‘Start-up’, as a phrase has become the part of our life, and it has also brought along the stereotypes, common beliefs and – of course – misperceptions. Reading articles where all starting enterprises are labelled as a ‘start-up’ is just a bit annoying, such as the association of the culture with grown up businessmen dressed like kids, playing with their boards in the office. A relatively more significant problem is the association with a higher success rate, extreme profit growth and having technology driven, or at least well-supported operation, enthusiastic team and committed leadership. Not to mention more.
Good product or service ideas, some disruptive innovation, and the promise of a good deal, a ‘buy’ rather than a ‘make’, attracts investors of all types. As long as we talk about a financial investment, we can turn a page thinking that those, who are investing into this sector, are robust enough to survive some stories of fallen angels. A picture is a bit different when it comes to an acquisition with the purpose of integrating the new business (or a part of it) into the original one. Then, suddenly, all the details become very clear, and – unfortunately – often quite very different from the original impressions… (We are coming back with a separate article on that.)
Screening quite some ‘start ups’, very recently, for a client, although relatively connected to a particular industry, generated many impressions. Since they show some patterns, or are systematically repeating, we thought it may be worth generalising them. We plan to publish a new one every week, describing our experience, with the purpose of highlighting them for those, who are about to enter into this sphere in the near future, or about to mend their actual business or organisation for good. Here comes the first one:
1. INADEQUATE SCALING
It is usually the consequence of immaturity, lack of strategic development knowledge or inadequate project/process management. Easily traceable in several areas, and most commonly a combination of the aformentioned deficiencies is present at the same time. The most frequently experienced manifestations are the followings.
Focusing on one or just some areas, products or functions. It is mostly experienced when there is one or few key persons ‘running the show’, and consequently their core competences will be those which are over-emphasised or over-developed compared to all the others. It is very eye-popping when certain functions or activities are mutually obstructing each other or the other processes in the organisation. Often, such discrepancies entail in less appealing financials – compared to the theoretical potential – given the core product or activity.
A common example is when the product development is extremely aggressive, responsive, but the support area is under-developed and cannot keep pace with the front-runners.
Inadequate amount of human resources. It can be either more or less than necessary. Surprisingly, our experience is that too many employees, too soon, is much more common than the opposite – the under-staffing. Normally, one could expect a modest approach in this domain, given that the cost of employees is one of the most remarkable ones in most of the industries. This may be the consequence of either the improper focus, or the lack of strategic development related knowledge.
A common example is, connected to an aforementioned one, the over-staffed product development and creative staff, which will further amplify the discrepancies. Those, stemming from the limited focus on the supporting areas, like product support or customer service, as mentioned before.
Oversized investment and overspending. It is hard to believe, but there is such a thing as too many financial resources. Unfortunately, it is almost common that it drows away alertness, cost-sensitivity and – as the worst – efficiency. This issue may be further amplified by the inadequate forms of funds, like having much equity with higher return expectations than debt instruments with usually lower interest payment obligations.
Common examples are many, extremely expensive cars in the garage, spacious offices without function, outstandingly high so-called ‘entertainment’ costs and tons of gadgets available for ‘free’ for the – anyway too many – employees. These are all considered as non-operational assets, meaning not contributing to the profit generation directly.
Trying to tap too many markets at once. With this one, we are approaching those mistakes, which are not so easily recognisable. There are product or service types where an aggressive strategy pays out (first mover advantage). If the necessary financial resources are available and there is a proper business development strategy in place, followed by a very pragmatic implementation, it may be the right decision. Especially in case of products and markets where the early penetration is key (e.g. there are many complementer products).
Unfortunately, this is not always the case, and we saw otherwise smart entrepreneurs ‘copying’ certain examples of their favourite business personalities – from a completely different sector – and wondering why they have a highly staffed, but still under-performing, exhausted organisation.
An example is an innovative device, providing integrated services, the developer-producer of which is running into the trap of facing very different standards, marketing limitations and product liability issues in the different markets. These make a spike in the legal and compliance costs, and shift focus to problem-solving from innovation or development.
Focusing on profit maximisation – only. Last but not least, this is an interesting issue we bumped into. Of course, there is nothing wrong with the profit maximisation, as this is what all entrepreneurs do. The problems start when it is done in a short-sighted way, meaning jeopardising sustainability of the business, as a whole.
We experienced both: simply an immature behaviour such as a willfully chosen rule of conduct behind this routine. Nonetheless, both are detrimental when it comes to suppliers, customers, and fair business practice, in general. Not to mention to be controversial from their own business perspective.
An example is when a particular company has been established with the sole purpose of selling off, as soon as practicable, and beforehand, owners are about to sweep out the financial resources to the extent possible.
Summary and conclusion. Proper, adequate scaling may be a key, even if it is just about long term survival. If it comes to growth strategy, especially an aggressive one, it is of utmost importance. Consequently, the sooner it is recognised is the better. Believe it or not, the adaption costs, in total, can be extremely high, as time flies and the organisation grows, thus it may be wiser to avoid them, eliminate this risk in advance, by spending a fraction of those amounts on the proper planning.
Do you have questions or need some help right now? Feel free to reach out to us.