Startups differentiate the doers from the dreamers. It is the noteworthy ZERO to ONE phase.
Scale-ups differentiate the achievers from the doers. It is the aspirational ONE to TEN phase
But, why does only 1 in 200 startups reach the scale-up stage when your business model is already proven as a startup?
What stops working that looked like it was working earlier?
After dozens of conversations with experienced VCs spread between the USA, Western Europe, the UK, and India,
we identified twenty critical mistakes made by these early-stage scale-ups and actionable solutions to solve them.
Mistake: Many experienced founders, riding on decades of experience, identify a problem area to solve and go full throttle.
Many even meet initial success thanks to their hard-earned network and reputation and find their early adopters.
However, they often fail to have a clear customer acquisition, pricing, or scaling plan once they hit the scale-up stage.
The problem is that they worked on their solutions validation so much that they ignored a long-term roadmap.
Solution: Develop a comprehensive phase-wise go-to-market strategy that includes sales, marketing,
and customer engagement plans for every annual revenue milestone achieved - USD1 Million, USD 5 Million, USD 20 million+
Mistake: Many startups fail to leap from startup to scale-up because their target audience is not large enough or has high inertia to switch, e.g., the real estate or manufacturing sector industries.
You can wow the niche to get your meter running from zero to one, but unfortunately, that's where the buck stops.
Solution: Start with detailed market research of your Target Addressable Market (TAM). Ideally, there should be more than 10K companies in your target audience pool.
If you are already a startup but reaching stagnation in growth, you need to identify products and features that can be upsold alongside the existing product.
Be open to pivoting based on market feedback or new information. Don’t be afraid to change direction if needed.
Mistake: As a startup, you may be excited and build too many features that users don’t need. The result is a dilution of perceived value in the end users' minds.
Let's say you build a product XYZ that can do twenty things for finance, 10 for HR, and 5 for Marketing.
When the decision maker evaluates, they will want to try a specialist tool because your messaging is not modular and precise.
Solution: Evaluate customer journeys heavily in your beta and early adoption phases.
Scrutinize heat maps, conduct interviews, periodic feedback surveys, etc. to determine what features are a must, good to have, and great to have.
Remember, what a wow feature today is; it will become a base expectation for tomorrow against the competition.
Mistake: When you built your product, you identified a particular gap; as you built and proved product market fit, there were customers to learn from. As you begin the scale-up, the initial customers, comprising friends, families, and referrals, shift towards organic adoption.
This requires building a trusted brand that understands how an unknown prospective customer makes decisions. With technology rapidly evolving every six months and new competition emerging constantly, not understanding the competitive landscape and target market can be a significant lapse.
Solution: Conduct bi-annual competitor benchmarking exercises and market research to identify competitors, both old and new, market gaps, current and emerging, and any trends or external factors that may shape people's decisions.
Mistake: This is a no-brainer yet often missed reason for downfall. Founders assume “they” know what’s best for the customer without listening to them or putting yourself in their shoes, which will land you in a spiral. There is a saying in the VC space “ Money talks, Bullshit walks.”
Ask and know what cake flavors customers are willing to pay for, not the cream and free cherries on the cake.
Solution: Regularly gather and incorporate feedback from real users to guide product development. In short, you need to have a set mechanism or process for seeking feedback from at least 0.5 - 1% of your customers every month to identify what they like/love/hate about your solution.
Mistake: The interpersonal relationships of founders in high-stress startup environments are a leading factor in company crashes. Inadequate communication or misinterpreted actions and intentions are a top startup hazard. This will increase during scale-up.
Solution: Clearly define responsibilities, communicate regularly, and have agreements on handling disputes. Founders must invest time into being on the same page and build robust communication mechanisms to handle tough decisions or diverging opinions.
Mistake: Once the first cash flow comes in during the startup phase, the founders often get bullish in the euphoria and overspend on office space, lavish company benefits, or, most commonly, overhire.
Solution: Once your revenue hits above USD 2 million, you need to start consciously holding leaders accountable for maintaining lean operations, prioritizing spending, and managing your runway carefully.
Ideally, you should have six months' runway in hand. Remember, the goal is not to over-exert existing teams to cut costs - but to hire the right number of talented resources for the job.
Mistake: Many founders start looking for investors when facing the prospect of an empty bank account in 3- 4 months. Believing funding rounds will close quickly, leading to financial stress.
Solution: The mantra in entrepreneurship is “Network!! Network !! Network!!”—not just with prospective customers but also with prospective investors. Funding is not a two-week or even a two-month job.
Money breeds caution. Start fundraising earlier than expected and realistically understand the time it takes to close deals.
Mistake: Early on, failing to address legal and compliance matters, like intellectual property protection, can become an issue if an emerging competitor tries to capture market.
Solution: Consult with legal experts to ensure your business is protected and compliant from the start.
Mistake: Financial planning is not a job you do at the start of the year. It's an ongoing process. Not having a clear financial plan or underestimating costs can lead to sudden dips in cash flows.
Solution: Create a detailed financial model, including revenue projections, expenses, and cash flow management.
Mistake: Setting prices without testing willingness to pay leads to pricing issues later. On the contrary, many solutions were underpriced for the value they offered when the market was clearly willing to pay more.
Solution: Test different pricing models with early users to find the optimal balance between value and affordability. If needed, establish regional pricing structures.
Mistake: Sometimes, a business may initially do well if it wins significant deals with key customers. The trouble in paradise arises if your handful of key accounts drives more than 50% of your annual revenue.
Solution: Ensure critical accounts never exceed 30% of your overall revenue. Try to spread the customer base across geographies and industries to minimize sudden client exit impact. Building a healthy sales pipeline will help mitigate this risk.
Mistake: When founders do not clearly define the team’s roles and promotion criteria, it leads to confusion and inefficiency.
Solution: Clearly define each team member's role and responsibilities from the start to avoid overlap and confusion significantly since the employee count may rapidly increase during the scale-up phase, and each colleague must know the value they are expected to contribute.
Mistake: Scaling the team too fast without proper evaluation regarding need, financial budget constraints, cultural alignment, and domain expertise.
Solution: Hire slowly and carefully. Ensure each hire fits the culture and contributes value that is needed or will be required for the next three months.
Mistake: If a startup focuses too much on policies rather than taking a holistic view of providing the proper guardrails and environment for employees to flourish and contribute productively, it can be a significant reason for talent loss. Not focusing on building a healthy, inclusive, and productive work culture from day one is a significant problem stopping startups from turning into scale-ups.
Solution: Define your core values early, ensure the team aligns with them, and foster an environment of trust and communication. For a scale-up, you need to focus on making employees aware of their sphere of contribution and independence.
And the biggest—CODIFY the culture! It needs to be the three best pages every employee knows where to find and remember.
Mistake: Founders often move their original core team to newer and bigger responsibilities as the company grows. However, not every employee is ready for it or is the right person for the evolving role.
Solution: What got you from zero to one required a specific skill set for thinking quickly and experimenting fast. What will get you from one to ten will be a deliberate and stable scaling happening predictably.
It is sometimes different; the same person can switch between the two needs. It's a tough decision to make, but if you feel a particular employee can be a future red flag - reassign them to different tasks or invest in retraining and upskilling to critical resources.
Mistake: At the startup stage, every founder focuses on vanity metrics like website visits or app downloads without concentrating on core business metrics like user retention or repeat revenue.
Solution: Identify the top four value-retaining metrics that you and your team should always know and monitor on a daily basis.
Focus on meaningful metrics like customer acquisition cost (CAC), lifetime value (LTV), and retention rates.
Mistake: Most founders at the startup stage want to just go with it, but they Underestimate the importance of brand identity, messaging, and customer perception.
Solution: Build a robust and consistent brand from day one, focusing on your unique value proposition.
Mistake: With an appetite for risk lower than in the previous startup stage, replying to manual processes and interventions creates a hall for errors.
Solution: Invest in automating as many processes as possible with human intervention limited to a final proof read or checklist check of activities and processes that become the system itself.
First-time tech founders can avoid many common pitfalls by focusing on validated learning, maintaining financial discipline, and building strong teams. Listening to customers, defining clear roles, and maintaining a healthy co-founder relationship are essential for long-term success.