Ten Commandments for Scaling Startups

“This is the unique space where all of you as MBAs can add the most value,” our Founder’s Journey professor explained to us in class. A scaling startup is like a rocket ship that can land on the moon or crash-and-burn. During the second module of our class, we learned from startups that scaled successfully.

This doesn’t mean they didn’t make mistakes. Mistakes are a part of life. Some mistakes, however, can be avoided. As the quote goes, “The wise man learns from the mistakes of others.” We’re here to share the lessons we learned from their startup mistakes, so you can avoid them. We’ve boiled these down to ten key commandments of scaling startups.

1. Thou shall not follow a “magic formula” to scale a company.

Would you buy a “magic pill” to give turn your beer gut into a 6 pack overnight? How about a “magic investing strategy” to get 30% returns from the NASDAQ for the next 25 years? If your answer to these questions is, “no”, then you should also probably apply the same logic for any “magic formulas” to scale your company from a start up to a unicorn. A quick Google search, proves this point:

Translation: there are a lot of people trying to give you advice, but what works for you may look very different from what entrepreneur.com recommends. Academics and professionals have a good understanding of how to operate a small company as well as how to operate a big company, yet the scaling journey remains a custom recipe, one that you will have to discover on your own. Product market fit, exceptional people, strong culture, grit, luck, and timing are all crucial factors, but you won’t find the perfect blend of these spices on the internet — it is up to you to improvise and adapt as you grow.

2. Thou shall do things that don’t scale in order to scale.

Yes, you read that correctly. Just as you don’t need to rent a 150 person office with Herman Miller Aeron chairs when you bootstrapping a company from your parent’s garage, you don’t need to design fully automated, scalable systems from day one. Instead, use your small scale to really get to know your customers and to build a product that delights them.

Don’t believe us? Take a lesson from Brian Chesky (CEO of AirBnb) when Airbnb was still just a few guys working out of Y Combinator. Here is an abridged version of a conversation between Checky and Paul Graham (founder of Y Combinator):

• Graham: “Where’s your business?”
• Chesky: “What do you mean?”
• Graham: “Where’s your traction?”
• Chesky: “We don’t have a lot of traction.”
• Graham: “People must be using it.”
• Chesky: “There are a few people in New York using it.”
• Graham: “So your users are in New York and you’re still in Mountain View.”
• Chesky: “Yeah.”
• Graham: “What are you still doing here?”
• Chesky: “What do you mean?”
• Graham: “Go to your users. Get to know them. Get your customers one by one.”
• Chesky: “But that won’t scale. If we’re huge and we have millions of customers we can’t meet every customer.”
• Graham: “That’s exactly why you should do it now because this is the only time you’ll ever be small enough that you can meet all your customers, get to know them, and make something directly for them.”

And, the rest is history. Chesky and his team traveled to New York every week, knocked on the doors of their customers, learned exactly what they wanted, and now have a company worth over $30bn. They didn’t build scalable processes from day one, and neither should you.

Hear the story in Chesky’s own words here.

3. Thou shall focus on people, not problems

You are a problem-solver. That’s how you’ve built a successful start-up. You saw the world differently than others, hustled and created a new solution. Now, it’s time to loosen the reigns. You cannot and should not solve every problem. There are simply not enough hours in the day.

Stop problem-solving, and start recruiting and coaching.

Empower people to make decisions. It’s okay if they make mistakes. Coach them through the process. If they continue to make the same mistakes, then replace them, but do not jump in and try to solve everything yourself again. You are only as good as the people in your company; uplift them!

If you’re looking to understand how to divide up your time, consider this advice from the article on Inc, “If your company is growing more than 25% a year, there are three critical areas of focus: people (50% of your time), strategy (35% of your time), and cash (15% of your time).”

4. Thou shall not copy-and-paste tactics from large companies.

Founders of early stage companies often copy the internal structure and processes of large companies as they scale in an effort to increase internal efficiency and productivity. While startups can be chaotic and unstructured, too much structure and processes shut down employees’ innovative spirit. Well-known VC First Round Capital points out in this article that the key mistake many startups make is copying others: “There’s all this stuff that everyone else does even if it’s stupid, so you do it too.”

Remember early stage companies are not miniature versions of large companies.

One way to think about how to understand the stages of a scaling startup is the power of three. The theory is that companies hit a “breaking point” whenever employee headcount reaches the following milestones: 3, 9, 27, 81, 243, 729, 2187. At each of these critical junctures, the executive team should pause and reassess internal dynamics and processes because “by subtracting bloated processes, [you] liberate great ideas.”

5. Thou shall be intentional about centralization.

As you start expanding and opening local offices, you will have to relinquish control from headquarters. Give your local offices autonomy to make the decisions they need to make in order to be successful in their local markets. They know the markets best. Yes, headquarters has the wisdom from its past success, but every market is unique. If you hired your local team, trust them and use them.

Mistakes will be made. It’s part of the learning process. Do not have a knee jerk reaction and centralize all functions and decision making.

Headquarters should not dictate the results and the means.

This will impede growth. People need to feel empowered. Therefore, set high expectations for results, give autonomy for execution, and measure performance. Think of the central headquarters as serving three functions for the local offices: advisor of best practices, service provider of resources, and controller of performance and culture.

6. Thou shall not confuse ownership with responsibility.

Do a quick Google search on “founder equity split” and you’ll immediately find hundreds of articles written by experienced VC investors, business executives and entrepreneurs arguing to split equity among the co-founders one way or another. Many of these arguments are based long-term implications of founder equity split on companies’ fundraising capability and potential to scale (example here from Y Combinator).

However, the reality is that no split is perfect, especially as companies scale and responsibilities evolve. This is why “co-founder” is not the only title in the company. Once a company starts to scale, it is critical to move past equity splits and ownership, and start structuring operations and governance around management responsibilities. Companies that do not make this transition quickly enough can end up destroying significantly more value than any upside a co-founder would get through a larger equity stake. Even some of the largest companies today do not quite get this right and are paying billions of dollars in lost revenues, problematic strategic moves — even long-term existence.

7. Thou shall not bet the farm, unless you have another one.

We remember many legendary entrepreneurs as master gamblers who “bet the farm” in pursuit of moonshot goals — and won. We celebrate and idolize these entrepreneurs because we find such bets incredibly difficult to make — and for good reason! If you make a live-or-die bet, and die, what comes next?

Are you telling me that entrepreneurs shouldn’t take bets? NO! If you wanted the safe path, you wouldn’t be doing something with a 90% chance of failure. However, it is critical that you are aware of the “survivorship bias” when looking up to successful entrepreneurs, such as Elon Musk. (The classic survivorship bias story comes from the Royal Air Force in WWII, described here.)

Just because some people bet the farm and win, doesn’t mean that you should every time.

Okay, so you are still reading and have decided to “bet the farm”, here is what to do next: First, make sure that your co-founders and loved ones are on board with your decision — you are affecting more people than just yourself. Second, understand how to “bet the farm” in the least risky way possible. In David Yoffie’s book Strategy Rules, he suggests “bet big, but don’t bet the company.” According to the book, ways to reduce risk include: diversify your bets, spread your bets over time, and time your bets.

Revisiting some of these “bet-the-farm” legends, we see that the risks they took are smaller than they first appear. For example, while creating a completely new mass-market electric vehicle brand is extremely risky, Elon Musk chose to first build a high-end sports car and then gradually move down market rather than starting with the Model 3. By doing so, Elon Musk bet the farm in a way that minimized risks, while still pouring his life savings into his venture.

Finally, before you “bet the farm”, remember that your startup is NOT your child. If things don’t work out with your company, you can always close up shop and get another job. However, if you go too far, “bet the farm”, and lose, you may put yourself and your family in dire straights that eliminate the possibility of a second shot.

8. Thou shall place more importance on firing than on hiring.

When you hire someone, you have limited data on their performance, personality, and effect on a culture. Hiring mistakes are inevitable, and while an employee may be a perfect fit for a role at one stage of a company they could be a terrible fit at the next stage. (To avoid mistake hires, see our earlier post on the importance of reference checks.) However, if you let poor performance or toxic personalities linger, you are messaging to the rest of your employees that these are acceptable parts of your culture (hint: they shouldn’t be.)

So, yes, you will have to fire someone, and yes, it will be one of the most difficult tasks of your career. However, how you handle the conversation (hint: do it in person, take responsibility, and be direct), treat the employee (hint: with dignity, with advanced warnings such as performance improvement plans, and by giving them the necessary time to process it), and message the termination to the rest of the company (hint: be transparent, yet compassionate) is what separates a smooth execution from a flaming disaster.

For additional practical tips on effective firing, check out this article.

9. Thou shall be aware of one’s biological responses, and act accordingly.

Let’s say that you took Commandment #8 to heart and decided to fire an underperforming, negative employee. You are now in the room telling them that you are taking away their income, his healthcare, and their livelihood. Your heart starts racing. Your blood pressures spikes. Maybe you even start sweating. Across the table, the same thing is going on in your employee’s body — his/her mammalian “threat response” has been triggered, starting in the amygdala and emanating throughout their sympathetic nervous system. Maybe they even vomit. In such a setting, neither of you will have a productive discussion until your reptilian brain circuitry has calmed down and the “rational” part of your brain has regained control.

Never forget that we are humans and humans are animals. You will never be able to fully control your emotions, and that’s okay.

However, as you go through the inevitable highs and lows of scaling a company, learn to recognize your emotions, and when you are feeling triggered, take a few breaths, put your feet flat on the floor, and try to break the cycle of your sympathetic nervous system. You might even want to take up a meditation practice to better prepare yourself for when these times inevitably arise.

Scaling a company is stressful. Learn how to master your emotions, and be aware when others aren’t in control of theirs.

[If you are interested in learning more about this topic, check out Daniel Kahneman’s “Thinking Fast and Slow”, or read one reader’s key takeaways from it here.]

10. Thou shall not regard entrepreneurship as a job. It’s your life.

Let’s face it. Entrepreneurship is not a job. It is your life. This is not only true for early stage startups. In fact, the piles of work seemingly grow faster as the company scales, with the company continually outpacing the infrastructure and team. Internal and external uncertainties arise and compile as the number of possible outcomes boosts through a combinatorial explosion. As a founder or manager, you are on the hook to keep the company on track and alive. As such, it is impossible to completely separate work from life. Just like a surgeon in an emergency room, when a dying patient comes in, she will always save the patient rather than head out to avoid being late to dinner.

The intensity of scaling a company is a reality that founders need to embrace and share with their loved ones and support network. Even more importantly, founders need to make sure they are working on something they are so passionate about that make the sacrifice worthwhile. The founders also need to ensure that those around them understand the intensity of the entrepreneurial journey. There may not be protected 2-week vacations for a few years. It is better to make this clear upfront than create an illusion and disappoint later.

Yet, even if you work hard as an entrepreneur, you must find a way to avoid burnout, break-ups, or a downward spiral of work-induced misery. Here are a few tips for keeping a bit of sanity in your life. If scaling a company is miserable, maybe you should consider why are you doing it in the first place? But, if you are able to stay sane, maybe even have some fun, and defy the odds to successful scale a company, it will be an adventure of a lifetime.

Written by Sana Mohammed, Ethan Li, Zander Sebenius (Harvard Business School, Class of 2019)