Once you are able to achieve some real “traction” with your business (paying customers, revenue stream), it may seem the time to relax a bit, but in fact this is the point where many founders start to flounder. All the skills and instincts you needed to get to this level can actually start working against you, and you fail to scale.

Investors often say that successfully navigating the early stages of a startup requires lots of street smarts, guts, and luck. For successful scaling of the business, there has to be a transition to “executive” mode in the more traditional business sense. Certain behaviors between these two modes are incompatible, and can cause real problems.

Way back in 2002, John Hamm published some early work on this subject in “Why Entrepreneurs Don’t Scale.” From my experience, here is my interpretation of that work, identifying some strengths of an entrepreneur during early startup stages which can become problems for scaling:

• Perseverance. This is generally a required quality for a successful entrepreneur, but it can turn into an unhealthy stubbornness during the scaling stage. The key is to make decisions from data and feedback, once your business has real customers and real products. Trusting your gut at this stage isn’t good enough.

• Absolute control. During the early stages, you are the company, processes are not documented, you don’t have much help, so you need a fanatical attention to detail. To scale the business, you have to find people who can do the tasks, and delegate appropriately. Control freaks are doomed to failure.

• Individual loyalty. Most founders form very close relationships with the small team that gets the startup off the ground, and that is important. Scaling requires that you expand the team, probably with people you haven’t known. You also have to deal with the inevitable personnel challenges, even within the original team. Total loyalty can be toxic.

• Isolated and insulated. Working in isolation is fine during the creative phase of the startup, where the founder is often the designer and architect, as well as the builder. Now this same individual has to step into the spotlight, and meet with customers, analysts, and investors. Insulation from the real world will not work during scaling.

• Tactical versus strategic. Early stage startup founders have to think tactically. Even business school courses don’t teach you to operate strategically, deal with people objectively, and create loyalty within a diverse workforce. These are areas where past stumbles are the best teachers. Investors don’t want to fund your stumbles.

Every founder moving into the executive role has to step back and take a hard look at what works, and what doesn’t work. The best ones can do that, and they adapt. Investors and advisors see this as a critical part of their role, and often are the “bad guys” who ask the founder to step aside, while they bring in a “more experienced” CEO to take over the helm.

Unfortunately, some founders won’t adapt, and won’t step aside. Even if they are pushed out, they can cause terminal damage to the business by negative versions of their strengths, now seen as stubbornness, unwillingness to give up control, testing loyalty, and hiding from reality.

Thus my best recommendation, if you want to scale and to survive, is to open up and work closely with an “outsider” that you trust, such as a respected board member, a coach, a mentor, or an investor. The key is to expedite your learning, and take deliberate steps to confront your shortcomings. That way, you will become the leader your company needs, learn to stop floundering, and begin to fly.

A question that I often hear debated these days is whether a new startup should focus on growth or profits. First of all, the glory days of “dot.coms” are gone, when investors “didn’t care” about profitability, and all the money went to growth.

In the long run, everyone wants both profitability and growth, but the question is still which comes first. Most startups and investors I know don’t have unlimited funds, so the first question they should ask and do ask today, is “When is your company going to be profitable (self-sustaining)?”

Of course, growth is implied in that equation, and is also required for maintaining a sustainable competitive advantage. The challenge is not to undermine growth by a blind focus on profits. You might sell one of two of your widgets for $1M each, entering profitability immediately, but then die because you can’t grow sales at that price.

I think you will find that most investors will relate to the following formula for keeping the right perspective and getting the profit versus growth balance right:

1. Pick an idea that has the potential to make money. That means it solves a real problem for real customers who are ready and able to spend real money. The number of current potential customers is large and growing. Solutions that may be viewed as “nice to have” or “satisfies a higher-level need” won’t get funded. 
2. Design a product or service that you can sell. Sure, you may need to give the product away for free to get traction, but assume you will have to sell something some day to get profitable and stay alive. Twitter, for example, has no revenue model today, and they are growing, but I’m not sure who can ever sell 140 character tweets. It’s hard to find investors for that model today. 
3. Build a business plan for profitability in your lifetime. This simply means you need to be sensitive to costs, revenue projections, and a timeline, such that there is light at the end of the tunnel. Most Internet businesses should show profitability in two years, while new medicines may take ten years to pass FDA and other safety tests. Investors will look at competitors in your industry for the norms. 
4. Identify the total investment required for profitability. A very common mistake of early stage startups is to request a small investment to get started. They are usually thinking only of costs required to get “in business,” rather than the total costs of marketing, scaling up, and going international. Be ready to answer the investor question “Is that all you need to get profitable?”

So unless you are building a non-profit, I say focus on profit all the time, every time. Of course, growth is implied in every focus, and profit enables growth. But some of you will surely say “What about Facebook and Twitter, who focused on growth first and are clearly successful?” So let’s take a look.

Facebook is indeed the largest growth site on the web, with about 400 million user accounts, all free. It actually is still only marginally profitable, with revenue only from advertising. What most people don’t realize is that the total outside funding so far is estimated at over $800M, which is a bit more than you will get from any Angel investor.

Yet I can’t argue their success in the value proposition, since they turned down a billion dollar offer from Yahoo way back in 2006, and value themselves today internally at $4B. It has taken them six years to get to this point, and some very deep pockets, so now you know why I smile when you tell me your plan emulates the Facebook model. Twitter has no model.

I’ve heard all the arguments that a push for early profits on new business models will lead a company to fall back to a lesser model that provides short-term results, but stunts risk-taking that could lead to more long-term value creation. That’s a great argument if you have unlimited means, but if you are just one of the “rest of us,” I suggest you focus on profit first.