What Every Entrepreneur Should Know Before Expanding

Willard Rich

By Liinus Hietaniemi (IESE Business School)

Should entrepreneurs align team growth with market demand or should they anticipate it? That choice, and the profiles it leads startups to hire, can play a major role in their future success. Conventional wisdom has it that entrepreneurs start lean so as not to overcommit tight resources. But this is just one side of the story.

My new research, conducted alongside Simone Santamaria, Aleksandra Kacperczyk and Juhana Peltonen, shows how and why different entrepreneurs follow distinct team scaling strategies. One crucial factor is whether they are standalone entrepreneurs or portfolio entrepreneurs operating multiple startups.

Operating multiple startups creates an opportunity to transfer staff elsewhere if one venture stalls. This option reduces the sunk cost of overcommitment, permitting the portfolio entrepreneurs to hire more aggressively early on. Hiring aggressively in turn helps these entrepreneurs develop capabilities faster, potentially leading to an outsized impact on firm success.

Flexibility for the win

Using a decade’s worth of employee-employer matched data for all Finnish startups, my co-authors and I found that the entrepreneur’s profile was a key factor in determining the timing of scaling the team.

Some entrepreneurs are focused on a single, standalone company. If they hire too quickly, the risk of overcapacity is higher. And if labor laws are rigid and firing costly, overcapacity can be a big reason for caution. We found that these entrepreneurs only scaled their team once market demand was proven.

Meanwhile, portfolio entrepreneurs may redeploy employees to their other businesses if one venture fails. In our analysis we found that these entrepreneurs were more likely to scale their teams ahead of market demand.

Besides scaling earlier, we found that portfolio entrepreneurs will look for profiles that allow them the flexibility to move and redeploy staff, depending on where there is growth. Since redeployment of staff is less relevant for standalone entrepreneurs, they were less likely to seek out profiles with transferable skills.

This flexibility can give portfolio entrepreneurs an edge over standalone entrepreneurs. If there is demand for the venture’s product, portfolio entrepreneurs are better positioned to fulfill the demand, generate network effects and develop unique capabilities.

Leveling the playing field

We further found that rigid labor laws increase the sunk cost of hiring for standalone entrepreneurs and, thereby, amplify the portfolio entrepreneurs’ advantage. When labor markets become more flexible, the sunk cost decreases and the portfolio entrepreneurs’ edge is mitigated. Reducing the cost of firing for startups could, therefore, help level the playing field for all entrepreneurs. There’s a tradeoff, however: what may benefit the budding entrepreneur may be detrimental to the startup employee.

Liinus Hietaniemi is a professor in the Entrepreneurship Department of IESE Business School.

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