Growing, Growing, Gone: The Quiet Killers of Growing Startups

“A startup is designed to grow fast.”

—Paul Graham

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When Elon Musk rolled out of bed on December 21, 2008, he felt on the verge of a nervous breakdown.

“I felt this is the closest I’ve ever come, because it seemed… pretty dark,” he told CBS.

In October of that year he became CEO of Tesla Motors, an American automotive and energy storage company, and Esquire referred to him as “arguably the most 21st-century entrepreneur on the planet.”

But the fuller picture is that Musk was coming off a string of failures in two companies he had bet the house on.

Pause. It’s typically around this point, after successive failures that leave a company hemorrhaging money and firing workers, that most startups call it quits. If they had noteworthy potential, they might luck out and see their name on the Startup Failure Post-Mortem list from CB Insights before they’re buried. Those that hang on, and fully believe they are the next Apple despite the overwhelming evidence, are living in what Mark Nichols referred to as “the type of delusion” that will probably increase the likelihood of their startup being one of the 90% that fail.

Play. As co-founder of PayPal, Musk made $180 million when eBay purchased the company in 2002. And he’d spent every cent of that on Tesla and SpaceX, a space exploration technology company he founded. The first three rockets launched by SpaceX didn’t reach orbit, and he felt a 4th failure could mean an end to the company. And Tesla? It was losing money, Musk had to fire a quarter of the company’s employees, and it was becoming known as much for its sense of innovation as for its quality problems (by May 2009 Tesla had to recall 75% of the Roadsters it made since March 2008).

Throw in this additional layer of context: the US economy was in the worst recession since the Great Depression, and nothing better portrayed this story than the very industry Musk was trying to succeed in. Chrysler would file for bankruptcy on April 30, 2009, and General Motors did the same about a month later.

Oh, and Musk was getting divorced, there was a point when Tesla nearly had to file for bankruptcy, and he was so broke that he was borrowing money from his friends to pay the rent.

Pause. You likely know where this feel-good story is headed after the pause, but there’s another reason why you should be feeling good right now: if your startup is growing you’re in a far greater place than Musk was back in 2008. Of course the barometer of global success is dependent on a variety of factors, including the industry, but your growth is a good sign. Paul Graham, venture capitalist and co-founder of the Y Combinator seed capital firm, put it this way:

Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of ‘exit.’ The only essential thing is growth. Everything else we associate with startups follows from growth.”

Play. The story then took a turn that is held up as a beacon for entrepreneurs everywhere. Money poured in from a variety of funders (including the government). The 4th launch of the Falcon 1 rocket orbited the Earth, becoming the first privately developed liquid fuel rocket ever to do so. Tesla went on to create the highest-performing car that Consumer Reports ever tested. And Elon Musk, since the death of Steve Jobs, became Silicon Valley’s superstar. Fortune even called him a “one-man embodiment of the future.”

Enter Zirtual

“Dedicated virtual assistants for entrepreneurs, professionals and small teams.” That’s the tagline for Zirtual. Or was. Or maybe it’s now on their virtual tombstone. Zirtual had enough potential to make the Post-Mortem list, but they’re now more known for their abrupt folding than for anything positive they achieved. As Tom Webster succinctly put it on Episode 56 of The Marketing Companion Podcast:

They folded without any notice to anybody. They had 400 virtual contractors who basically woke up the next morning finding out they weren’t going to get paid.”

Webster then referenced the Medium post from Maren Kate Donovan, Zirtual’s CEO. Donovan, in 8 sentences, tells the cliched story (and as some commenters believe, an untrue or incomplete story) of having her “backpacker’s pack and burning desire,” having to live in hostels so she could financially support her dream, and then in a blink how Zirtual “…had almost 500 employees, was serving thousands of clients and was on an $11M run rate.”

But it’s the 9th sentence that steps out of myth and steps into the kind of reality most startups face:

Then growing fast caught up with us….”

For every Tesla story there are hundreds, maybe thousands, of stories like that of Zirtual: companies that started with a fire in their belly, carved out their niche enough to grow and then… growing fast caught up with them. They had chased down growth, but once they got a hold of it things started to spiral out of control.

So what happened in this case? Donovan said burn was Zirtual’s problem, and she refers to it as “that tricky thing.”

Note 1: Burn is money in vs. money out.

And then she said the words that confirmed why a ton of people were pissed off:

The reason we couldn’t give more notice was that up until the 11th hour, I did everything I could to raise more money and right the ship.”

Here’s what Peter Shankman, founder of HARO, tweeted out:

Donovan then followed up her comment about burn with this gem:

“I’ve read notes from people calling me stoic as this shit storm has hailed down on us.”

Note 2: Burn is money in vs. money out. A shit storm may burn, but burn cannot shit storm.

As Webster completed his telling of the story, his podcast partner Mark Schaefer (who I admire greatly), brings up…

…Elon Musk. And of course the story of how Tesla was saved at the 11th hour.

And this is how the cycle of startup delusion continues. When all the stories of failure are countered with the same anomaly, that anomaly starts to become the mythologized norm. And since history rarely remembers teams, an individual becomes the epic hero.

The verdict’s out on what’s true in Donovan’s post, but this is the part all startups should spend time deconstructing before it’s too late:

At the end of the day we grew faster than we could handle.”

So how can growth, that crucial component that makes a startup a startup, be the problem? Let us count the ways.

The 7 Quiet Killers of Growing Startups

Note: For a quick takeaway of these, check out our SlideShare at the end of the article.

1. The Growth Trap

In 2012, Georgetown University professor Sandeep Dahiya wrote a quiet little article titled Are You Growing Too Fast? for Harvard Business Review.

In it, he tells the story of Allen Printing, a family-owned printing business in Tennessee that had to file bankruptcy nearly a year after their sales hit an all-time high.

The Challenge: Dahiya said the company had “fallen into a familiar trap: unsustainable growth.” He spoke of how high growth can overwhelm the existing internal control of small teams. Eventually, the CEO:

“…realized that as new orders poured in, it became difficult to establish the true cost of fulfilling them. And, because credit was readily available to cover the growing need for working capital, it was easy to ignore the sizable number of unprofitable and late paying customers.”

The Answer: Dahiya breaks it down into three points:

First, understand your true operating costs and how they evolve as your business grows. Rapid growth frequently put margins under pressure as the company tries to keep customers happy with such services as faster fulfillment and generous payment terms.

Second, get a solid grasp of your working capital needs—how much cash does your firm require to conduct day-to-day business?

Third, avoid the widespread obsession with income statements as an index of health.

His conclusion is the practical advice of actually being in the mindset to take action based on what your metrics are telling you.

2. Stretching Resources

Stretch gently, and when you’re warmed up, and you’ll likely be fine. Stretch ballistically, when you’re cold, and shit will likely break.

The Challenge: In an article for USA Today titled Can small firms grow too fast?, Laura Petrecca said that “Stretching too far, too fast is a common misstep among enthusiastic business owners eager for growth.” Petrecca then highlights Daniel Lubetzky, CEO of KIND Snacks, who says he made many mistakes by putting too much emphasis on expansion.

Stretching resources to pursue the belief that sales growth trumps everything is a challenge many growing startups face. And in being hellbent on expanding, quantity can pull too much of the company’s attention.

The Answer: Lubetzky eventually learned from those mistakes, and now says he puts more emphasis on the quality of the product — even if that means he misses an opportunity that needed his immediate attention. Petrecca tells the story of one of KIND’s most popular products:

For instance, it took his company two years to develop a dark chocolate and sea salt snack bar. He could have rushed the process to get the bar on store shelves sooner, but Lubetzky says he didn’t want to compromise on taste or rashly add in ingredients he wasn’t proud of including.”

“We probably could have launched it in six months,” Lubetzky said. “But we did not betray our values.”

3. Changing Team Size

As a startup starts to grow, eventually the size of the team will as well.

The Challenge: Whereas focus could once be spent on task management, focus must increasingly be split between the task and on the building and managing of a growing team.

John Hall, CEO at Influence & Co. opened his piece at Forbes titled, 12 Challenges Faced By The Fastest-Growing Companies, with this statement:

There’s a common misconception that fast-growing startups have it made: They’ve found a business recipe for success and are on the fast track to making millions. Unfortunately, that’s not the case — high growth equals high uncertainty.”

From there he asks fellow CEOs what struggles they faced as their growth really picked up. One response, from Tom Sullivan of SoundConnect, stood out because it seemed to astutely address concerns brought up by others:

Getting the right people on the bus is hard. I’m picky, but I think that is a good thing. If you don’t have enough of the right people, then you will try to do everything yourself.”

Mark Miller, VP of Marketing at Emergenetics International, was next in line. He had something awfully similar to say:

As a fast-growing company, the biggest challenge we face is capacity. We have increasingly been able to build our demand, but ensuring we have the right people to execute on this demand is really tough. There are brilliant potential employees, but truly understanding what kind of hires we need and how to get people up and running quickly, effectively, and productively is our biggest challenge.”

The Answer: Take your time when building a team. Filling “the bus” with temps (or with people that do not fit with what you love most about your company’s culture) could cost the company big time. For a deeper dive, check out this piece on team size from Cyrus Molavi.

4. Filling the Gaps

Gaps arise naturally when a startup begins to grow. And it’s often the filling of these gaps that enables the startup to have steady footing for their next surge.

The Challenge: It’s often the CEO, the one with the bird’s eye view of the company, that knows which gaps need to be filled. But too often, especially in lean startups, the CEO tries to fill the gaps. The result isn’t just burnout, it’s all of the problems that can arise when the company leader isn’t leading by his/her strengths. In his piece at Entrepreneur titled, Challenges faced by CEOs at fast growing companies, Deepak Narayanan of MyCFO states:

In high growth companies, CEOs possibly have larger roles to play since they end up filling the gaps left open by the existing team. Mind you, this is not a comment on the capability and energy of the existing teams; it is just a reflection of an unfinished agenda that is omnipresent in every high growth company that needs filling up.”

The Answer: If you’re the CEO/leader and filling a gap, have an exit plan. This includes strategizing with your team on when and how you’ll exit, as well as what you’ll pivot your attention toward when you do.

5. Understanding Tech

Writing for Inc. Magazine, Ken Lin, founder and CEO of Credit Karma, said technology is “…less a solution to all of your company’s problems than a puzzle that needs to be constantly assessed and configured to make sure you’re serving your customers in the best possible way.” This applies not only to tech startups, but to any startup.

The Challenge: How to assess and configure? How to decide which product to trial or commit to among the thousands out there? That’s just part of the challenge. Lin posits that, broadly speaking, there are three key challenges: Data, Inertia and Security.

The Answer: For Data, Lin says: “If technology and cost weren’t obstacles, what would your company be doing with your data to help put out the best imaginable product? When you know that answer, you have to start challenging the long-standing assumptions that are keeping your business from achieving that vision.”

For Inertia, Lin speaks of the increasing time it can take to get things done with a larger team. When the startup was small, decisions could made in minutes. He suggests the importance of being mindful of this change not only as its happening, but before it happens. Growing the team is exciting, but it’s important to keep the decision-making process as streamlined as possible as you do.

For Security, Lin says it perfectly: “Security is a technological issue that can also easily become a reputational one.” The answer here is to take it seriously and to not naively believe “you didn’t think it would happen.” Do what you can to shore up issues before the breach. For starters, 1Password is a great product for making sure all your team’s passwords are safe.

6. Keeping the Customer First

Your growth means newfound popularity. Your employees may be receiving interview requests, speaking engagements or other opportunities. While these can certainly be worth pursuing, the flip side to your growth is that there are more users of your product. This means more customer service interaction, more support tickets to handle and more customers tweeting about some problem they’ve had.

The Challenge: You’re equipped to get your product into more hands, but are you equipped to develop the extra customer service relationships that demands? “Customer service failures” takes #3 on the list of Carla Young’s OPEN Forum article titled, 7 Ways Rapid Growth Can Kill Your Business.

The Answer: Know the problem. Your growth may look beautiful when it’s covered in major media outlets or when it’s compiled into a bar chart, but it can be easy to forget that behind every success and number is a customer. Company’s typically rise and fall based on their products and their customers. And it’s especially important to nurture both in times of immense growth.

7. Balancing Budget & Risk

And now we’re back to talking about cash flow. In a Forbes article titled, Watch Out For The Five Hazards of Growing Too Quickly, Brian Hamilton, chairman of Sageworks, said accounts payable moving faster than sales or collections is the biggest challenge he sees in his work with fast-growth companies.

The Challenge: Hamilton says, “The company’s growing, but they’re selling on account rather than through cash transactions. This turns you into a debt collector. Suddenly, you find yourself in the banking business (to a certain extent). You could have – and you do have – cases where the company’s growing, they’re even profitable, but because they’re not collecting their accounts receivable quickly enough they go out of business or they have big problems.”

The Answer: Sure, it’s important to strive for that balance between aggressively pursuing growth and allowing your existing cash flow to shape your decisions. But let’s be real; most startups are pursuing a dream, and many become so caught up in it that they may take on a certain numbness to the risks involved. The advice is twofold. First, go back to (1). Second, find a trusted advisor who is outside of the daily company work and who, preferably, has achieved something similar to what you hope to achieve. They’ll understand the game you’re playing, and be able to provide a new perspective.

Of course all startups face challenges. But some of these challenges can be exacerbated when the growth they’ve pursued starts to kick in — and this is in addition to the many new challenges that arise as a result of growth.

While Elon Musk’s fandom (count me in) and story will continue to grow, the story of Zirtual perhaps has more to teach.

And since we opened with Elon on the verge of a breakdown, let’s end on a more positive note: the advice he delivered at Dell World 2013:

If you can get a group of really talented people together, and unite them around a challenge, and have them work together to the best of their abilities, then a company will achieve great things.”

Do you have advice for growing companies? Has your company overcome seemingly insurmountable setbacks? Do you also think Kevin Durand is Elon Musk’s doppelgänger?

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The 7 Quiet Killers of Growing Startups

-Photo: Flickr/werkunz