Once upon a time there was a brilliant startup founder who hit upon a great idea, built a product, immediately hit exponential growth and went on to become a billionaire icon.
Who was the lucky founder? Facebook’s Zuckerberg? Groupon’s Mason? AirBnB’s Blecharczyk?
The answer is none of the above. This account is a fairy tale, imbued with as much fantasy as a Grimm’s bedtime story, yet arguably a tale that is at least partially responsible for the vast majority of startup failures—via unrealistic expectations.
We can be forgiven for crafting compelling narratives: As humans, our neurobiology demands it. Tens of thousands of years of evolution developed stories into the vehicles by which our brains derive meaning from the world. If the cavemen had shared data around the campfire, things might have turned out differently.
The problem happens when all the soft nuances are shaved off the story and it hardens into myth. Fine distinctions get warped into broad generalizations and real meaning is distilled to a simplified headline. Currently, myths such as these encourage founders to attempt growth before their business is ready, leading as many as 74% of high growth internet startups to fail due to premature scaling.
This number is so large it can initially be challenging to believe, yet one ultimately finds this incredibly common mistake goes a long way to explaining the dismal 90% failure rate of startups. The lower one’s burn rate, the longer one can survive, using every opportunity to pivot as necessary to achieve a fit between product and market. The higher burn rates of startups pushing for scale take away the safety net.
Of course, there is nothing wrong with growth. The primary distinction between a small business and a startup is the expectation of high growth—or as Paul Graham put it in one of his essays: Startup=Growth—but data shows that attempts to scale must be appropriately timed. Serial entrepreneur Jim Pitkow defined the concept very succinctly: “Premature scaling is growth in anticipation of demand instead of demand-driven growth.”
So the billion dollar question—literally—is when is a startup ready to scale? Until recently, founders have had no objective way to know.
In place of relevant benchmarks, founders and investors often encounter myths presented as fact: 22% week-on-week growth for Facebook, 20% for Groupon and 17% for AirBnB. What’s extraordinarily difficult to find are the nuances behind those stories. AirBnB founders spent years getting themselves into credit card debt (then selling political-themed cereal to get themselves out) before their storied growth curve began. Groupon was a struggling activism engine that tested coupons as a skunkworks project to keep the lights on before they pivoted to real growth. Facebook was a side project for Zuckerberg who initially accepted ad revenue to offset the $85 per month server space he rented.
Why does myth and uncertainty lead to failure? Founders are consistently under intense pressure to scale, but have few tools beyond their own instincts to decide if they’re ready. Investors want to see a growth curve. The head of sales wants to hire a team of five. Marketing needs more budget to beat AdWords competitors. Without benchmarks to provide an objective perspective, it’s no wonder so many startups scale too fast. But what if founders weren’t blind to their performance relative to peers? What if they could see an abnormally low retention rate that identified a product issue needing to be solved before the big ad campaign began? Or a lower than average close rate pointing to a valid need for more sales staff? Or that peers relying more heavily on PR achieved better results than pay-per-click anyway?
Startups that wait for the right time to scale have much higher rates of both survival and success, whereas those likely to fail overspend on customer acquisition, hiring, product development and several other key metrics before they’re ready.
Startup failure rates aren’t just a problem for entrepreneurs or Silicon Valley. The Kauffman Foundation Study showed that net job growth in the US was driven entirely by technology startups. Thus, it is not a stretch to say that if we could improve the success rate of startups by giving founders context about when to scale, the economic future of the country could be significantly improved. Even the globe.As read on the Compass blog.