Focus on scale or profitability? The science is in!
Focus on scale or profitability? The science is in!
Avoiding premature scaling is crucial for achieving product-market fit.
Many famous companies like Uber, Twitter and Spotify did not focus on being profitable for years, but focused on growing and scaling their business.
Is this a healthy strategy for you? No. 1000 times no.
The numbers don’t lie
Premature scaling is the quicksand of thousands of startups each year. A study on 3400 startups by Startup Genome tells us that:
Premature scaling is the most common reason for startups to perform worse. They tend to lose the battle early on by getting ahead of themselves - Report source
In dire cases, VCs pump money into startups to grow at all costs, without concern for profitability, creating zombie unicorns that will never amount to much more than their initial valuation.
Ofcourse, most people want to have a growing, profitable company. A 2023 study on 66.000 Finnish firms tells us that profit first is the way to go:
“Profitability rather than growth first is a better strategy to succeed in both.”
The 2023 study replicates a study from 2009 and confirms the most important insights, underpinning this notion of profit over scale. Replication studies are imporant, looking at you, psychology 👀…
How to avoid premature scaling?
Basically, assume you are not Uber, Twitter or Spotify.
Avoiding non-profitable growth becomes increasingly important as your startup ages, the 2023 study found.
The researchers found that the size of your company hinders the flexibility and adaptability of your company. So if you are in a poor spot, and grow, you will not be able to hoist yourself out anymore. Smaller companies are nimble and able to do so much more often than large ones.
Therefore, avoiding premature scaling is crucial for achieving product-market fit. Avoiding premature scaling is achieved by being able to recognise it.
Startup Genome identifies six dimensions on which founders scale prematurely. With your team, reflect on each of the points: are we doing this?
Profit before scale
Most founders want to be a high-growth, high-profitability startup. The odds of becoming that are much higher if you take profit first approach.
This doesn’t mean that you should maximise profits from the start. It means you shouldn’t scale a leaky bucket. Have something solid, in terms of problem-solution fit, product-market fit (PMF), and a working business model. And, ofcourse, I can help you with that.