20 May, 2024

Considering Rapid Business Expansion? Beware of These Hidden Traps

Every business leader tries to grow as fast as possible, in many cases even before they get their feet on solid ground. That’s why around 20% of new businesses fail within the first two years, while only about 25% make it to their 15th anniversary.

Many CEOs who get past the two-year mark think they have weathered the storm. However, their chances of failure increase as well. Nearly 45% of new businesses fail during the first five years. That figure jumps to 65% before companies make it to the 10-year market.

According to CBI Insights, a Tech-focused research house, the top reason most new businesses fail is “running out of cash [or failing] to raise new capital.” Coming in a close second is “no market need,” while getting “outcompeted” and having a “flawed business model” are also causes of failure.

That said, there are many factors that impact a new company’s success and failure. Location, industry, adequate market research, competitor strength, and product-market fit are just a few of the many factors that affect failure or success.

Common Business Expansion Pitfalls

Every business venture can be an opportunity to grow or burn through your cash reserves and inch close towards bankruptcy.

For example, for a company to expand to a new market or increase its local market share, it needs to conduct a throrough Market Environment Research, not only research the competition and the consumer, but also examine the regulative and political aspects, study the historical trajectory of similar businesses, culture biases, language impact on perception, and much more.

A company needs to examine if the expansion fits with it’s vision and objective. In many cases, businesses shift away from their primary goal to accommodate expansion, especially if it is to a new market.

However, while many companies attempt to do so, they tend to also make assumptions about the market, such as view themselves as the target audience, resulting in skewed buyer personas.

Another side to the same coin is when business leaders try to replicate the success of their competitors without taking into consideration the difference between the product, customer interests, consumer perception of their product, and the many steps their competitor may have taken—beyond the product or service offered—to achieve their market share.

It’s also important to realize that the same product may appeal to different customers for different reasons, a fact that can contribute strongly to the success of your—or your competitors’—success .

On the other hand, lack of adaptability is another common issue with many companies. This is a core ingredient for a business hoping to expand at a rapid speed and weather the storms that rise.

When attempting to expand your business, whether locally or to a new market, many CEOs believe they should start big. This is one of the biggest pitfalls startups—especially tech—fall into.

When you start too big, you don’t give your business a chance to stabilize its foundation. In other words, you won’t be able to handle a strong market shakeup or economic volatility.

Starting big looks different from one company to the other, it can be hiring hundreds or thousands of employees in preparation for an upcoming expansion. It can also be high investment in a product from day one, without trying to first roll out a minimum viable product.

This translates to less cash flow or reserves than needed to maintain the business, slower results, and hundreds of layoffs.

While starting big isn’t ideal, rapid expansion can often translate to stretching your resources too thin, whether your human resources, capital, or machinery. Rapid expansion can weigh down on all of those, sending your expansion efforts rouge.

A lack of business strategy is another way to kill your potential. You managed, for example, to grow your business from 100 customers to 1,000 customers in a few months. However, without a clear business strategy to guide you, your strokes of luck will be just that. You won’t be able to replicate your success or maintain your growth streak.

Lack of adequate financial forecasts is another common pitfall. It can result in doubling or tripling your expenses, wiping out your cash reserves.

Then, there’s the assumption of higher sales equals higher growth. What businesses often neglect in that equation are the customer acquisition cost (CAC) and the importance of customer retention for tech and SaaS businesses. For non-tech companies, machinery and production costs are often the costliest areas that bring down this assumption.

Four Examples of Companies that Struggled Due to Rapid Expansion

There are many ways a company can fail, despite its best intentions to expand locally or globally. Here are some examples of companies that made one or more of the above mistakes and paid for them dearly.

Kodak

At one point, Kodak’s market share of the film and camera industry was over 85%. Despite having invented digital photography in the 1970s, Kodak’s executives wouldn’t move away from traditional film equipment.

They underestimated changing buyer behavior and the rising interest in smartphones and digital cameras. Although it hasn’t completely shut down, Kodak lost much of its market share and renown.

Zynga

Game developer Zynga made strides in the free games industry in 2007. The company quickly gained recognition and had several popular games under its umbrella including Mafia Wars, Words with Friends, and Farmville (several Farmville games).

By 2011, Zynga had seen millions of downloads across its various games, prompting the company to make a sizable investment. Zyna paid $100 million to build its own data centers.

Four years later, the company had to close down its data centers, citing the high costs of maintaining them, and laid off a fifth of its workforce, roughly 364 employees.

Swvl

Dubai-based mass transit solutions provider Swvl is one example that comes to mind. Swvl began as a success story with three founders launching their startup in 2017. Shortly after, ride-hailer Careem made a $500,000 investment and Swvl closed Series A and Series B funding rounds in 2018, marking a $100 million valuation.

In 2019, Swvl its rapid growth, expanding operations to Kenya, Nigeria, Pakistan, and Jordan. It also moved its HQ to Dubai. Fast forward to 2021, Swvl went into a SPAC merger and achieved unicorn status with a $1.5 billion valuation. It also began expanding its presence in Europe through a series of acquisitions.

During that time, Swvl’s expansion involved hiring hundreds of employees. But after its initial public offering (IPO) through the SPAC merger, the company decided to lay off 32% of its team in 2022. Following a listing on NASDAQ, Swvl failed to maintain profitability, taking its $1.5 billion valuation to $53 million. The company’s success streak seemed to be coming down with a potential delisting that made headlines.

Swvl’s rapid growth involved entering new markets, acquisitions, and hiring too many people too fast. That said, after several rounds of lay-offs and a cost optimization strategy, Swvl recently reported turning a profit in 2023.

Borders

At one point, bookstore Borders had over 500 branches and employed nearly 19,500 people. In 2011, Borders lost to its competitor Amazon. Not because Amazon was a big company. At the time, Amazon was just beginning to tap into the e-book industry.

Borders, somehow, decided to let Amazon “control all of its online book sales.” The result? The company filed for bankruptcy and laid off its 19,500 employees in 2011.