2 Ways Growth Can Kill Your Startup

A popular Frank Sinatra song speaks of love and marriage going together like horse and carriage. The words startups and growth seem to be used much the same way. Recently I moderated a panel on “Why some startups grow and others don’t” at the TATA First Dot powered by NEN student startup showcase.

One of the questions that came up during the discussion was

Is growth always good? Are there instances when growth can be bad?”

The panelists all agreed that NOT all growth is good growth. Specifically,

Non-focused growth Naga Prakasam, angel investor and mentor, brought up the point, that growth unless directed and focused can easily derail a startup. So growth in revenue, even when profitable, could turn out to be bad in some situations.

One of two things most commonly happen

Revenue consideration – as a cash-strapped entity many startups chase any and all revenue – so you have product companies taking on services or service firms taking on non-core functions – pretty soon the organization is pulled in many directions with people stretched either too thin or into areas that are not their strengths

Customer retention – you have a major or important customer for whom you provide specific products or services. They want you to support them doing something that another vendor is doing – for instance in my first startup we did only Bluetooth software. However our customer, one of the largest accessory makers in the world, wanted us to help them with IT support too. Luckily we turned them down even though the risk of losing our core business to their IT vendor loomed. (Of course their IT vendor claimed that they could do Bluetooth software as well – but that’s a whole another story 🙂 Such growth, unless planned as part of a larger strategy, will eventually end up hurting the customer and your business, as you take on things for which you either don’t have competence or distracts you from your core business.

Non-profitable growth In the semiconductor business, we’d always joke about “making it up in volume!As airlines, magazines and mobile phone companies learned the hard way, growing non-profitably, especially when you lose money on each sale is not a good thing. In  fact, the more growth you have the more money you’ll lose (or burn through) and rarely is the outcome pretty. Sure, there are times you have to get your foot in the door, enter a new market, test a new product when you will lose money – but hopefully that’s well planned and the downside is contained. Either it allows more profitable products to be sold or customers to be acquired and cross over from loss to profit making, when some volumes are attained (or fixed costs or amortized).

Growth, when focused and profitable is good. But when neither can easily hurt your startup and possibly kill it too!

One thought on “2 Ways Growth Can Kill Your Startup

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s