The Perils Of Scaling Startups



In recent weeks, we have seen a number of high profile startup collapses:

July 17Homejoy shuts down

August 5Good Eggs shuts down all non-San Francisco locations

August 10Zirtual shuts down overnight

All were well-regarded startups. All together, they rose close to $100 million in funding. Even with ample funding, solid momentum, and real revenue being generated, it was not enough to keep the lights on.

There is a lot of money floating around Silicon Valley these days. People talk about bubble, and maybe there is a bubble. Money does not like to sit idle and right now for the near future, the money is on startups.

What this means is that venture firms have more capital at their disposal. They can make more swings for the fences. You have to when just to make a decent return on capital requires multiple billion dollar plus exits. Before it was special if you rode a unicorn, now it is table stakes just to be relevant.

This puts pressure on founders to scale. Why raise $10 million when you can raise $50 million? The idea then is to grow your way out of problems and stamp out competition. I can hear the talk in the partner meetings, “We just need to replicate the Uber playbook!”

I sincerely feel for these entrepreneurs. It is too much pressure to grow so fast and there is little justification for it. Money forces speed. Speed amplifies mistakes. Mistakes at high velocity can kill. If they had slowed down, they just might have found the flaws in time and fixed them.

Startups are a high wire act. It is exciting and death defying to see. Sometimes though you fall and there is nothing to catch you on the way down. When scaling at such a rapid pace, you have the added benefit of a gale force winds hitting you and you are 100 stories up. Everyone is watching.

I wish we were not in this current cycle of investment frenzy. Founders are looking over their shoulders too much. There is this keeping up with the Joneses attitude where everyone is comparing funding rounds. It is as ego boosting as it is intoxicating. Funding is no more a matter of needing the funds for achieving specific business objectives. Funding is now the sport.

The gap between a few million in revenue and $100 million is vast. Most companies do not get there. However, they still manage to grow enough each year to get to $10 or $20 million in revenue. If you are making money and generating profit, then you have created a sustainable business.

Outside investor, capital should be more gravy than meat at that point. Once you take the massive funding round however, you are signing up for the unicorn club. Then, there is no stopping the roller coaster ride of startup scaling. The more money there is the scarier the ride.


This article was originally published on Strong Opinions: a blog by Birch Ventures for the NYC tech startup community.

Image credit: CC by Kool Cats Photography over 5 Million Views

About the author: Mark Birch

Mark is an early stage technology investor and entrepreneur based in NYC. Through Birch Ventures, he works with a portfolio of early stage B2B SaaS technology startups providing both capital and guidance in the areas of marketing, sales, strategic planning and funding.

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