Why do most start-ups fail to successfully scale up? Five reasons where founders are going wrong

By K Yatish Rajawat

The only goal every start-up has is to successfully scale and disrupt or own an industry. The biggest reason that bulk of them fail at doing so is because their founders fail them. Here are five reasons that explain why is failure so endemic to life of a start- up.

Why do most start-ups fail to successfully scale up? Five reasons where founders are going wrongReason 1: Most start-up fail because of the founders, yes it is true its not because the product is bad, or anything else. Founders fail their start-ups. And they do so because they are unable to change or move with the market, trend, or competition. They are not able to move beyond their own initial idea.

As any successful venture capital (VC) will tell you that they look for winning teams in a start-ups. A team that is smart, intelligent and willing to swim ahead of the tide, and willing to change, adapt and move before the market changes. Which is why the same idea or product is still funded by several VCs, each one is funding the founding team not the idea. If the founding team is not able to move fast, change faster they are dead before they start.

Reason 2. Founders do not realise that they are out of depth as the demands of company grows. Used to micro-managing in the initial stage they just cannot give up control or even trust somebody else to do the job. Whenever they take back control from an employee they reduce his or her importance. They also break the rules of delegation and development. And this is where the penny falls as they take away the control resulting in one employee less. If they keep doing it, they not have empowered employees but employees following orders.

Reason 3. Most start-ups are unable to attract employees better than the founders or different from the founders. They always hire downwards not upwards till such time a VC fund or Private equity funds starts hiring at the leadership level. When the founder hires downwards he or she creates a spiral of micro management and employees are continuously waiting for approval or clearances. This destroys all initiatives and prevents the start-up from being nimble which is the biggest strength it has against an established competition. Matter of fact the success of any founder or any leader has always been established by the number of brilliant people they are able to attract. Founders forget this simple leadership adage, especially when they come from conglomerates where they hired mediocre to protect their positions.

Reason 4: The controls that worked at seed stage do not work beyond. As the funding comes in and demands from investors increases controls need to move away from the founders to systems. Founders cannot continue signing every cheque or clearing every due. Financial controls need to be managed by professionals and they should be capable of scaling up. Remember every employee hired is working for a salary, if his reimbursement is delayed by a day he gets concerned. He gets concerned about whether there is enough funding ? If a small reimbursement cannot be cleared will his salary come on time next month ? This is the beginning of disenchantment and best employees will start looking out very fast.

Reason 5: Employees who join start-ups are risk takers and potential entrepreneurs themselves. If they were not risk takers they would have not joined a start-up. Respect this spirit, nurture it , harness it by enlarging their roles so that they can breathe this into the start-up. Don't stifle it so that they leave. If they want to do something independently give them time to pursue it, even fund it. Employees who have the entrepreneurship spirit are rare, they are the ones which will give the big breakthroughs. Don't ever let them go as they are irreplaceable. Give them better incentives to make them stay, give them profit share if need be.

Most founders fail at sharing rewards, they are stingy with sharing stakes in the company. They negotiate so hard on salaries and stakes as if it is something limited they are giving away. It is not limited as value of every stake is notional till such time it is realised, and paradoxically it grows by giving it to the right employee. So giving it away is enhancing its value and it creates a culture of co-ownership that is so crucial for any start-up. Allow the employee to rise up if he has that rare gene to bring deals to the table.

Most founders are so insecure that they never want to discuss rewards or performance if the employee has achieved the impossible. They see it as his job, yes it is his job. But what if he instead of doing this job decides to start his own business. Whenever a start-up loses an employee to another start-up, or when a rockstar employee leaves to start his own venture, something has gone wrong. If the founders have not been able to retain a rock star than they will never be able to attract one too.

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Updated Date: Mar 25, 2016 17:29:48 IST

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