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on January 17, 2022 (last modified on June 22, 2022) • 24 minute read
Did you know that many startups fail because they grow too quickly?
Whether it is hiring too slowly to keep up with growth, making poor financial decisions, high churn rates, or underinvesting in infrastructure, these are just a few of the reasons why once-promising startups go under.In this post, we’re taking a closer look at the signs a company is scaling too quickly and how to avoid the mistakes that could sink your startup.
The two telltale signs that your company is scaling too quickly are that you are no longer hitting your success benchmarks and that your outflow and profit margins are exceeding your normal ratio.
This is according to 73 respondents that we surveyed, all startups themselves or agencies/consultants working for startups.
As we alluded to above, rapid growth is a champagne problem that most startup teams could only dream about.When you strike gold and are in the middle of a period of rapid growth, it is easy to get wrapped up in it and that’s where mistakes happen, like becoming unfocused as a company, failing to set proper goals, hiring too quickly, or getting sloppy with your startup’s finances.
Let’s take a closer look at some of these mistakes as well as solutions to recognize and overcome them in time. We have divided the answers gathered into 2 groups – advice from startups and advice from agencies or consultants working for startups.
Here are some of the most common mistakes that startup teams make (and how to avoid them).
The biggest mistake that startups make is scaling without having the proper growth strategy and allotted resources in place.
“The biggest mistake a startup can make is not properly managing the growth,” explains Daniel Javor of Step By Step Business. “All parts of the business have to grow, not just sales. If growth is not managed properly, you can be left unable to fulfill orders or not able to service customers. The key is to plan for a rapid growth phase – your original plan should have a low forecast, an expected forecast, and a high/rapid forecast with plans to manage each.”
Zach Reece of Colony Roofers adds, “Many high-growth startups forget to scale their logistics and operations when they experience growth. Failure to do that results in bottlenecks when customers place orders. For example, the website crashes because they only purchased enough bandwidth for a small volume of traffic, orders are delayed because they didn’t have enough staff to process them, there are inventory shortages because the startup poorly anticipated demand, and so on.
It can be prevented by scaling your operations and logistics with the growth in demand. Increase inventory, make sure your website can handle additional orders, and forecast the amount of materials and inventory needed to meet demand.”
While this is often a result of failing to secure enough resources, this issue can also emerge when you try to go after too many opportunities at once.
“The most common mistake startups make under rapid growth is taking on more opportunities with no definite plan or team in place to execute,” says Linda Nguyen of SOUPPLY. “Whether it’s expanding into new markets, launching new products, or new collaborations, many companies get excited about the idea without discussing with their team how the opportunity may disrupt current business operations or whether it is aligned with their business growth goals.”
If you find yourself understaffed, you might be tempted to cut corners and hire faster than you normally would. This can lead to a ton of problems.
“The single worst mistake you can make when your startup is experiencing rapid growth is hiring too quickly and bloating your expenses,” says Brian Clark of United Medical Education. “I’ve seen this time and time again where new companies take on new bodies to fill positions and distribute workloads without first efficiently outlining employee tasks. You should always know how these employees’ efforts will eventually move the needle on your bottom line, and hopefully be able to accurately predict a timeline in which it does.”
Servers crashing, an influx of customer support tickets that can take days (if not weeks) to answer, and messages from your team getting lost in translation are all indicators that you aren’t investing enough in your infrastructure.
“The single worst mistake is not investing in scalable IT and communication infrastructure,” says Bradley Katz of Axon Optics. “It’s easy to communicate with a few people when you’re a small startup, but when you’re rapidly growing and hiring, it’s a lot harder to maintain fast and accurate communication and it can’t get taken for granted that key points will not get lost. Startups need to also consider the increased IT and communication needs that come with scaling alongside the typical capacity requirements that come with scaling.
Invest in scalable IT and communication infrastructure, for example in cloud technology that you can scale up and down easily, and potentially in online communication tools that can rapidly transmit information quickly to everyone in the company.”
This might sound strange, since strong marketing can be a precursor for rapid growth. Far too often, startup teams get a lucky break. They think they can stop marketing (or do a lot less) and the growth will just continue.
“In my opinion, the worst mistake a startup can commit during rapid growth is not giving importance to marketing,” says Anton Radchenko of AirAdvisor.com. “Since the business grows fast, startup owners think there is no need to market their product anymore.
They rely on customers to spread their brand through word of mouth, which is not 100% guaranteed. Not every customer will be delighted with a company’s products or services, which will make them recommend it immediately.
As a result, only the people who acquired the products or services will know about the brand, resulting in stagnancy in the long run. Despite the company snowballing, owners should always keep in mind the importance of having effective marketing plans and goals to ensure that the business will continue to grow in the future. Customers are the key to a brand’s success, and marketing is the way for them to know your brand more.”Take StuDocu as an example. Apart from their marketing and growth strategies, they have used their userbase to continuously solidify the platform and acquire new users.
While many startups underinvest in marketing, others invest in the wrong type of marketing. Let’s call it vanity marketing, where they are chasing TechCrunch write-ups and other press coverage.
“Start-ups, once they get a glance of success and recognition in their field, often lose sight of their goal,” says Sam Shepler of TestimonialHero. “Flashy valuations and media coverage is not the goal of any business – it is their profitability and sustainability that should be the most important consideration.
Expansion – whether that’s amassing a higher headcount or setting up operations in other regions and countries – can look great in terms of growth, but can also drain the cash of a company. This happens because some companies want to sustain their hype in hopes of a bigger company willing to buy them out.
Unfortunately, there are some instances when this plan falls apart. The growth was not fast and the revenue that should be generated by the business fails to sustain the operations itself. Start-ups should remember that they need to prove their business case on a small scale before planning a further expansion.”
As a SaaS business leader, there’s no shortage of metrics you could be monitoring, but the real question is, which metrics should you be paying most attention to? To monitor the health of your SaaS business, you want to identify any obstacles to growth and determine which elements of your growth strategy require improvements. To do that, you can track the following key metrics in a convenient dashboard with data from Profitwell:
If you want to track these in ProfitWell, you can do it easily by building a plug-and-play dashboard that takes your customer data from ProfitWell and automatically visualizes the right metrics to allow you to monitor your SaaS revenue performance at a glance.
You can easily set it up in just a few clicks – no coding required.
To set up the dashboard, follow these 3 simple steps:
Step 1: Get the template
Step 2: Connect your Profitwell account with Databox.
Step 3: Watch your dashboard populate in seconds.
Growth won’t fix a bad pricing strategy or the wrong business model. In fact, it will amplify the problems.
“One of the commonest mistakes that startups usually do during rapid growth is having the wrong business model (or not having one at all!),” says Adam Garcia of The Stock Dork. “Basically, the business model is the way that the startup (firm) represents to create values for its customers and then generate profits out of it. These values usually come out from the feedback of the market about the product/service the startup provides.
So, this is not a static thing but becomes much clearer during the rapid growth stage, however, most of the startups don’t pay enough attention to their business model or use the wrong one.
As a result, failing to reach the updated feedback from the market will lead to startups failing during the rapid growth stage. What to do to prevent it? Create a strong business model and keep in mind its “continuously improved” according to the market and customer changes. This means; clear and updated information about the target audience, recording key business resources and updating the value/innovation of the product/service.”
When you are in a period of rapid growth, it can be tempting to think this will last forever or at least for a while. That’s a dangerous assumption to make.
“The number one mistake a startup can make is thinking they’re experiencing sustained rapid growth when really, they’re seeing a short moment of rapid growth,” says Eytan Bensoussan of NorthOne. “Many early stage companies have very little data to go on, and as soon as you get some sort of a trajectory, your instinct is to think things will continue to move upwards.
Sometimes you just find a cohort of customers that are particularly good, but you don’t necessarily know how to find more of them. Sometimes your bursts can be short-lived, so it’s about having a cautious eye. Study those bursts almost scientifically to understand what caused them, and talk to the customers who led to the burst of growth. Understand what created it, why it died down, what happened to the engagement, etc.
Through studying and constant feedback, you’re making sure that customers are going to stay and that you’re building to their preferences rather than to your preferences. I don’t think there is a “scaling too quickly”, it’s more so that you’re seeing a lot of customer revenue scale. You’re scaling the cost base of the company, you’re expanding the team, and you’re doing that to support what you would think of as future growth that’s coming. But it actually wasn’t sustained. The growth died or the churn was dramatically larger. And you essentially added a meaningful part of your cost base before the revenues were truly demonstrating that they were retaining, that they were compounding, and that they were sustained. You want to make sure that when you get a burst of revenue or customers, that it is a sustainable source of revenue – that the growth is not a flash in the pan, that the revenue is staying, and that there’s not a leaky bucket problem. And that there’s a pretty good understanding that those customers actually need you to invest in more team.”
For example, Paul Baterina of Sleep Advisor says, “As a small startup, we experienced that rapid growth that you were mentioning, and everybody reminded me to avoid this one mistake to ensure our success.
Don’t just grow vertically, grow horizontally too. It’s easy to think that because you’re experiencing rapid growth now, that the same will occur tomorrow, or the day thereafter.
A couple of years ago we were also in a period of rapid growth. Sales numbers were up, website traffic was great, so I wanted to hire more staff. But, a dear friend told me to hold on to my horses. It was more important to put systems in place to deal with our rapid growth, than it was to try and conquer new fields. We had to “settle in” and enjoy the growth, without overextending our reach. Sure enough, growth peaked, but luckily we didn’t have any extra expenses, such as new staff.
Eventually, with the proper systems in place, we managed to capitalize on that growth and we’re currently experiencing another rapid growth period. So my tip to avoid this mistake is: Take time to grow your administration, your HR and other systems such as marketing and content creation. These systems will help spur that growth on. “
Thinking the random growth your startup is experiencing is a larger trend is one of many culprits that can lead you to make bad financial or strategic decisions.
“One of the worst mistakes a startup can make while experiencing rapid growth is to fail to consider decisions properly,” says Baruch Silvermann of The Smart Investor. “When things are happening quickly, there can be great pressure to make an instant decision that could impact your future success.
Whether this is related to recruitment, customer orders, or improving your infrastructure, a poor decision could be a massive setback. This makes it crucial to maintain your focus. Having focus will help prevent you from feeling overwhelmed or disorganized. If you have a clear vision of where you plan on going, you can make deliberate choices about what you will do and will not do.
By maintaining your focus, you can also guide your team. When everyone is aware of the startup goals and objectives, you can minimize mistakes. Additionally, as everyone makes mistakes, when one does happen, you can be aware of it and adjust accordingly. This means that even if a decision is not the best or most well informed, it shouldn’t derail your entire operation.”
Brian DeChesare of Breaking Into Wall Street adds, “The worst mistake a startup can make while experiencing rapid growth is to go ‘all in’ on an idea, product, or set of products too soon. This tends to happen because rapid growth can easily give us a false sense of security. And a result of that is getting carried away with ideas before testing them out consistently in small increments. That initial period of rapid growth is more akin to a test than a reward – it faces you with the challenges of growth, and managing those by testing small, simple products is always a better strategy than going all in as soon as you begin to see results.”
Growth doesn’t mean much if all of your customers are unhappy and churn out right away. That’s why it is important to make sure you are investing properly in customer experience.
“The worst mistake a startup can make while experiencing rapid growth is letting customer service and experience fall by the wayside,” says Stephen Light of Nolah Mattress. “It’s exciting for small businesses to suddenly experience rapid growth, but if there’s suddenly too much focus on acquisition, retention practices can fall into neglect. Small businesses have a unique intimacy with their audience, and often go above and beyond the call of duty when it comes to customer experience. With rapid scaling, startups can fall into the trap of pushing for more sales rather than fostering relationships with existing customers. Customer retention is just as important – if not more – to steady growth as acquisition, so startups should always invest in customer service at the same rate as they invest in sales.”
While not having any systems and processes can create its own issues (in the face of growth), the opposite is also true. You need to make sure the processes you put in place are flexible.
“Applying the same workflow and protocols when growing, without the flexibility for optimization, is the worst mistake a startup can make while experiencing rapid growth,” says Scott Hasting of Betworthy LLC. “The processes and workflow are no longer the same when the business was just starting as compared to when it is experiencing rapid growth. Hence, implementing the same workflow will no longer work. The business founders should be able to adjust and curtail several parts of the workflow in order to fit the rapid growth so the business won’t crumble.”
You also want to make sure you are continuing to talk to customers.
“Disregarding the customer – in a period of intense high growth, it’s easy to forget about the most important group of individuals who keep your business afloat,” says Jered Martin of OnePitch. “Extensive hiring sprees, misaligned goals, and uninformed decisions are all factors that can affect this.”
However, there is one danger when it comes to talking to customers. That’s only talking and relying on feedback from a small subset, like your earliest adopters or the most vocal ones. This can lead your startup astray.
“The worst mistake a startup can make while experiencing rapid growth is focusing too much on explicit feedback provided by consumers,” explains Charles Cridland of YourParkingSpace. “There will always be a tiny group of active customers ready to give suggestions for product improvement. This minority group represents opinions of less than 1% of the total customer base, but these people are active on forums, and they proactively contact support teams to give some advice.
You should listen to their feedback, but you shouldn’t base your strategy on it. Instead, your strategy should be based on implicit feedback that can give you a wide range of information about customer behavior and preferences. So you should build analytics that will help you identify patterns in how consumers are using your product and focus on it. Of course, it will require additional investment in software like Heap or Mixpanel.”
When you are in the middle of a period of rapid growth, it can be helpful to bring in experienced third-party service providers for an outside perspective.
Here are some of the biggest growth mistakes that startup agencies and consultants see.
Cutting corners because you are understaffed and unprepared for growth can (and has) sunk many startups.
“The most common mistake a startup can make while experiencing rapid growth is to hire new employees before the company can manage them effectively,” says Natasha Rei of Explainerd,
“It’s better to take on too little work than too much, and it’s hard for new hires to contribute if they’re constantly being asked to do things outside their job function–everybody loses in that scenario.
A company may experience increased pressure from its customers. Still, if those pressures are causing more day-to-day work at a time when they’ll have trouble managing more people, then it will just increase the chance of high turnover and ever greater pressure on those remaining.
Competent managers who know how to use technology should already be capable of scaling up with a company as it grows. Rapid growth is usually a sign that an organization will face challenges, but it doesn’t necessarily mean that it will fail. It’s not all doom and gloom!
Making sure to lay down a system of accountability and training and standardization ahead of time (or as soon as possible) can help keep the new organizational structure from getting too chaotic too quickly, making it harder to focus on long-term strategy. Guest posters, training, feedback sessions, etcetera are also helpful in keeping everyone on the same page with what’s happening in the rest of the business (regardless of their level).”
Thomas Mercaldo of Aquinas Consulting adds, “Hiring the wrong people is the worst mistake a start-up can make while experiencing rapid growth. More specifically, this failure includes hiring people with either the wrong job skills or people who are not a value or culture match for the company.
Start-ups in rapid growth mode are under pressure to get talent in the door that can help get work done. In response to this pressure, they often make expedient hiring decisions that will hurt the start-up long term.
Initially, it is essential to seed the organization with the right people who can grow with the company and help take the organization to the next level. Getting those individuals is the key to building a company and can help ensure the long-term success and growth of the company.
Rather than compromising on hiring, using temporary workers to get work done is a good alternative to making permanent hires just to fill seats. Using temporary employees can also allow companies to evaluate people they may not be sure about to see if they perform well enough to join the team full time. Having a strongly defined hiring process that is decisive and inclusive of the right people instead of too many people is equally important in making the right hiring decisions.”
Another way to minimize the chance of hiring the wrong people or hiring too quickly is to plan in advance.
“You should always have a pool of potential candidates to choose from to fill key roles in the future,” says Andrew Raso of Online Marketing Gurus Australia. “The hiring process can take a few months and sometimes even half a year. If you don’t prepare ahead of time to build a database of qualified candidates who are interested in working in your company, you can disrupt your processes or agree to compromise and hire the wrong candidate who doesn’t fit the role just to fill up the vacancy. That will have a negative and quite costly impact on your company.”
You need to scale not only your people but also your software, systems, and processes so that it can keep up with increased demand.
“Lack of a scalable infrastructure,” says Christian Velitchkov of Twiz LLC. “Your company will be able to keep the pace and make the most of its momentum if its infrastructure is in place – systems, procedures, and physical space. Many startup founders assume that communication will naturally evolve with growth. Communication changes and progress with a few people is a lot easier than with 10, 50, or even 1000 people. Communication infrastructure is crucial to keeping everyone on the same page within your company. The IT infrastructure must also be set up properly. Keeping all of your data and communications on the internet requires redundancy and a backup system that is reliable.”
Sandi Legeman of 301 Digital Media adds, “One of the most common mistakes we’ve seen startups make under rapid growth is failing to scale processes and best practices to support and sustain growth. In the throes of rapid growth periods, especially at the outstart, it’s easy to get all hands on deck to keep things running, but in time, without the right strategic emphasis on business process development, as employees naturally turnover or, worse, get burnt out, it throws things into chaos and inhibits sustainable long-term growth.”
Sometimes, rapid growth happens by throwing money at it in the form of paid ads. That works great until it doesn’t. The way to make sure that your company continues to grow is to also invest in brand marketing.
“Startups that are experiencing rapid growth are usually a consequence of money injection,” says Hammad Afzal of TechNerds. “Money injection can result in wanting to see immediate results. The need for quick results can lead to massive investment in paid growth. Paid growth is excellent for rapid growth but not at the expense of organic marketing. Startups should not underestimate organic marketing, and this is usually the biggest mistake a startup can make. Create content that resonates with your audience. Get backlinks that show Google your authoritativeness and expertise in your Industry. This will complement your rapid growth when the money printing machine stops working.”
Every startup hits plateaus. If you aren’t managing your cash flow properly, you are in for a lot of pain.
“We’ve found that managing cash flow is a key reason some of the businesses we advise continue to grow year after year,” says Amol Maheshwari of Growth Idea Ltd. “Because fast growth sometimes requires investment and working capital growth, big orders and increased sales often go hand in hand with cash crunches. What helps is having funding available (even if unused) and financing conversations ongoing at all times even when there is no requirement for funding. It also helps to keep a close eye on the next three months of projected cash flow, especially after every large order.”
Poor cash flow management often goes hand and hand with thinking that your current growth trajectory will last forever.
“I love working with fast-growing start-ups, but one of the biggest mistakes I’ve seen is becoming too complacent about growth,” says Heather Baker of Definition. “Start-ups that experience rapid growth can fall into the trap of thinking that growth rate is secure for the future. Then they don’t invest in lead gen and when something happens that stalls growth (new competition, economic changes, market saturation) they are not prepared.”
Even if you never intend to sell your startup, it is not a bad idea to go through that thought experiment. “I think a mistake startups make during exponential growth is not creating an exit strategy,” says Ashley Folkes of BridgeWorthWealth Management. “And, I believe it is crucial even if you do not know if you want to exit. As a financial advisor, I look at the company as an asset. We want assets to grow and maximize their worth. So creating a flexible plan with different scenarios on how and when to exit at some point in the future can be very important to maximizing the potential of your start-up.”
One of the best preventative measures you can implement is to create a dashboard with all of your startup’s most important KPIs. Best part – you can create a free Databox account and automatically plug in all of your data and sources into a dashboard. This will allow you to quickly gauge if your startup is on track as well as get in front of potential issues faster.
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