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Three reasons not to scale prematurely

In our blog post The four stages of innovation we go through and explain all the phases of the lifecycle of a product: business modelling, problem-solution fit, product-market fit and lastly, scale.

To get to the last phase - scaling, you need to have a product that's working and is gaining customers, a product that is solving customers’ problems and is getting traction in the market.

In the scaling phase you need to accelerate the growth in order to succeed in the marketplace. You do small experiments to increase your numbers just by little, as opposed to experiments you do in previous phases where you can do bigger changes at a lower cost.

One of the core lean startup principles is that entrepreneurs should not scale until they have achieved product-market fit. This premature scaling can bite you back in many different ways.

First, early-stage startups can lose their agility, the ability to quickly change direction based on new information, and at a lower cost because they have not yet committed resources that must be redeployed. But once they start scaling, pivots become more difficult and expensive.

Second, by scaling prematurely you run the risk of disappointing large numbers of customers if a startup must pivot to a new value proposition. Disappointing your early adopters and telling them their purchase was wasted can backlash, and have strong consequences on your reputation. The odds of a startup succeeding (staying alive) in the first years are low to start with, so you don't want to push it over the edge.

Lastly, you don't want to shorten your runway (defined as the number of months required to exhaust a startup's cash balance based on its expected burn rate), and the number of build-measure-learn cycles the team has to complete. You want to go through the funding as slowly as possible to have more time to learn.

If you can't raise more capital, which is difficult to achieve in the scaling phase when product-market fit has not been reached, scaling prematurely will increase the burn rate and shorten the runway.

It’s also important to mention that ‘’no premature scaling’’ does not mean ‘’no scaling until a product earns profit’’. This can easily be debunked by looking at examples of platforms with strong network effects such as Facebook, YouTube and Twitter, who have not fully validated their business models until they had a critical mass of users. Their plans for making money were not clear from the get-go, but relied on ecosystem partners to help experiment with ways to monetize their platform.

While they didn't have clear plans for making money, some maybe had a theory on how to cash in, but still choose to defer monetization. A great example would be PayPal, who offered their service free-of-charge in order to acquire a big user base, which due to network effects increased their value and made them the dominant online payment service that now charges a fee.

In the end of it all, unless your startup was born ‘’fat’’, a child of a successful serial entrepreneur, or was bred inside an established corporation, and can speed the time-to-market, it would be best to embrace the principles of lean startup. If it’s of any comfort, smaller startups born in someone’s garage or living room have fewer obstacles in applying lean startup principles in practice.

And some of you may think why follow principles of a method that has been dying for years. No, lean startup is not dead. Its principles have just been absorbed by other movements.

To toot our own horns, the Playing Lean game we created is a great way to experience and learn what it’s like to run a startup, and get your product to market by going through all the phases. The winner of course, is the team that scales first, but watch out not to reach it prematurely!

 

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