The number one reason that startups fail is from premature scaling. A study from the Startup Genome Report found that 74% of startups fail because of premature scaling, while those who scale properly typically see growth that’s 20 times faster.
To better understand scaling risks and rewards, I worked with Alligatortek to analyze a list of major companies that scaled quickly, with good results and bad. Here’s what we found:
· Companies who scale quickly have many similarities, including the ability to raise capital to support growth prior to turning a profit.
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· Slack, a popular cloud-based team collaboration and communication tool scaled quickly from 2014-2017. The popularity of the app globally spurred a need to grow quickly. In that time period they went from 8 to 385 employees and raised over $160 million in funding. Their valuation also went from $1.2 billion to $3.8 billion in just under 3 years.
· Chobani also got scaling right. Chobani knew they could scale quickly for two reasons. One their product was extremely popular in a limited area, so they could safely assume it would be popular if they took it nationwide. Lack of competition was the other factor that contributed to their success. In just 7 years they went from a revenue of $2 million to over $1 billion.
Many companies have got scaling wrong including Groupon, Blockbuster and Kodak.
Groupon, the e-commerce group coupon marketplace, had the second-largest tech IPO in history, behind Google. It was an easy to replicate business model that didn’t factor in a plateau in user behavior. As they scaled, Groupon had a hard time growing profits and took investor money despite not having a plan to be profitable. While still in business, the stock has dropped dramatically since the IPO, from $20 per share to $3.75 per share in April 2017.
Some companies were so big, they refused to adapt to the changing tide of consumer demand. Despite having actually invented the digital camera in 1975, Kodak didn’t fully accept it as the future and hesitated to adapt to the digital photography boom, allowing other companies to steal their market share. Blockbuster, the mega-store of home entertainment, failed to react quickly enough when new channels of entertainment started to pop up. They passed on a deal with Netflix, only to watch the streaming service take its place at the top of home entertainment market.
Take a look at the rest of the analysis below