Starting a company and growing in until it reaches national or even global success is a dream all entrepreneurs share. But what is the differentiating factor between thriving and failing startups? A longitudinal study by Startup Genome explains.
Since 2010, Startup Genome’s Bjoern Lasse Herrmann and Max Marmer collected and analyzed a comprehensive data set on over 34,000 companies to determine what are successful startups doing differently from the rest.
Herrmann and Marmer concluded that the main reason startups fail is premature scaling. On the other hand, successful startups master the art of balancing numerous internal and external variables simultaneously, often in uncertain and volatile environments.
According to their study, the most prominent challenge startups face is balancing the so-called ‘inner and outer dimensions’ of a newly founded business. The outer dimensions are best summarized by traction while the inner dimensions are five-fold, and they refer to the product, team, finance, legal, and customer relations.
The results of Startup Genome’s research indicate that when inner dimensions outgrow outer ones, companies scale prematurely and become what Herrmann and Marmer classify as ‘inconsistent companies.’ By contrast, the startups that scale properly are what they consider ‘consistent.’
Seven stages of startup development
The discovery phase is characterized by determining whether the company is solving a meaningful problem or not and whether it was solved in an adequate manner. This is followed by the validation phase, in which the focus is to confirm, using qualitative and quantitative metrics, that the product has a passionate, early-adopter user base.
In the efficiency phase, the company prepares for scaling by optimizing a long conversion funnel. Refining the business model, company culture, and financing plans are the main tasks in this stage. If the previous steps are performed correctly, the company is likely to grow exponentially in the scaling phase. Sustain, maintain, and decline phases are the final three in the lifecycle of a startup, as defined by Herrmann and Marmer.
Main differences between consistent and inconsistent startups
Growth is a sign of progress, but it needs to come at the right time. Expanding too much too quickly is a mark of inconsistent startups. According to the Startup Genome study, inconsistent companies grow 10-12 times faster than their consistent counterparts during the discovery stage, and 1.5-2 times faster in the validation stage. However, this tendency halts in the crucial efficiency and scaling phases, when inconsistent startups grow 16-26 slower in comparison with consistent companies.
Staff also matters, the study suggests. In successful companies, the team size stays relatively constant through the discovery, validation, and efficiency stages, growing at the scale stage. Unsuccessful startups tend to take on too many workers before the scaling phase, only to lose them at the crucial scaling phase.
Another critical indicator that a startup is developing too fast is the amount of funding it raises at each lifecycle stage. Inconsistent startups raise three times more money in the efficiency stage and eighteen times less money in the scale stage.
According to the study, the number of paid users in the discovery and validation phases differentiates consistent companies from inconsistent ones. Startups that scale prematurely have 75% more paid users in those first two stages compared to consistent startups. Consistent startups have 50% more paid users in the scale stage than inconsistent startups.
Finally, outsourcing product development in early stages bodes ill. On average, inconsistent startups outsourced 11% of product development in the discovery and 19% in the validation phase. Consistent startups outsourced only 3 to 4% over the same period.