The Scaling Chasm

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I've observed a number of startups going through significant growing pains when scaling from around 20 to 50 employees. When trying to understand why this happens and what the common themes are, there seems to be a recurring tension between the structure of an early stage startup, and the structure of a mature startup / company.

The transition from early-stage to growth-stage startup is fraught with difficult, and I've come to christen it the "Scaling Chasm".

This post talks about the changes in corporate structure, interactions, leadership and management styles that occur over this period, and is intended to give Founders a heads-up on what to expect and how best to react.

Corporate Structure at an Early-Stage Startup

The corporate structure at an early-stage startup is more like a small team or scrum - it's typically a close-knit group of people working together with a common goal and common sense of purpose. At around 2-10 people, the entire company can fit inside a single room, and therefore communications can be clear, direct, and in-person.

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The defining characteristics of this phase are: -

  • Small (2-10px) team size
  • Clear, direct, in-person communications
  • Ability to explain and outline reasoning
  • Strong alignment, clarity of reasoning, and direction

Decision-making at this stage is often ad-hoc, but quick and effective. Typically it's a couple of employees chatting together, pondering over a problem, and deciding to do something. This sort of ad-hoc decision making works in this size of company because they typically have: -

  • Low complexity
  • Few internal dependencies
  • Very open communications
  • High alignment

In this mode of operation, it's hard to mess up a decision because someone will quickly tell you what the problem is. There's nothing complex or fragile to break, and there's few internal politics to be aware of.

Furthermore, this style of decision-making can lead to rapid decision-making, decisive moves, and the sort of iteration around problems / products / solutions that helps startups find Product-Market Fit

Contrast with Corporate Structure at Mature Companies

Without delving into the depths of corporate structure and hierarchy (which is a whole, broad topic of research, specialization and expertise that I can't comment on), we can talk in some general terms about the structure of a mature startup

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A maturing startup will typically create a hierarchical structure around a set of divisions - example, Dev, Product, Operations, Sales. Each is typically managed by a VP, Director of-, or similar senior manager. Each typically specialises in a function. Each typically coordinates teams within that function, with team leads, aims, goals, workers etc. The resulting hierarchy is typically tree-like, with the branches fanning out from the CEO / Founder / Co-Founders in some manner

This structure has a number of immediate, clear strengths: -

  • Defined reporting structure
  • Clear division into specific areas of work / expertise
  • Practical separation of employees into meaningful and manageable groups
  • Reporting hierarchy for accountability

This allows a large number of employees to be managed in a practical, meaningful way. However, it also suffers from a number of issues itself, particularly: -

  • Employees become silo'ed in their divisions
  • Communication between lower level employees in different divisions is stiffled
  • Managers may jockey for position, or seek promotion at the expense of others
  • Information flow is predominately up-down, and not across the organisation

There are a number of solutions to these issues, including townhalls, clear vision and direction, OKR's, metrics, dashboards etc. etc. which all help solve these issues. However, there's a fundamental tension that occurs when a startup grows to this scale, because what worked successfully at an early-stage is now destructive at a late-stage startup.

In my experience, Founders are unaware of the major changes in leadership and management style that this more mature structure requires

Typical Issues that Arise

A host of issues arise when the old habits and ways of doing things are brought into a scaled startup. Fundamentally, what worked in a small startup of 2-10 people no longer works in a larger organization. In fact, the old practises are often ineffective, slow decision-making and/or are damaging to morale

Small Group Decision-Making

Decision-making used to involved chatting with a few colleagues, coming up with an idea and implementing it. That worked when the startup was small and there were few internal dependencies. Now it fails because there are a host of other people and processes that depend upon stability of operations.

Founder-Employee 'Chats'

Founders get used to chatting with employees and asking their input. At an early stage this helps align people. At a late stage it creates division, favouritism and dissent.

If a Founder goes around layers of management to talk to an employee, ask their opinion on a decision, or tell them explicitly what to do, then they alienate those managers. This weakens the ability of managers to lead clearly and decisively (will the Founder just come tell their employees to do something different?). It also alienates the individual employee (why are they so special that they get this attention?)

No Consideration of Corporate Complexity // Snap Decision-Making

Founders and early employees often revel in the freedom of an early-stage startup that is experimenting, trying to figure things out, and seeking PMF. That freedom, hustle and hackiness often led to rapid innovation and the majority of the early successes.

However, larger companies are more complex, move slower, and have more internal dependencies. There are more systems to break, processes that need to be maintained, or interactions that occur. To be clear, I'm not encouraging you not to innovate or hustle, but I am warning you that the inherent complexity of a larger startup needs to be taken into account


Typically I've seen startups struggle with these issues for between 6 and 18 months as they scale. The old habits that created success are hard to change, and newer ways of doing things often seem stange, alien, or too complicated. That said, I believe that a startup needs to make these changes if it is to mature and succeed.

How to Avoid these Issues

There's no easy way of avoiding the issues outlined above, because most exhibit the tension between what used to work and what is new and uncertain. I encourage Founders to do the following: -

  • Be aware of your startup and yourself
  • Make decisions in large groups with all stakeholders present
  • Set clear direction via OKRs and metrics
  • Avoid excessive one-on-ones with employees that don't directly report to you
  • Don't manage individuals directly - follow the chain of command

If you can, then recruit experienced managers that have scaled startups and can guide you. Finally, talk to other Founders that have successfully scaled companies and listen to their stories. Learn from them and their mistakes.

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Posted by Phillip Gales

Phillip is a serial entrepreneur who specialises in Operations, Data and Metrics. He applies AI and Machine Intelligence to old, antiquated and/or forgotten industries that are ripe for disruption.

Phillip holds an MBA from Harvard Business School, and an MEng in Electrical Engineering from the University of Cambridge, specialising in Machine Intelligence.

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