Why entrepreneurs find it hard to scale up

A bigger business requires more process and less innovation

Michael Gibbs | Aug 16, 2021

Sections Entrepreneurship

I once gave a talk at the University of Chicago’s Polsky Center for Entrepreneurship & Innovation to an audience full of alumni entrepreneurs and venture capitalists. I summed up the main point like this: “As you hit the growth stage, your business needs to become more bureaucratic, dull, conservative, process-oriented, slow, less innovative and take fewer chances.”

The entrepreneurs were stunned, but the VCs were all nodding their heads in agreement. That’s because entrepreneurs, especially those who have not scaled up a business before, don’t know what they don’t know. Scaling up a business is hard to do, and doing so requires changes that aren’t easy for entrepreneurs to make.

If you’re an entrepreneur, think about the early days of your company, the kinds of people you worked with and the culture of the workplace. There isn’t a ton of structure. You hire people who can do a little of everything because you don’t have the money to hire a dozen or more specialists. Salaries are tied to results or include shares of the company. 

The risks are big because they have to be. Being bold gets you to market first, attracts early adopters and offers a thrill that serves as strong motivation to succeed.

But once you’re past that and the company moves into the growth stage, things change. Along almost every element of organizational design, what works well in a startup or small company does not work well once the company grows in size and complexity.

Jobs must become more formalized and specialized. There’s a hierarchy that has to be followed. You might even develop an organizational chart, something many entrepreneurs would likely scoff at.

The culture becomes more corporate, in other words, with risks becoming more calculated and actions following company policies. 

Entrepreneurs fall into the trap of believing that the things that got them this far will continue to bring success through the growth stage. But the spirit that got them through the early years can become a liability and keep the company from adopting workflows and strategies necessary for future successes. 

As hard as it is to accept, entrepreneurs find out that they might not be the best people to lead their companies after a while. It’s why VCs often see the need to replace the founder with a new CEO or to appoint a COO who can help the founder/CEO navigate this new paradigm.

If you’re an entrepreneur who finds yourself in a situation in which you’re being asked to change, your instinct might be to fight. But consider that your whole goal when you founded the company was to make it successful, and the VCs or board members who are agitating for change want the same thing. Don’t look at this as losing control so much as playing to your own strengths and leaning on the strengths of those around you.

Michael Gibbs is clinical professor of economics at Chicago Booth.

This column is part of the Chicago Booth Insights series, a partnership with Crain’s Chicago Business, in which Booth faculty offer advice for small businesses and entrepreneurs on the basis of their research.