Warning! Early Success Reality-Distortion Minefields Will Destroy Your Startup

“We need to figure out how to scale this system to support a million users simultaneously.” – The CEO of an education software technology company in 2008 during a private discussion.

I was speechless for a few seconds. This gentleman was running a firm with only one customer and around a dozen active users. He had around 20 employees (yes, yes, this firm was venture capital funded). However, there was no hockey stick growth pattern to be seen anywhere. In hindsight, I should have said something, but I was less experienced then, and even though I had some misgivings, I did not challenge this assertion.

Reality can be defined as those things that obstinately remain when you wish away things that you find undesirable. The CEO could not wish away the reality that six months later, after applying the effort of around 75% of his engineering team, they had a “standards-compliant” system (that could scale significantly under test conditions), but they still had the same dozen users. It is important to note that the system did exactly the same things for the customers before and after this exercise, and there were no new customer, as the solution was as tepid at the beginning as at the end.

Looking back, the problem was that this CEO was brought in by the investors, and was essentially an overly powerful employee (and was not a founder) with a treasure-trove of cash to burn. The CEO was focused on selling a story that would inspire confidence in his leadership, so he did what he was really good at, and started posturing.

“Everything is awesome, everything is cool when your part of a team,
Everything is awesome, when you’re living out a dream.”

– performed by Tegan and Sara for The Lego Movie

He deployed his personal reality-distortion field, and started talking about growth issues that firms with real growth problems would be experiencing. Fake it till you make it works great when it comes to pre-selling and capturing early visionary customers, however, it should not be a practice when you’re carrying out the actual prioritization and planning within the firm.

“Tilting at windmills” is an English idiom which means attacking imaginary enemies. The word “tilt,” in this context, comes from jousting, which is a form of horse-mounted mock-combat with sticks. Miguel de Cervantes’ book, Don Quixote, may as well have been telling the tales of modern managers with activated reality-distortion fields. Following one’s passions is great, but when you mix it with delusions of grandeur, and ignore market forces, it is reasonable to expect tragi-comic consequences.

Too much short-term money, access to a personal sandbox filled with people and toys, and a divorce from reality causes otherwise rational, sane professionals to do the corporate equivalent of tilting at windmills. The results are waste, heartbreak, and inter-personal rancour when reality casts a hard light on ‘bridge to nowhere’ projects that should never have been started in the first place.

Early funding is meant to help firms to survive, and build relevant processes that identify, prove and consolidate the business model. They are not pelf and spoils the give you freedom to play—for ultimately, they are a trust and are given to you with the goal of helping build equity value for the investor, create useful solutions for customers and sustainable, viable jobs for your employees.

If you over-spend, you’ll end up in the uncomfortable situation where you’ll need to charge $250,000 per customer license in order to break even, for something that could be provided, with less expensive automation, somewhat reduced service levels, and more elbow grease, for $1,000 (or even $100) per unit.

The Startup Genome Project has identified that 70% of startups scale prematurely. Indeed, even 74% of high-growth Internet startups, with serious star potential fail. These failures are primarily due to premature scaling. Get massive investment before you are ready, scale before your firm has a repeatable viable business model, and you’ve suddenly dialled up the risk factor to extreme levels.

In the next part of this article, we’ll identify how you can determine if your team is in the mine-field, and arm you with some suggestion on how to get out of this trap alive.