Failing to Scale: The Crisis among Start-ups

There has been much press declaring the fall of American entrepreneurism.  Cited in a 2015 Wall Street Journal story, the Kauffman Foundation analysis of US Census data determined that start-up momentum in the US had stalled. (WSJ Article)  Additional publicity has blamed sputtering entrepreneurship for our country’s slow economic recovery.  Gallup CEO Jim Clifton stated, “We are behind in starting new firms per capita, and this is our single most serious economic problem.”

Venture capitalist Marc Andreessen tweeted his provocative take on the relationship of entrepreneurship and the economy.

A 2016 study by MIT researchers tells a different story.  Using more granular measures of entrepreneurial quality, the research team concluded, “Starting in 2010, there is a sharp, upward swing in the expected number of successful startups formed and the accumulation of entrepreneurial potential for growth.”

           

While the MIT research showed entrepreneurship on the rise, they highlighted a more vexing issue.  “To the extent that the current state of American entrepreneurship is facing a crisis, it is not the rate of creation of high-growth start-ups or in the initial funding of those firms but instead in the potential of those firms to scale.”   

            The conclusions of this groundbreaking investigation square with my own experience.  In a blog posted last October, I outlined how Founders struggle to pilot their businesses through the turbulent Transition Stage between Start-up and profitable Going Concern.  The MIT research team added, “Even as the number of new ideas and potential for innovation is increasing, there seems to be a reduction in the ability of start-ups to scale in a meaningful and systematic way.” 

            The MIT report does not provide recommendations for how to address the problem.  I see this gap as well in my work with start-up leaders.  There is no consensus or common approach to deal with this perplexing phase of a company’s life cycle.  

While well suited for launching a start-up, Founders are less experienced in the organizational and cultural nuances needed to scale their business.  Collapse during the Transition Stage can be driven as often by internal meltdowns as missteps in strategy or product design.  

Why is this?  In my view, C-level leaders are focused so heavily on “What we Do”, they neglect the appropriate balance of “How we Operate.” 

Young firms tend to rely on a few brilliant minds at the top to outsmart the market.  Today’s complex and competitive business arena requires a broad array of perspectives.  Adopting the axiom ‘Nobody is smarter than Everybody’, companies tapping the collective wisdom of the entire team are best positioned to seize market opportunities.

Unfortunately, organizational friction can stymie team member input.  As headcount soars so do functional structures, hierarchies and other vestiges of bureaucracy.  Turf battles, silos, political maneuvering, and lack of authenticity inhibit collaboration.  Trust breaks down.  Staff engagement drops and innovation stagnates.

            So how do Founders/CEOs minimize organizational friction while keeping their firms nimble and quick?  What aspects of “How we Operate” enable start-ups to scale?

Two key areas to consider: Core Values and Collaborative dynamics. 

Clearly articulated Core Values and explicit cultural norms are an excellent first step to sustain growth.  Most young firms have defined their Mission, Vision and Values.  Some design snazzy posters to plaster around the office.  Noticing a set of eloquent Core Values artistically rendered on the conference room wall, I asked a CEO how well his team was living out these standards.  He looked at me quizzically.  Shaking his head, he realized his team had not considered how to measure this basic of company progress.

In one start-up where I served, employees could name the company values but were confused over what they meant or how to apply them.  Our Values were vague words to them, too open to individual interpretation.  To rectify the situation, we identified a series of attributes to define each Core Value.  Adding explanatory prose helps.  

We augmented a section of our annual reviews to rate how well employees exemplify these virtues.  This evaluation reinforced the meaning of our Core Values while assessing if our organization was operating accordingly.

Culture is another nebulous concept.  While all firms champion a company culture, their personnel may struggle to pinpoint the specifics.  Culture is regularly expressed in terms of dress code, vacation policy, office décor or team building exercises.  This cursory view misses the critical inner workings defining "How we Operate."  Too often, the firms's implicit cultural norms are left unspoken, creating ambiguity and confusion, particularly among new employees.

Rules and handbooks do not define company culture.  Passions and purpose do.  Culture is the expectations between us as well as interactions among us.  Our approach to prioritization, decision-making, conflict management, meeting protocol and the role of leadership are the life-blood of the organization.  Communicating openly about our cultural underpinnings connects team members more deeply with one another while enabling the company to thrive.

A second key aspect of “How we Operate” is Collaborative dynamics.  In a number of posts, I have dug into the foundations of Autonomous Cross-functional teams, Distributed Authority, Transparency, Peer Accountability and an emphasis on leaders as Catalysts and Coaches rather than commanders.  None of these collaborative cornerstones are revolutionary.  In fact, many firms have tested these concepts on special project teams or key initiatives.  The intentional integration of these five dynamics enables organizations to operate more fluidly.  Staff members have a stronger sense of ownership.  Teamwork flourishes.  The steady flow of creativity inspires the innovation driving further growth.

With ample capital flowing into the venture space, start-ups will continue to sprout.  To meet the return expectations of investors, the most progressive leaders are experimenting with fresh organizational paradigms to scale their start-up and create a profitable business.