Startups Need an Economy of Scale

A new startup can be a fragile thing.

 New startups are so fragile, in fact, that nine out of ten new startups go under within the first three years of their existence. Is this reason to give up on your dreams as an entrepreneur and forget about your own startup plans? No, not really. But such a statistic should make you extremely careful about how you go about starting your enterprise, and committed to finding the right strategy to help it survive, and then grow, and finally to thrive.

Most new entrepreneurs make a major mistake right at the start of their enterprise. They want growth at the cost of everything else. Such impatience and ambition are understandable, of course — since your average entrepreneur is passionate and wants things done immediately. But most experienced and successful owners of startups agree that ambition must be tempered by a sense of the ‘economy of scale’ in order to survive the first few years.

What is ‘economy of scale?’

While the business community is familiar with ‘scaling’ and talks about it all the time, the term ‘economy of scale’ is less familiar with those who have not pursued startup dreams over a longer period of time. When we talk about scaling we are talking about creating a business strategy that is commensurate with current assets, market conditions, and market research. According to LoanStar, “This kind of scaling controls how fast a new startup can grow and is based on financial equations worked out over the past seventy years by financial institutions — sort of like the actuarial tables that large insurance companies use to calculate policy rates.” 

But a practical economy of scale strategy is not quite the same thing. First of all, it’s concerned with more mundane functions — such as accounting systems and inventory tracking. Many new startups go under simply because they start with prepackaged accounting programs and product inventory systems that are not suited to their particular needs. It’s like buying a buzz saw to slice deli meats — it’s too much, too unwieldy, and ultimately too expensive. Every new entrepreneur should use caution and prudence when it comes to economy of scale— to actually committing funds to the nuts and bolts of the operational and managerial program. It’s better, to begin with, something small and simple — and then as the startup experiences, stable growth and layers of complexity begin to pile up, to revamp systems with something more complex and deeper. Don’t start out with programs meant to measure and analyze million-dollar yearly profits — that’s overkill. Start small and build to something bigger if and when the demands, and the financing, are real, not imaginary or just wished for. 

Finally, to really reap the full benefits of economy of scale, a new startup should embed an accountability strategy, a bedrock legacy philosophy, in each department from the moment of its inception. Even if it’s just one person who handles HR, for instance, make sure that person understands what he or she is accountable for, and how that accountability will be tracked and improved upon. As the old folk saying has it: As the twig is bent so the tree will grow.