome Compass and I would encourage you to do so. It uses company data to generate a comprehensive report on your company, which allows you to benchmark your company against over 3,200 internet startups and provides analysis that you can use to ascertain the type of startup you are and the stage you’re at.