Premature Scaling & How To Avoid It

Premature Scaling & How To Avoid It

The Startup Genome analysis, which investigated 650 Internet startups, found that “premature scaling is the most common reason for startups to perform poorly and lose the battle early on”.

Similarly, a complementary report on 3200 high growth startups revealed that “74% of high growth internet startups fail due to premature scaling”.

Premature scaling, thus, is a startup killer. But what, exactly, is premature scaling?

And how can you prevent it from leading to the death of your company?

In the startup world, a wannabe company becomes a “real business” once it develops the ability to acquire customers quickly and at a cost that’s lower than the revenue that such customers generate.

The formation of a repeatable and scalable business model is essential to a startup’s vitality precisely because it opens up the possibility for a startup to accomplish its central objective, i.e., to grow and scale exponentially.

Achieving such a business model is the ultimate goal of a startup.

Your company reaches this defining point when it secures the following 3 key developments:

1.     Your customer acquisition cost (CAC) i.e., the total cost of convincing a potential customer to buy a product or service — is lower than the lifetime value of customer (LTV) metric — i.e., the revenue that a customer is expected to generate during his/her lifetime;


2.     You operate in accordance with economies of scale i.e., a situation in which the more customers you have, the cheaper the cost of your product become — such that your CAC/LTV ratio decreases with growth; and


3.    Your business model keeps replicating itself, i.e., you continue to successfully acquire customers without exhausting your customer acquisition channels.

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6 Stages of Startup Development 

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The startups generally pass through 6 milestone-based stages of development.

Specifically, startups typically progress through stages of Discovery, Validation, Efficiency, Scale, Sustainment, and Conservation.

The first 3 stages — i.e., Discovery, Validation, and Efficiency — encapsulate the period during which time a startup validates the core assumptions of it main business ideas and product.

Let’s look at the first 3 stages in a bit more detail:

Discovery stage: focus = ensuring that the primary customer pain that the startup intends to solve is a) substantial enough to fuel the growth of a new company and b) monetizable to the point where the business can eventually turn a profit and scale. In other words, finding a problem/solution fit is the most important concern.

Validation stage: focus = achieving a product/market fit. Product/market fit means creating an in-demand product that satisfies the needs of a market that is large enough for your startup to grow into a full-scale business down the road. As I’ve discussed previously, as a founder you must be “absolutely sure that a market actually exists for the solution you intend to offer — otherwise, your startup won’t ever earn the money it needs to scale or to do any good in the world”.

Efficiency stage: focus = optimizing the business model so that the startup can eventually become profitable. This ultimately involves developing a repeatable and scalable business model.

In general, once a startup has successfully progressed through these 3 stages it’s then time to start spending money aggressively so as to expand and scale operations:

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Let’s take a closer look at the dangers associated with premature scaling, which typically occurs earlier in the startup lifecycle.

What Is Premature Scaling?

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In simple terms, premature scaling refers to an effort to grow your business at a rate faster than you can afford to sustain.

“Failing to nail down the specifics of your CAC and LTV can facilitate premature scaling and, thus, cause startup failure.”

Startups that fail because of premature scaling share one or more of the following characteristics in common:

  • They build and try to scale products before having adequately tested and validated their problem/solution fit.
  • They overspend on customer acquisition efforts before successfully establishing a solid product/market alignment.
  • They hire too many people too early, raise too much money and/or try to generate high earnings at the cost of every other aspect of growing a company.

At this point, having successfully traversed the first 3 or 4 key stages of building a startup, it’s time to move onto developing economies of scale, generating greater revenue, and expanding your operations.

About Devansh Lakhani

Director of Lakhani Financial Services, and a Chartered Accountant, he helps start-ups raise funds from his network of investors. He guides and advises start-ups to scale up by providing with efficient sales, marketing, team building and business management strategies. He has executed fund raising by block deals on the stock exchange and conducted IPOs and right issues on the SME platform to the tune of over Rs. 50 Crore. He is currently working with start-ups from various sectors to help them channelize their business models and investments.





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