When Wharton management professor Saerom (Ronnie) Lee was in college, he received a lot of what seemed like good advice from venture capitalists who were pouring money into his tech startup.

They told him: Move fast and break things. Always outpace your competitors. Don’t have bureaucracy.

“Those are the things that my investors emphasized,” Lee said. “I followed their advice, and it led to the company’s ultimate demise. We were spending cash to scale our business without thinking carefully about what our business strategy was.”

The experience left him wanting to understand the critical decisions that enable some entrepreneurs to flourish while others fail. Years of research have led to his latest paper, “When Do Startups Scale? Large-scale Evidence From Job Postings.” The study was co-authored by Wharton management professor J. Daniel Kim and published in the Strategic Management Journal.

Lee and Kim determined startups that scale within six to 12 months of their founding are 20% to 40% more likely to fail. They also found no evidence that early scaling leads to a successful exit, either through acquisition or an initial public offering of stock (IPO).

The professors said their study counters the “fast and furious” mindset that’s so prevalent in startup culture. For a majority of founders, “slow and steady” really does win the race.

“Entrepreneurs get excited by early validation of proof of concept,” Lee said. “They get hyped up when there is early demand, which helps them secure funding. Then, they prematurely double down and use the money to hire sales personnel, growth hackers, business development reps, and other positions to rapidly scale their business. But that early validation often ends up being not scalable.”

“Entrepreneurs get excited by early validation of proof of concept … but that early validation often ends up being not scalable.”— Ronnie Lee

Patience and Experimentation Lead to Growth

Hiring indicates growth, so Lee and Kim examined job ads to measure precisely when startups post their first manager and sales jobs. They analyzed 6.3 million job postings by more than 38,000 startups founded in the United States after 2010. The dataset also allowed them to capture company status and organizational characteristics, such as founding year, VC funding, patent protection, IPOs, acquisitions, and closings.

The study revealed that startups, on average, scale after four years. Those that scale early are far less likely to experiment through A/B testing. This is key, Lee said, because experimenting decreases the risk of committing too early to a product, service, strategy, or design that hasn’t been proven or refined.

“Having patience and testing the product market fit rigorously — that’s No. 1. You need to make sure that not just the product but the overall business model is well-designed and scalable,” he said. “No. 2, embrace a culture of experimentation. Many entrepreneurs are hesitant to experiment with or pivot to different concepts, but a systematic approach to experimentation and pivoting will help your startup succeed.”

A Safer Business Strategy for Platforms

In their paper, the professors discuss PillPack as an example of successful scaling. The online pharmacy was founded in 2013 after the idea emerged from the MIT Hacking Medicine hackathon that same year. After several years of experimentation, the founders began scaling in 2016 through significant hiring and the launch of their platform, PharmacyOS. After reaching $100 million in revenue, PillPack was acquired by Amazon in 2018.

“There are many examples across industries where startup companies are very cautious in taking investor money and careful about expanding. I think companies like PillPack and Prose exemplify this cautionary approach,” Lee said.

“Having patience and testing the product market fit rigorously — that’s No. 1.”— Ronnie Lee

Caution is crucial for platform-based startups. Platforms are quickly becoming a dominant business model, but they have a higher rate of early scaling and failure. Lee said the popularity of companies such as Uber and DoorDash makes a persuasive argument for early scaling. However, he pointed out that these firms only became profitable more than 10 years after their founding.

“They were fortunate to ride that low-interest environment, where they could get VC funding cheaply and fuel their growth. But that’s likely not going to be the startup environment in the next decade,” Lee said.

The Exceptions to ‘Slow and Steady’

The study reveals the dangers of early scaling, but are there situations where “fast and furious” is better? Lee said yes — in unusual circumstances. Early scaling may be a viable option for entrepreneurs who want to seize on a market trend, quickly exit, and move on to their next startup idea within a couple of years. However, investors are becoming more wary of sinking money into companies that show a spike in performance only to fall.

“Many investors got burned, so now they are very cautious in investing in a hyped-up startup and prefer to wait two or three years to see if the startup can sustain its rapid growth,” Lee said.

The second argument for early scaling is when competitive advantage can only be achieved by monopolizing the market. Scaling quickly reduces the risk of imitation and copycats that cut into market share. “But again, it’s questionable how many businesses are like that,” he said.

“A systematic approach to experimentation and pivoting will help your startup succeed.”— Ronnie Lee

The paper offers hindsight for Lee, who said he wishes he’d been given the same fact-based guidance as a young entrepreneur instead of the hackneyed advice he followed. He remembers one of his investors joking that, as a founder, he would “sleep like a baby.”

“He meant you’re going to wake up every two hours, crying over how miserable your life is. He was right,” Lee said with a laugh.

The professor said the biggest lesson he learned from the research is that entrepreneurs need to know and learn what not to do, rather than solely focusing on what they can do.

“When entrepreneurs see a light, they often get too excited and try to catch every opportunity out there to grow their business,” he said. “By doing so, they scale their business without a clear strategy. You create a monster that’s doomed to fail.”