Why Entrepreneurs Fail to Scale

During my career I have noticed that many people have an appetite for starting their own business. I am reluctant to call all of them entrepreneurs – entrepreneurs have a dream and a gameplan and are intrinsically motivated to realise that dream, while many people seem to be mainly motivated by money. Especially when working in so-called frontier economies, like in CEE, I came across a business model I called “The Inverse Business Model: Poor companies, rich owners”. Many owners didn’t seem to be particularly interested in maximising their company profits, as proper company ownership would be. Instead, they were mainly interested in increasing their personal wealth. As a result, these economies developed very few “national champions”, let alone companies with the potential to become regional players.

However, the heydays of this model are coming to an end. As the fiscal nets are tightening, corruption is becoming an increasingly dangerous game and competition levels are growing, leaving entrepreneurs with basically two choices: continue to do business the way they have always done by skimming excess cash flow from the company until the company most probably goes bankrupt, or to fundamentally change the way they conduct business by investing in upgrading the company, hiring well-paid staff and implementing a clear and coherent business strategy in order to create a sustainable competitive advantage.

In all honesty, most company owners will not be able to make this turn, as it goes against everything that made them into what they are right now. This is definitely a major obstacle to further growth for any company. However, even if an entrepreneur has changed course, there are still a few other pitfalls that may prevent him from scaling up. The qualities that served him well in launching a business often work against him as the company grows. The reason entrepreneurs fail to adapt their leadership skills to their growing business’ needs is more a matter of approach than character. A leader who adapts is willing to drop skills and habits that are no longer useful for the new challenges that lay ahead.  

The ability to manage people, think strategically, and create trust with staff and customers is not learned in a business school but comes with experience. No wonder so many entrepreneurs find it difficult to lead as the complexity of their businesses increases. This is especially true in frontier economies, where CEO’s are often very young and have never experienced a downward business cycle. Without these skills, most new CEOs fall back on what has worked well for them before.

This is also very true for entrepreneurs. I’ve observed that the habits and skills that make entrepreneurs successful can undermine their ability to lead larger organisations. In an article in Harvard Business Review, John Hamm identifies several tendencies that work for entrepreneurs with small companies but become liabilities when they try to manage larger organisations with diverse needs and priorities.

The first tendency is loyalty to colleagues, who were there when he started the business. But unquestioned loyalty can become a weakness when the organisation becomes complex. When entrepreneurs fail to see and act upon a team member’s weaknesses, they place the company at risk. Entrepreneurs who grow understand that their first loyalty must be to their employees, clients and investors, and to the essence of the business – not to former comrades-in-arms.

The second tendency, excessive focus on de­tail, can cause a large organisation to lose track. As the business grows, these entrepreneurs often fail to make strategic choices. True entrepreneurs understand the importance of high-level strategic choices. And are able to change priorities when new opportunities or threats arise.

The third tendency, single-mindedness, is a double-sided sword. It is a positive trait when launching a new product, but can turn into tunnel vision, where the entrepreneur refuses to listen to different opinions. True entrepreneurs can widen their perspective and let go of their initial passion in order to follow new business opportunities.

Entrepreneurs who grow overcome these obstacles through open-mindedness, self-discipline, and flexibility. They handle problems swiftly and let go of people who do not perform. They set their priorities and don’t get distracted. They sometimes do things that don’t come easy to them but need to be done for the team and the company. They learn to deal and communicate with staff, clients and other stakeholders alike. Mostly, they constantly have the long-term success of their company in mind.

Obviously, overcoming these problems of loyalty, task orientation and single-mindedness in the early stages of the company will prepare the entrepreneur for the long-term. Sometimes, entrepreneurs overcome these challenges all by themselves. Most of the them, however, manage with a little help from a coach, mentor, or board member. But they are always open to learn, or they will ultimately fail. They want to experience new things and develop their leadership skills, regardless of talent, skill or background. Entrepreneurs who want to grow have to actively face their shortcomings and develop the leadership required to scale up their companies. Only then can they grow their companies into real champions within an industry.