Why is it so hard for start-ups to scale?
The ability to scale is arguably the single most important capability investors look for. But it’s not just a technology issue — it’s more often a management issue. This isn’t a secret, but that makes it even more important to ask the question: which companies should be looking to raise money, and when?
Even if you have a great idea for a business, before quitting your job, find and hire someone with the right business experience to help you run the company. Depending on your own experience, another alternative is to get a founder with a lot of business experience to run it for you. Otherwise, how will you grow?
Resist the urge to take money — as a loan or in exchange for equity — before you have a team that can make it all work in the long haul. HBR said it in 2002, and it’s still true — a successful business requires a lot more than innovative thinking. See Why Entrepreneurs Don’t Scale.
As a concrete example of why founders might want to review this old chestnut, here’s something that happened in a class I taught recently at an Internationally Renowned Business School:
One of the students, a founder, was very concerned: would investors respond poorly if he told them that the company was 5 years old?*
Some participants suggested that the founder shouldn’t tell investors the company’s age — 5 years is when you exit, they said. Why haven’t you raised funds before?
I voted with the other half the class who said that it’s an advantage to have bootstrapped. It gave the new company time to develop the technology and client base before selling any equity. It shows commitment to your business, they said (and I agree), and you’re in a better negotiating position with a higher valuation.
Here’s my concern:
A very smart, accomplished, internationally experienced group of people had a heated debate about whether or not to take a cash infusion.
But the management team’s ability — or inability — to grow the company didn’t even come up.
