The Startup Genome Project just released a very interesting study.
In the study, which took 6 months to conduct, they gathered and analyzed data on over 3200 startup companies in the technology field.
Their goal: to identify the reason why some startups succeed, while others fail.
Importantly, in their research, they identified the ONE reason that stood out more than all the others for business failure. That reason: premature scaling.
So, what is “premature scaling?” Premature scaling is trying to grow your company too quickly.
Examples of premature scaling include:
- Spending too much money on marketing/customer acquisition before you’ve proven that your current product is the right fit for your customers’ needs
- Building “nice to have” features into your product/service before getting it in the hands of customers to get real feedback
- Hiring too many employees before you absolutely need them
- Not adapting your business model to a changing market
Six other key findings from the study include:
1. Invest in Mentors, Metrics and Education
The most successful startup founders invest in mentors, metrics and education. Startups that have mentors, track performance metrics, and learn from startup thought leaders raise 7 times more money and have 3.5 times higher customer growth rates.
2. Don’t Be Afraid to Pivot
Startups that “pivot” once or twice are much more successful. A pivot is when a startup decides to change a major part of its business. These startups raise 2.5 times more money, have 3.6 times higher customer growth rates, and are 52% LESS likely to scale prematurely than startups that pivot more than 2 times or not at all.
3. Consider Having a Partner
Founding teams with just one founder take 3.6 times longer to reach scale stage versus founding teams of two. Solo founders are also 2.3 times less likely to pivot. The most successful combination is having one business founder and one technical founder.
4. Take the Full Plunge
Founders that only work part-time on their ventures are much less successful. They realize 4 times LESS customer growth and raise 24 times LESS money from investors.
5. Don’t Underestimate How Long Things Take
The research showed that founders dramatically underestimate the time needed to validate their market (i.e., to get a product in the hands of customers to confirm their need). In fact, on average, the 3200 startups surveyed needed 2-3 times more time than they expected to validate their market.
6. Accurately Estimate Your Market Size
Startups that haven’t raised money overestimate their market size by 100 times. That’s a huge amount. The reason for this is that presenting to investors forces you to more narrowly define your market, and identify/prove the specific segment which will most want your product or service.
7. Raise Money for Your Business
As expected, the study found that not raising money, or raising too little money, was a key cause for business failure.
I think this study provided great information. But I don’t want it to go in one of your ears and out the other. So, please spend a minute right now to, based on what you learned, identify one or two things to add to your To Do list.