Why Your Startup Won’t Last (2024)

The global startup economy is worth $3 trillion today. Startups are no longer concentrated in hubs like Silicon Valley but instead spread across the globe. There are 25 startup ecosystems around the world, with an ecosystem value above $10 billion each. But even with support from various incubators and accelerators, the “unicorn” status (a privately held startup valued at over $1 billion) isnot commonplace.

While doing extensive research on building case studies of fast-growing companies, Harvard Business School Professor Ranjay Gulati has grappled with one key question: Why do some startups that have crossed the threshold of “product-market fit”andhave a viable business model with a growing revenue streamstill fail?

Let’s step back and understand the problem. Many startups fail because they don’t have a viable business model or idea. Many fail because they haven’t been able to gain enough traction with customers or are unable to cope with competition. And that seems reasonable. But some startups even after successfully traversing market challenges still don’t manage to survive. While there is no hard data to support this, the problem seems to be real.

When Gulati beganresearch on the startup ecosystemmore than a decade ago, his thinking was that startups need more structure to thrive. Founders resist putting in place structures and systems as they grow and that eventually leads to organizational chaos and ultimately, failure. But as he researched this further, his thinking evolved to realizing that while on the one hand too little structure in a high-growth venture can lead to chaos, going too far on the other extreme with too much structure can also be equally detrimental and kill the soul of the startup.

How can startup founders learn the mechanics of scaling up effectively before they reach a point where they tip over too far, in one direction or the other? In an attempt to better understand this problem, Gulati conducted a closed-group discussion with professionals, investors, and founders operating in various segments of the Indian startup ecosystem.

The group identified nine main challenges that startups that scale up must confront.

The Fear of Structure

Issue:Bringing in structure and “grown-ups” tarnishes the entrepreneurial spirit. To get the business off the ground, startup founders do whatever it takes and that works as long as the startup is small. When scaling up, it becomes critical to add some elements of structure and delineate roles so people can be responsible for their tasks as things get more chaotic. Structure also means better accountability for tasks and control. And as you add structure you have to also consider bringing in functional specialists who understand how carry out those specialized tasks so that they can be done more effectively. The challenge here is how one can bring in structure whilst still maintaining the entrepreneurial spirit.

Proposed solution:Clearly define roles and areas of authority. Bring in structure and also define specialized roles along with hiring functional specialistsgradually, while still reinforcing the entrepreneurial spirit.

Taking the Vertical Structure Too Far (or Not)

Issue:Not thinking the hierarchy through. It’s not just adding structure that could be an issue but adding excessive layers to the structure that could pose problems. This rapid verticalization of the organization — that is sometimes put in place to appease early employees who want to be at the top of the pyramid — can slow down decision-making. When the company is small, the decision-making lies in a few hands making it much easier to make quick calls. It also gives people a sense of being trusted as they know they can handle their own work and make decisions for things that lie in their domain.

The flip side is not adding enough layers — the founder or CEO wants everyone to report to them — which becomes a bottleneck for quick decision making. This could frustrate and demotivate people as things move slowly and access to decision-makers is tough.

Proposed solution:Be deliberate as you add vertical layers into your organization. Founders and early leaders need to understand what their span of control should be. In a previously published HBR article, Gulati suggests using what he calls “freedom within a framework.” Along with freedom you need to provide employees with a framework within which they are able to exercise their freedom. You have to find the balance between very little and too much control.

Mapping Your Path to That of Established Companies

Issue:Emulating the growth pattern of successful startups and applying it blindly to your startup. Every startup cannot become an Amazon. In trying to emulate the scale-up paths of established companies, founders forget that the ecosystem that existed when Amazon was scaling up was very different from what it is now. Strategy, market context, culture and mission differ too. One cannot simply follow the footsteps of establish startups and try and replicate that. They need to find their own paths and growth story. Is your end point to be a mid-cap company or a large-cap company? There is no single, universal pathway to building a scaled organization, so know your mission.

Proposed solution: Aim fordisciplined growth: chalk out how fast you want to grow and what your play for growth will be and then stick to that mission.

Crafting the Culture

Issue:Growing the team while preserving the culture. The culture at a startup is typically what attracts people to join and what keeps the startup going. Stories of how early employees have worked through countless nights to get things done is commonplace. A sense of belonging to a team and pursuing a common goal of making the company viable pulls people together, but as you grow and add headcount the number of people who can relate to the struggles of early days are less in comparison to the total number of employees. As you begin to scale and formalize functions, the founder’s attention moves to things that are more immediate like managing a brand campaign or managing operations. Instead of being deliberate about the culture, founders let it evolve on its own. Culture can sometimes take a backseat. Take the example of Uber, whose culture evolved in ways that have caused huge strategic and employee-related issues that continue to linger despite efforts from their leadership to tackle them.

Proposed solution:The founding team should be deliberate — from their early days — about articulating and communicating (even overcommunicating at times) their culture. Hire people in functional roles a bit ahead of the scale up process so the new hires have enough time to understand and soak in the culture and grow with the startup.

The Changing Role of the Generalists

Issue:Not every generalist wants to be a specialist. Employees who have been with you from the start can find the scale-up process somewhat unnerving, if the scale-up isn’t thought through with regard to their roles. When you bring in people from outside for specialized functional roles (as you restructure and remove roles that weren’t very clearly defined previously), older employees — who typically have a more generalist orientation — could feel frustrated at losing authority. The result could be employees leaving, taking with them the critical tacit knowledge of the business and of your culture (and also some strong client relationships you’ve built since you started).

Proposed solution:Involve generalists in the hiring process and, and in many instances, this may even entail, “hiring their own bosses.” Domain experts can act as mentors and help generalists find their niches. And if it is time for the generalists to leave, handle that departure with care.

Spotting the Right Talent

Issue:During the scale-up phase, it is imperative you have talent that brings in expertise the founder lacks. Founders usually grapple with hiring the right talent for the scale-up phase. Should you bring in someone who has helped scale startups previously or who has the ability to do that? How do you assess if this person will be the right fit for your start up and will be able to manage scale? Young entrepreneurs, due to lack of experience, are also challenged when it comes to asking the right questions of the candidate to identify the right talent. Along with bringing in talent with functional skills, it is also important to bring in those who have scaled a venture before and understand the dilemmas associated with scaling. And knowing when to upscale your talent and in which specific areas remains a perennial challenge for many entrepreneurs who sometimes reach out to their venture capitalists (VC) for advice in these matters.

Preserving the Cash Cow

Issue:As the money flows in, your focus can waver. How do you grow your core business around which your startup was built while also creating more opportunities for growth? As the startup grows and you have been able to secure more funding, founders may feel that it’s time to add more feathers to the cap, taking the focus away from the core business. There is a delicate balance between staying focused on what you are doing well, whilst still exploring new opportunities that might even require you to make a radical pivot.

Proposed solution:One way to ensure focus is to articulate a purpose statement that encapsulates the firm’s reason for existence and business plan, and to revisit it frequently. Focus but also the willingness to adapt can be emphasized during internal business review meetings by asking these questions:What game are you playing?andHow are you going to win?

The Changing Role of the Founder

Issue:They don’t stop calling themselves founders. As the startup scales and specialists are brought in, the founder still wants to call the shots, not wanting to give up their decision-making power. Many founders don’t let go of their titles (still calling themselves founders) and that leads to a disconnect between what they were responsible for as founders versus what they should be responsible for in their new role. Another reason for not wanting to give up on that position and title is that as the company has grown, the founders haven’treskilled enoughto take on new, specialized or niche roles and it becomes difficult to find themselves a fit in functional roles in a scaled-up organization. Some founders indicated that they begin to feel as if their own organization has outgrown them.

Proposed solution:Founders need to continuously retool themselves and find a role for themselves within the growing organization and it doesn’t necessarily have to be at the top, leading the organization. As the company grows, they should find a role that suits their skills and also devise more functional designations, so they know what exactly they’re responsible for.

Managing Pivots

Issue:When to pivot and what to pivot to? Managing pivots in the firms’ strategy and direction is a common challenge faced by entrepreneurs. One facet of this challenge is convincing the firm’s key stakeholders (investors, employees, and customers) of the need to pivot and getting their buy-in on the new strategy. Another facet is restructuring and reorganization to align the firm with the new strategy. This includes changing the way teams are structured, identifying teams that need to be let go, building functions that need to be expanded, and building expertise in the new area of focus.

Proposed solution:But you need to step back periodically and reflect on whether you are in pursuit of the right growth opportunities in your rapidly changing market. And don’t fall into the “sunk cost fallacy” where you cannot move beyond your initial ideas and investments. In this context, turning to your VC and other seasoned entrepreneurs can be critical, especially for inexperienced founders.