11/20/2014

A Deeper Look At Blackboxs Data On Startup Failure And Its Top Cause: Premature Scaling [Infographic] | TechCrunch

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http://techcrunch.com/2011/09/01/adeeperlookatblackboxsdataonstartupfailureanditstopcauseprematurescaling
infographic/

ADeeperLookAtBlackboxsDataOnStartupFailureAndIts
TopCause:PrematureScaling[Infographic]
ByRipEmpson

Earlierthisweek,wecoveredBlackbox,theyoungcompanyresponsibleforcreatingTheStartupGenome
Report,anongoing,collaborativeR&Dprojectdesignedtotakeacomprehensivediveintowhatmakes
SiliconValleystartupssuccessfulandnot.(Readourinitialcoveragehere.)OnTuesday,wecoveredthe
companyslaunchofwhatitcallstheStartupGenomeCompass,abenchmarkingtoolforstartupsthathelps
foundersmonitortheirprogressindifferentgrowthcategories.Sincethen,morethan6,000startupshave
signeduptousetheCompass.
Alongwiththediagnostictool,Blackboxalsoreleasedanewresearchreportonthemajorcausesofstartup
failure,includingperhapsmoresignificantly,theprimarycauseofstartupskickingthebucket:Premature
scaling.Whilethiswastouchedoninourpriorcoverage,wethoughtitmightbeworthelaboratingontheir
findings,includingpresentinganiftyinfographiccreatedbytheteamoveratVisual.ly.
Torefresh,sinceFebruary,Blackboxhascollectedadatasetfromover3,200highgrowthtechstartups,with
theresultsoftheirstudiesshowingthatprematurescalingistheprimarycauseofstartupfailure,afflicting70
percentofallthestartupsthatwenttomeettheirmaker.And,arelatedpointthatsworthyofnote:Basedon
those3,200startups,theexperienceofentrepreneurs,gender,countryorigin,educationandagehadno
influenceonthepredictedlikelihoodoffailure.
But,assomeastutereadersinthecommentsectionofourpriorpostpointedout,itcertainlycanseem
dangeroustominealargeanddiversesetofdatacreatedbystartups(andinturnbyactualandequally
diversehumanbeings)toclaimthattheworldhasfoundonesingle,ultimatecauseoffailurethatcanbe
usedasaprescriptionforstartupsofeverystripe,acrosstheboard.WhiletheBlackboxteammaydisagree
slightly,thestudyisaimedathelpingearlystagecompaniesavoidthedeadpool.Simpleasthat.TheStartup
Genomeisanongoingresearchprojectseeminglyintendedtoilluminate,notforcefeedprescriptions.Itis
scientificinitsapproach,someofitslanguagemayseemdryanditmaynotworkforeveryone.
Whatsmore,prematurescalingmayseemanoverlysimplisticterm,anditmaybeeasytomisconstrue.
TheBlackboxteamdefinedprematurescalingintheirresearchasawayofdenotingthefactthatastartups
coredimensions(product,customer,team,financesandbusinessmodel)areoutofsync.Thatistosay:
One(ormore)aremovingatdifferentspeedsofgrowththanothers.AsBlackboxCofounderBjoern
Herrmannpointedout,insomecasesdysfunctionalscalingmaybeabetterdescription.
Withthisdescriptioninmind,theresearchfoundsomefairlystrikingdifferencesbetweenthosestartupsthat
scaledprematurely(ordysfunctionally)asopposedtothosewhoweremoreinsync.Mostnotably:Nota
singlestartupthatscaledprematurelypassedthe100,000usermark.Notonlythat,but93percentofthose
startupsnevercrossedthe$100Kayearinrevenuethreshold.And,perhapssomewhatcounterintuitively,
startupsthatscaleproperlygrow20timesfasterthanstartupsthatscaledprematurely.
InvestorandserialentrepreneurBradFeldweighedinonprematurescalingtosay,Hiringanysubstantive
numberofsalesormarketingpeoplebeforethereiscustomeradoptionisprematurescaling.Alltheearly
hiresshouldbetechnicalorproductfocused.Atleastoneofthecofounders,though,shouldbeobsessed
withsalesandmarketingfromthebeginning.Addingonesalespersonaftertheproductisinthemarketand
onemarketingpersonisfine,buttheseshouldbedoersnotVPs.
http://techcrunch.com/2011/09/01/a-deeper-look-at-blackboxs-data-on-startup-failure-and-its-top-cause-premature-scaling-infographic/

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11/20/2014

A Deeper Look At Blackboxs Data On Startup Failure And Its Top Cause: Premature Scaling [Infographic] | TechCrunch

AsafurthermeansofelaboratingonhowtheBlackboxteamdefinedtheirresearch,Hermannsaidthatthey
definedstartupsastemporaryorganizationsthataredesignedtoevolveintolargecompanies.Once
defined,theteamthenattemptedtobringascientificapproachtounderstandingthelifecycleofthose
startupsalmostlikeabehavioralpsychologistbydefiningsixstagesofdevelopmenttheyevolve
through:Discovery,Validation,Efficiency,Scale,Sustain,andConservation.
Earlystagestartupsaredesigned,Herrmannsaid,tosearchforproduct/marketfitunderconditionsof
extremeuncertainty,whereaslatestagestartupsaredesignedtosearchforarepeatableandscalable
businessmodelandthenscaleintolargecompaniesdesignedtoexecuteunderconditionsofmuchhigher
certainty.Soundsreasonable.
Buttheywentfurther:Everystartup,theydetermined,hasanactualstageandabehavioralstage,inwhich
theActualstageismeasuredbycustomerresponsetothestartupsproduct,throughlookingatmetricslike
numbersofusers,usergrowth,activationrate,retentionrate,revenue,etc.Thebehavioralstage,then,is
madeupoffivetopleveldimensionsthatthestartupcancontrol,likeCustomer,Product,Team,Financials
andBusinessModel.Eachdimension,boththeActualandBehavioralarealwaysclassified,Herrmannsaid,
intooneofthesixdevelopmentalstages.
Intermsofhowthismodelrelatestoprematurescaling,astartupreceivedthislabelintheresearchwhenits
behavioralstagebecamelargerthanitsactualstage.Anobviousexampleofprematurescaling,the
BlackboxCofoundersaid,wouldbeastartupthatrapidlyscalesupitsteamto30to40peoplebeforeithas
anycustomers.Inthisexample,theActualstageofthestartupwouldbeinValidationbuttheBehavioral
stageoftheteamwouldbeinScale.
Ontheotherhand,BlackboxtendstodefinedysfunctionalscalingasacaseinwhichtheBehavioralStage
islowerthantheactualstage.Startupthatprovideexamplesofthis,accordingtoBlackbox,include:Tokbox,
Friendster,Orkut,Wesabe,Digg,SixApart,Myspace,abdChatroullete.
Butratherthangointoeachoftheindividualstages,heresanexamplefromone:Specifically,thatofthe
oldecustomeracquisitioncategory.Blackboxlabeledastartupasscalingprematurelyinrelationtoits
customeracquisitionwhenit,forexample,spenttoomuchmoneyonacquisitionbeforetrulyrefiningits
actualproductormarketfitor,alternatively,overcompensatingormissingproductandmarketfitwithtoo
muchofafocusonmarketingandpressspending.Anilluminatingstatinthiscaseisthatstartupsare2.3
timesmorelikelytospendmoreoncustomeracquisitionbeforegettingallothercategoriesinsync.Blackbox
citedColor,Webvan,andPets.comasexamplesofstartupsthatspenttoomuch,tooearlyonthecustomer
acquisitiondimension.
Fornow,wellleaveitatthat.Butforthosewhoareinterestedinmore,checkoutBlackboxsresearchon
prematurescalinghere.
Andwithoutfurtherado,Visual.lysinfographiconprematurescalingisbelow:
byStartupGenomevia
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