Congratulations! You’ve finally secured series A financing. Closing that first round of funding is a big step for any startup and something to be excited about. Now comes the next step—deciding what to do with that new capital. You know what not to do, but what positive steps should you take first: Do you develop your product further? Start marketing and branding initiatives? Hire a round of employees? Undertake other business operations?
A recent study by Startup Genome found that 74% of high-growth Internet startups fail due to scaling prematurely. When you’re growing a new company, it can be easy to just think in terms of numbers: Everyone wants more customers, more users, a higher headcount. But there’s more to it than that.
Now that your business is starting to look like a fully fledged company, it’s time to act like one. Here are a few things to keep in mind as you embark on your next phase of growth.
When most companies think of scaling, they envision more, more, more as quickly as possible. But it isn’t always the best idea to try and grow sky-high as quickly as possible. Instead, you should consider growing outward, instead of upward, for these three reasons:
1. Growing outward keeps things predictable. If you can create a platform for one user base, you can find out what works and replicate it for others groups of users when you’re ready. That way you can individually customize your platform based on the needs of each new type of customer you go after. It also gives greater control over the expansion process.
2. You have time to learn from your mistakes. If you scale too fast, it can be hard predicting how your business will live up to the stress of growing from 2,000 to 250,000 customers overnight. The last thing you want is to start losing customers because your site crashes or some other part of your infrastructure isn’t up to the task. But if you grow out instead, you can test each piece of your operation as it grows and make sure everything scales appropriately.
3. You can make better hires. How will you grow your team as you begin to scale? If you focus on growing up, you’re probably waiting until your number of users justifies hiring new employees. But that’s a reactive strategy that takes control out of your hands. You’re more likely to find yourself hard-pressed to hire and train newcomers if you’re doing so in order to meet the demands of rapid customer growth. Plus, you’re less likely to hire the right people that way.
As founder and CEO of Qualtrics, Ryan Smith, said, “Nail it, then scale it.”
As Google entered its hyper-growth stage in the early 2000s, co-founder and CEO Larry Page began to tire of the hierarchy that resulted from growing the company up to 400 people. So he got rid of all the manager roles completely. Of course, this didn’t last long, since even the most talented engineers needed someone to go to when problems arose outside their scope. Still, once your company gets to a certain size, as Google soon learned, that go-to person can’t always be the founder or CEO.
Scaling means change. That should be obvious, but it’s a truth that can be hard to put into practice during the growth process. When your startup is comprised of just five people, doing a lot of the work yourself is just part of the process. But as you begin to grow, you’ll have to place trust in other people and decide on the organization structure that best empowers them.
Most startups think they’re being very deliberate about who they hire, but since there’s seldom a precedent for many new roles, hiring can be difficult to get right. One rule of thumb is to think about the product or service you deliver, and work backward: What sorts of employees will you need to help you deliver it at scale? Toptal CEO Taso Du Val, who has been featured on CNBC and Fox Business, has said that: “Your people determine your product.”
The key to scaling any business is the ability to take on more work without compromising service or losing revenue. But even if you could figure out a way to scale your company to an exact science, there’s always room to do more, or better. It’s smart to throw in some un-scalable touches even as you get bigger. In fact, programmer and investor Paul Graham encourages startups to do things that don’t scale—for example:
1. Recruit users manually. When users agreed to try the beta for the payment platform Stripe, the co-founders would actually take the users’ computers and set them up with the program on the spot. No promise of a future link or forthcoming software and no time for users to change their minds. Just immediate service.
2. Keep users happy, and provide amazing service. The online form generator Wufoo sends users handwritten cards. But great service and customer experience doesn’t have to be handcrafted. Apple’s brand rests partly on its exceptional product packaging and its fleet of “geniuses” for customer support.
3. Remember, startups are fragile, and do things the slow way. To save themselves from failing, Airbnb at one point went door-to-door to take photos of apartments and homes that were up for rent.
4. Do things yourself when you need to. When Pebble, the smartwatch company, started, it didn’t have any money for production, so its staff assembled the first 100 watches by hand.
These strategies have saved many of the above companies from going under early on by delivering on the promises they made to customers and secure their loyalty. After all, that’s precisely what attracts investors in the first place. Staying true to those principles—even at the expense of rapid upward growth—can help you put that funding to good use and sustain growth in the long-term.
Jonha Richman is a partner at JJ Richman. The private investment firm’s latest investments focus on real estate, emerging technologies and various other globally diversified assets, particularly in Asia and the Middle East.