The most common pitfalls of startup management
Managing a startup is fundamentally different from the management of an established company. You will be confronted with a mix of startup specific challenges. Many of them are directly linked to scaling your startup successfully.
In a blog post from 2010 that has lost none of its relevance, Steve Blank argued that as a scalable startup grows from a garage into a Google, it progresses through three distinct stages – each presenting a unique set of challenges and decisions. And in order to manage the growth successfully you are requiring vastly different resources, skills and strategy on each stage. Steve Blank named the three stages as follows:
- The scalable startup,
- transition,
- large company.
I agree with these three stages because I think they divide the life cycle of a startup in a meaningful and catchy way. And no less important, you can remember them very well.
In this article, I will focus on the major management pitfalls you will face in the scalable startup phase. I will address the management challenges at later stages in the lifecycle of a startup, namely transition and large company, in separate articles.
The scalable startup
In this phase, your goal must be to find a working business model and product market fit. You need to prove that you have a repeatable sales model and, as a result of startup growth and the growing organizational complexity that comes with it, find and hire managers. The most common pitfalls in this phase are from my perspective:
Inadequate business planning
Eisenhower is reported to have said something like that plans are useless, but planning itself is irreplaceable. I agree with that. I think that a startup's business plan is basically already caught up with reality while it is still being written. Nevertheless, you as a startup founder should never do without the planning process. Because failing to create a comprehensive business plan can at least result in disorganized operations and a lack of clear goals. Without a plan, you may struggle to allocate resources in your startup effectively or to adapt to changing market conditions.
Poor financial management
In fact, many startups I see do not have their finances sufficiently under control. This is of course highly problematic, as you really need to know your revenues (if there are already any to speak of), expenses, cash burn, etc. You need a working and reliable financial planning (especially liquidity and capital requirements planning) to know how your finances will develop and especially important to know how long your runway is. That is, to know how long your money will last until you need to raise new capital. And never be over reliant on raising new capital for your startup, because it can create a false sense of security. If you depend too heavily on external funding without a repeatable and sustainable revenue model can lead to financial difficulties when funding sources dry up or investor expectations are not met.
Overall not taking care of your finances will quickly lead to financial instability of your startup.
As a consequence it’s a must to prioritize financial planning, monitor cash flow closely, and seek expert advice when needed.
No management team
Without a professional management team, your startup will fail. It will not stand a chance, no matter how brilliant your business idea, how high the profits, how good the products and how great the demand. One of the greatest management thinkers of all time, Peter F. Drucker, established this fact. He targeted none other than Thomas Edison, whose products were absolute high-flyers and the demand for them almost inexhaustible. However, as an entrepreneur, he always refused to build a professional management team. The result was that every single one of his four or five companies collapsed as soon as it reached a medium size. The companies were ultimately saved only by removing Edison and replacing him with a professional management team.
What everybody can learn from this story is that managing a startup successfully requires a professional management team that has the ability to operate in a dynamic and uncertain environment. Management teams that fail to adapt and pivot in a new context can face significant challenges. The mindset of startup management team should be to stay agile which translates into making timely adjustments to the business model or strategy for long-term success of your startup.
In a nutshell your startup requires excellent management and leadership skills. Without it, your startup will be a failure.
Doing market research
There are more than enough startups out there that think they need to do market research. The main argument for this can be as follows: Understanding the target market, customer preferences, and competitors is crucial for making informed decisions and positioning the startup effectively.
Initially this sounds like a good idea. But please realize that market research doesn't work for highly innovative products or services. How can you do market research for something that doesn't even exist yet? The market probably doesn't even exist until it is created by innovation. That certainly makes sense.
Much more important than doing market research is understanding what kind of customers buy from your startup. You need to understand the purpose for which they use your product or service. Is it the purpose originally conceived by your startup or is it something else entirely? There is a story of a startup in India that manufactured bicycles with an auxiliary motor for the Indian market. However, only the auxiliary motors were bought, without the bike. The startup wanted to reject the orders at first, but then asked itself the crucial question: What were the customers doing with the motors? For what application were they being used? So they visited the customers and got direct feedback from them. It was understood that the motors were being used to power irrigation systems that previously had to be operated manually. And so the small startup became the largest manufacturer of small irrigation pumps, selling millions of them.
Hence, as a startup founder, you should be aware that your product or service will find customers in markets that either don't exist yet or didn't occur to anyone when the product or service was developed.
As a startup founder, you need to go out and take the time to look around at your customers, distributors and, if necessary, the market. You have to use systematic methods to check the benefit and value of the products and services for your customers. Because the products or services your startup offers are determined by the customers. Be as effective as you can in understanding your customers. This will also help you to do impactful marketing in order to effectively reach your target audience and acquire customers. Startup managers often struggle to apply adequate marketing strategies, including poor messaging, ineffective channels, or an unclear value proposition, which can hinder growth.
Scaling too quickly
A successful startup is growing. The joy is great. But the challenges that come with it are at least as great.
A fast-growing startup is at risk of breaking up and bursting into a fireball.
Keeping a hyper growth startup from exodus is perhaps the ultimate challenge for a startup management team. If you are scaling your startup too quickly it can result in multiple problems. Some of them are
- accelerated strain of resources,
- operational inefficiencies,
- poor customer experiences,
- and even failure.
Your main objective must be to maintain a balance between growth and stability. One way to do this is building an adaptive organization as suggested by Eric Ries the author of the Lean Startup. In an ideal world this would be an organization that automatically adjusts its process and performance to current conditions. I’d say to have the organization automatically adjust is an almost impossible endeavor. But the idea to build your startup using this concept as a guiding principle makes certainly a lot of sense. Make sure that when you scale your startup, you must scale thoughtfully and strategically. When scaling up your startup according to scaling expert, Verne Harnish, you should focus at least on the following four areas: People (leaders, team, managers), strategy (tool(s) for strategic planning), execution (heartbeat of the organization) and cash (cash flow, funding).
If you want to learn even more about how to build and scale your startup successfully and how to avoid the most common pitfalls in startup management please refer to the list of references below. I found a lot of valuable information in these blog posts and books. And I bet you will as well - if not already.
Reference(s):
Drucker, Peter F. (2009): Management, Volume 2: Das Standardwerk komplett überarbeitet und erweitert, 1st edition, Frankfurt am Main, Germany: Campus Verlag GmbH.
Harnish, Verne (2014): Scaling Up: How a Few Companies Make It…and Why the Rest Don’t, 1st Edition, United States: Gazelles, Inc.
Ries, Eric (2011): The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, 1st Edition, New York, United States: Crown Business.
https://steveblank.com/2010/01/14/a-startup-is-not-a-smaller-version-of-a-large-company/amp/ (last retrieved on June 11th, 2023)
