How to Save a Stumbling Startup

An adapted version of this newsletter first appeared on?Inc.com .

From the earliest days of my academic career, I have sought to answer a question: Why do so many fast-growing small businesses end up failing?

This question fascinates me, in part, because I saw a thriving small business unravel right before my eyes when I was teenager. It was a fashion business that my mother started and that became so wildly successful that my mother felt compelled to wind it down. Does that seem like a paradox? In fact, this scenario – which amounts to a start-up growth trap – is more common than you might realize.

My mother, who was a schoolteacher, attended a master’s degree program in anthropology at Vanderbilt University that met in Athens, Greece over five summers. The program attracted students from all over the world, and many of them were drawn to my mother’s fashionable clothing, which she designed herself and which drew on her Indian culture in creative ways.

My mother’s fellow students constantly wanted to know where they could buy her colorful printed clothing, until she finally realized she had a business idea on her hands. In fairly short order she became an entrepreneur who managed several factories and several hundreds of employees in India.?

Demand was off the charts – and that was a big part of the problem. The company was growing faster than its minimal structure could handle. My mother found herself constantly putting out fires – sometimes quite literally, as when one of her factories burned down. Amid the chaos of success, the company slowly started to unravel.?

At that point my mother realized that her heart wasn’t in it anymore. She just didn’t have the desire to introduce the structure and processes that would take her business to the next level, and she decided to pull the plug on it. ?

When a company has a product for which there is little demand, it is easy to pinpoint why it fails. It’s the companies that have excellent “product market fit” (as we business academics like to call it) and yet still manage to fail that have always intrigued me. Too often I have seen company founders ride the demand they have stoked on a meteor of euphoria until they come crashing to the ground.

I wrote a case on a company called Micromax that fell into the start-up growth trap. It created a very low-cost mobile phone for Indian villagers that was exactly the right product at just the right time. Demand skyrocketed, along with the company’s revenue and market value, to the point that it announced plans for an initial public offering in 2010.

But the next year the company was forced to withdraw its IPO. As it became larger, its internal workings had become so disorganized that it was unable to perform some of the key functions of a business. Even after the company hired experienced professionals to try to instill some discipline, the founders remained resistant to introducing the structures, systems and processes that would have quelled the chaos. As a result, the company lost out on major new opportunities and failed to live up to its full potential.

My observation that most entrepreneurs resist structure – which they absolutely need in order to grow and survive – led me to co-write an article for the Harvard Business Review called “Startups That Last.” The continual tension between agility and control, I wrote, must be acknowledged and resolved.

As I wrote in the article, in order to build a sustainable business, startups must: ?

“Hire functional experts?to take the enterprise to the next level,?add management structures?to accommodate increased head count while maintaining informal ties across the organization,?build planning and forecasting capabilities,?and?spell out and reinforce the cultural values?that will sustain the business.”

After that article was published in 2016, I thought I had pretty much covered the topic. But then I started getting pushback from business leaders who told me, “Ranjay, you didn’t tell the whole story.”

What they meant was that if startup founders take my advice and start introducing things like hiring protocols, admin systems, budgeting and forecasting, they begin to lose the knows-no-bounds entrepreneurial spirit that animated their business in the first place.

How do they restore that entrepreneurial spirit? I will explain some of the steps they can take in my next newsletter, along with tips on how growing businesses can achieve a happy medium of both structure and spontaneity.