A recent study, published in the Strategic Management Journal, has revealed that startups should be cautious about early scaling, as it has a direct correlation with a higher risk of firm failure, especially for platform companies. The study also found that while early scaling may seem attractive to deter competitor imitation, it can hinder learning through experimentation and commit a business to an idea that lacks product-market fit.

Contrary to the success stories of high-growth startups like Facebook and Uber, which achieved their fortunes through early scaling, also known as ‘blitzscaling,’ researchers Saerom (Ronnie) Lee and J. Daniel Kim, both esteemed members of the Wharton School at the University of Pennsylvania, have observed numerous instances of startups failing due to this approach. This prompted them to conduct an extensive data analysis to test these contrasting views empirically.

Building on existing research, the researchers defined scaling as the process where startups focus on acquiring and deploying new resources to execute their core business concepts and expand their customer base. To determine when startups begin scaling, Lee and Kim devised a unique method. Since companies typically do not publicly disclose this information, the researchers had to get creative. They turned to job postings, analysing when startups planned to recruit their first managerial or sales personnel. This innovative approach allowed them to build a robust dataset.

Their approach involved analysing when startups planned to recruit their first managerial or sales personnel, discernible from their job postings. This analysis yielded a dataset comprising 6.3 million job postings from over 38,000 startups founded in the U.S. post-2010, containing details on the date and occupational category of each posting.

Significantly, they discovered that startups scaling early were less inclined to engage in experimentation through A/B testing. Moreover, startups entering nascent markets (i.e., devoid of pre-existing competitors) tended to delay scaling compared to those in more established markets, contrary to the prevailing belief advocating early scaling to mitigate imitation risks. Crucially, early-scaling startups exhibited a greater propensity for failure compared to their later-scaling counterparts.

“What surprised us was the robustness of this trend, particularly evident among platform companies, which are central to the blitzscaling narrative,” remarked the authors.

Consequently, entrepreneurs should embrace a strategy of gradual and consistent scaling. While the argument for rapid scaling highlights a select few success stories, counterexamples such as WeWork, Theranos, and Baroo, known for aggressive expansion without a viable product or scalable business model, underscore the perils of premature scaling.

“Instead of pursuing blitzscaling, startups should allocate ample time to experiment with their business concept and assess its product-market fit,” advise the authors. “Upon confirming product-market fit, they can then commence hiring and expanding their customer base.”

More information: Saerom (Ronnie) Lee et al, When do startups scale? Large-scale evidence from job postings, Strategic Management Journal. DOI: 10.1002/smj.3596

Journal information: Strategic Management Journal Provided by Strategic Management Society