8 Common Challenges for Scaling Startups and Solutions to Tackle Them

• “Failure is a gift”
• “The bigger the failure, the bigger the lesson”
• “Those who dare to fail miserably can achieve greatly”

These quotes look nice on a poster. But moving past failure is easier said than done. In the startup world, failure is closer to a guarantee than a possibility. So what’s the most effective way to counteract this? It’s certainly not wearing black turtlenecks or naming your first-born space gibberish — it’s staying prepared.

After all, product-market fit, scaling too fast, culture breakdowns...the list of reasons why startups fail is endless. Founders should prepare for this fact.

Here are eight challenges businesses face as they transition from startup to scaleup, and potential solutions to tackle them.

1. The Loss of a Flat Hierarchy

Startups with around 10 employees enjoy a unique form of self-management and accountability. The organizational hierarchy is generally flat. Each department is headed by one or two people. Decision making is streamlined and collaboration comes naturally. This form of hierarchy is cherished by those with an entrepreneurial mindset. Employees wear many hats. They're spread thin, but the autonomy and potential of the work makes up for it.

When it’s time to scale, more traditional management relationships and job titles form as new employees onboard. For those from the initial crop of employees, this change can be jarring and uncomfortable. Even Zappos, the poster child for culture-first workplaces, faced major challenges when the company reached 1,500 employees. After months of high turnover and weakening culture, employees were offered a cash stipend to quit if they didn’t want to follow the holacracy (no manager) model. Founders should expect challenges to arise when the hierarchy changes over time.

2. Volatile Co-Worker Chemistry

Hierarchy, decision making, and transparency all fall under the umbrella of company culture. But there’s a certain culture problem that can’t be explained by analyzing processes and structure — it’s simply a lack of chemistry. As headcount increases, there are natural cliques and social models that develop. Some startups thrive during this stage, others fail to mix-in people effectively. Personality clashing, generational divides, and a lack of camaraderie can make it difficult for employees to enjoy their work. This underlines the importance of hiring well and identifying culture fits.

Fortunately there’s a secret culture-improving weapon available to startups. That’s right, you guessed it - lunch. Chris Miller, former director of engineering at Thumbtack, said, “eating lunch together is the single most important culture-building activity we do.” His team developed a list of food rules: eating lunch together at a table (not a desk), weekly all-hands dinners, banning vending machines, etc. With 1000+ employees and a $3B+ valuation, we’d say the rules worked out. CaterCow gives startup teams the opportunity to eat lunch (and other meals) together. Each meal can be prepared individually-wrapped or buffet style, comes from local restaurants and caterer, and thoroughly vetted so startups get the perks of eating lunch together without the stress of planning.

3. Decision Making & Autonomy

Many new startup employees marvel at the lack of red tape compared to corporate organizations. Marketers, product teams, and developers have more freedom to solve problems and test solutions without drawn out approval processes. As the company headcount rises, this system of decision making fades. More employees mean more director level personnel as decision involvement is part of their job. For some employees, this becomes a point of frustration and a departure from “how it used to be”.

This is one of the many reasons why management and executive hiring is so important and challenging. Managers must find ways to implement their skills and experience without slowing down decision making or ravaging autonomy. Maintaining autonomy becomes a useful trait at the point of possible acquisition. Large companies are looking for ways to expand and enter new markets without having to overhaul business models.

4. Transparency & Knowledge Sharing Challenges

With a handful of employees, it’s easy to keep tabs. Whether it’s in-person conversations or manageable Slack chatter, information is largely transparent and knowledge sharing isn’t a major issue. As the scale-up phase begins, this becomes difficult. For instance, previous knowledge sharing methods suddenly become problematic. Items such as naming conventions, training, expense reports, HR paperwork, etc. aren't a big deal initially. It quickly becomes overwhelming for one person to manage when headcount doubles.

Startups should focus on building processes that scale — simple habits such as storing files a certain way or using a universal template for meeting notes. These tasks take a few extra minutes at first, but provide immense value when new employees continue the same processes.

5. Missing HR Policies & Procedures

The terms “human resources manager” and “startup” aren’t exactly peanut butter and jelly. Perhaps they should be, as widespread HR issues derail companies no matter the size. HR responsibilities are usually shared amongst the founders and early employees until significant growth occurs. This might make sense for innovation, but can expose companies to legal trouble. Consider this incomplete list of paperwork that can fly under the radar for months, even years.

• Proprietary Information and Inventions assignment agreement (PIIAAs)
• Anti-harassment and anti-discrimination policies
• Handbook acknowledgments
• At-will employment acknowledgments
• Employment classification documents
  

Additionally there’s a growing demand and need for documented policies that reflect modern workplace trends such as DEI (diversity, equity, inclusion) social media, well-being, and remote work.

6. Running Out of Space (Physically and Digitally)

Space is likely the last thing on the mind of any hard charging entrepreneur. In the age of work from anywhere and cheap yet powerful communication tools, it shouldn’t be a top focus. Yet as headcount rises, teams inevitably run out of physical office space or lose the ability to work together at a single location. Perhaps more importantly, there can be an increase in required licenses and software fees. The use of free accounts might dwindle as larger SaaS plans become necessary.

This can be avoided with some pre-planning around scale timelines, and communication with employees about the required flexibility. The current trend is hybrid and flexible work. Companies are downsizing offices. Employees can work there occasionally and a small number of employees can commute daily. This trend is a welcome sight for startups that can pitch flexibility as a perk yet save on overhead costs.

7. Profitability Problems & Market Variables

It would be an oversight to not acknowledge that startup problems and failures are due to a wide range of factors. Issues arise not just because of an increase in headcount but due to market trends, timing, leadership actions, investor relations, and more. Take three examples:

Juicero had around 230 employees and $118.5 million in venture funding when it shuttered its luxury juicer business. After public and media outrage over the $699 price point yet lack of innovation, their hopes were squeezed 16 months after launch.

Beepi was a used car marketplace with $60 million in Series B funding. While the technology was lauded, Beepi’s leadership were said to micromanage decisions while bringing in bloated executive salaries and buying items such as a $10,000 office couch. All 180 employees were eventually laid off.

Quibi is a recent example of startup failure, the streaming service raised an astounding $1.75 billion pre-launch. Despite massive financial backing and experienced executives at the helm, the programming strategy didn’t click and operations mostly shuttered six months after launch.

These examples are extreme, as most startup failures are much more boring and nuanced. However it shows some of the randomness that is startup success and failure.

8. Unlucky & Bad Timing

Speaking of randomness, there’s another factor that can’t be ignored when discussing headcount problems. Luck, timing, and generally random outside factors impact startup fate. Luck and timing are not synonymous, founders build entire strategies around timing through researching trends. But think about startups launched around the dotcom bust, the 2008 financial crisis, and the COVID-19 pandemic — a couple of months here or there could easily be the make or break factor. Many brick and mortar like gyms, movie theaters, and restaurants had to unexpectedly shut down during the pandemic. Here at CaterCow, we lost 99% of our revenue during the first month of the pandemic as offices closed.

Entrepreneurs can cope with this fact by maintaining a positive outlook and staying prepared. Many argue that luck is the culmination of preparation and determination. Startups should put in day-to-day work so they can capitalize on luck when it arrives.