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Inconsistency And Premature Scaling Main Cause For Startup Failure: Blackbox

Bjoern Lasse Herrmann and Max Marmer earlier this year launched the Startup Genome Project, which seeks to type startups, identify their developmental stage and the metrics that matter, and build a system to integrate the methodologies of many of the Valley’s leading thinkers such as Steve Blank, Eric Ries, Sean Ellis and Dave McClure. Blackbox, founded by entrepreneurs Bjoern Lasse Herrmann and Max Marmer, in June released its first Startup Genome Report — a 67-page in depth analysis on what makes Silicon Valley startups successful based on profiling over 650 startups.

This time they have announced findings that, while unlikely to surprise, provide more solid data about failure rates of startups. About 90% of all startups fail, and the most common reason for failure is premature scaling. “In our dataset of 3200 startups about 70% scaled prematurely,” say the authors of the Startup Genome Report.

Findings on Premature Scaling

1. 74% of high growth internet startups fail due to premature scaling.

2. No startup that scaled prematurely passed the 100,000 user mark.

3. Startups that scale properly grow about 20 times faster than startups that scale prematurely.

4. 93% of startups that scale prematurely never break the $100k revenue per month threshold.

5. Before scaling, funded inconsistent startups are on average valued twice as much as consistent startup and raise about three times as much money.

6. The team size of startups that scale prematurely is 3 times bigger than the consistent startups at the same stage. However startups that scale properly end up having a team size that is 38% bigger at the initial scale stage than prematurely scaled startups, and almost surely continue to grow. Startups that scale properly take 76% longer to scale to their team size than startups that scale prematurely.

7. Inconsistent startups are 2.3 times more likely to spend more than one standard deviation above the average on customer acquisition.

8. Inconsistent startups write 3.4 times more lines of code in the discovery phase and 2.25 times more code in efficiency stage.

9. Inconsistent startup outsource 4-5 times as much of their product development than consistent startups.

10. In discovery phase 60% of inconsistent startups focus on validating a product and 80% of consistent startups focus on discovering a problem space. In the validation phase, where startups should be testing demand for a functional product, inconsistent startups are 2.2 times more likely to be focused on streamlining the product and making their customer acquisition process more efficient than consistent startups. It’s widely believed amongst startup thought leaders, that successful startups succeed because they are good searchers and failed startups achieve failure by efficiently executing the irrelevant.

11. Inconsistent startups monetize 0.5 to 3 times as many of their customers early on.

12. The following attributes have no influence on whether a company is more likely to scale prematurely: market size, product release cycles, education levels, gender, time that cofounders knew each other, entrepreneurial experience, age, number of products, type of tools to track metrics and location.

Startup Genome Compass

But Blackbox decided that it was not enough to simply have a static report, so with its mission to help increase the success rate of startups the accelerator is launching the Startup Genome Compass. The web app basically gives entrepreneurs a dashboard where they can monitor their progress, helping them to set better priorities on a monthly basis.

The tool also automatically diagnoses a startup’s type according to the Startup Genome’s Typology (Automator, Social Transformer, Integrator or Challenger) and by Stage (Discovery, Validation, Efficiency and Scale). It then benchmarks them against startups in the same type and stage across more than 25 key performance indicators and highlights relevant research from the Startup Genome Report. It can also helps diagnose startups for premature scaling by mapping the startups’ progress along 5 core interdependent dimensions: Customers, Product, Team, Business Model and Financials and finds any inconsistencies.

If you’re a startup, you’re probably going to find this tool invaluable.

You can find out more about the Startup Genome Compass here.

Daniel Goh is the founder and chief editor of Young | Upstarts, as well as an F&B entrepreneur. Daniel has a background in public relations, and is interested in issues in entrepreneurship, small business, marketing, public relations and the online space. He can be reached at daniel [at] youngupstarts [dot] com.

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