Most startups fail. In fact, 90% of new businesses fail. In his Monktoberfest 2013 talk, Zack Urlocker cites research that shows 74% of the startups that fail, fail because they attempt to scale too soon. In other words, these startups believed they were gaining traction and began to invest heavily to capitalize on that traction.
The problem is that the startups that fail are either too soon or were wrong about the traction. Either way, the result is that these startups spent more money than they had, did not earn the revenues necessary to support the spending, and they failed. It turns out, the process of scaling a business takes longer than most people think.
So, What is Scale?
There are many definitions of scale, which can complicate what it really is. One typical definition is as follows: A system whose performance improves after adding [resources], proportionally to the capacity added, is said to be a scalable system. Well, that is simple enough, but it does not really tell the whole story. For example, a spending increase of $10,000 that increases revenue by $10,000 means profits have remained the same. Is that scale? According the the definition above it is. Is it growth? Not exactly.
What Zack Urlocker points out in his talk is that scale is simply the ability for a business to grow revenues faster than expenses, or otherwise driving a wedge between the revenue line and the expense line.
Of course the bigger question is, “How does a startup scale?” Urlocker explains in his talk that the only way to scale a business is to understand the factors that limit growth so that these factors can be addressed, therefore allowing the business to grow. If a startup does not understand what factors limit its ability to grow, any action it takes to scale is guess work and destined to fail.
Five Factors That Affect Startup Growth
And this is what Zack’s talk is all about. You will have to watch the video to get all the details, but Urlocker lays out five factors that impact a company’s ability to grow. These factors are:
If you understand how these factors impact your ability to grow, you can do something about it and grow your revenues faster than your expenses. In other words, you can scale. I recommend watching the video because there is excellent advice about each of the five factors
Final Thought on Scale
Urlocker points out that even though addressing these five factors in order to scale a business requires a systematic, even scientific approach at times, scaling is more art than science. And like any art, scaling a business can be learned and mastered, if it is treated as a discipline.