The 'Devil's Triangle' Keeps Most Startups From Growing Into Full-Fledged Businesses
flickr/kellysmithThe early stages of starting a company are incredibly difficult and stressful, and that's the place where many would-be entrepreneurs fail. Something that's not discussed nearly enough is what happens a few years later.
There's a plateau that businesses reach where they become more complex, but don't know how to deal with or scale it. It's a crucial failure point that many founders aren't ready for.
Harvard Business School professor Frank Cespedes calls it "The Devils Triangle," and HBS' Working Knowledge interviewed him to find out why this period's so hard for companies, and how businesses can break out of it.
Accelerators, crowd funding, and angel investors have made it dramatically easier to start a business than ever. But more than half of startups fail within three years, and 94 percent never break $10 million in revenue.
Growth brings challenges, Cespedes says:
Once a venture reaches a critical size, its complexity greatly increases. The original business model must deal with new market and organizational realities, and behaviors that established the business are often inadequate for scaling. SG&A (selling, general, and administrative) costs then rise faster than revenues, and resource-constrained ventures are forced to raise a dilutive round of capital, operate in small niches, or go out of business.
At this stage, there's a mere fraction of the support, advice, and funding that's available to brand new startups. For most startups, every sale is a heroic effort, and big changes are made for clients without a strategy for the future. That isn't a scalable model. It leads to a business that tries to be something for everyone, and stalled growth.
In order for companies to grow, according to Cespedes, they need to develop an "ideal customer profile." Basically, they need to figure out which customers value them the most and provide the most opportunity, and shape their strategy around them. It seems obvious, but it requires a change in mindset and a commitment that can be difficult for many founders.
That means turning some customers down and getting out of some businesses, which can be incredibly difficult. But this sort of decision is one of the things that separates being a startup from becoming a real business.