The book Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies, by Reid Hoffman and Chris Yeh, has caught the attention of many entrepreneurs — likely inspiring them to scale their own businesses quickly. It also piqued the interest of researchers Saerom (Ronnie) Lee and J. Daniel Kim, both of the Wharton School at the University of Pennsylvania. But their own research cautions — with empirical evidence — against such fast-paced movement.
Lee and Kim’s new study, published in the Strategic Management Journal, explored when startups should begin scaling. They define scaling as the process in which startups primarily focus on acquiring and committing new resources to implement their core business idea and grow their customer base. To test the question of whether startups should scale early, Lee and Kim had to find a way to empirically measure when startups start scaling their business, because companies don’t publicly announce such information.
Their solution: job postings. The researchers analyzed when these companies planned to hire their first manager or sales personnel, which they deemed to be the common markers of scaling. They created a dataset of 6.3 million job postings for more than 38,000 startups founded in the U.S. after 2010, which included information on the date and the occupational family of each job posting.
They found that, most notably, startups that scale early are less likely to engage in experimentation through A/B testing. They also found that startups operating in a new market (i.e., no competitors before entry) tend to scale later than those in a more established market — despite the popular belief that they should scale early to reduce the risk of imitation (the popular examples being Facebook and Uber). Importantly, they found that early scalers are associated with a higher likelihood of failure than their peers that scale later.
“What was surprising to us was that this pattern is especially strong for platform companies, which have been the foundation of the blitzscaling argument,” the authors say.
So despite the desire to be like the Zuckerbergs of the world, slow and steady has a greater likelihood of winning a startup race. Yes, famous names line the argument for scaling quickly, but the argument against such aggressive moves also includes other well-known examples like WeWork, Theranos, and Baroo. These companies were quick to hire new employees and expand into new markets without a viable product or scalable business model. Their downfalls were often as fast as their growth.
“Instead of blitzscaling, (startups) should take sufficient time to experiment with their business idea and test its product-market fit,” the authors say. “Once they are confident that they have achieved product-market fit, they should start hiring new employees and expanding their customer base.”