A recent article in The Atlantic assessed the reasons why so many large investments in the education space have not generated the expected ROI. Reading the piece conjured a few moments of professional PTSD for me as I recalled a few of my own experiences with promising companies and business models that took turns for the worse. Particularly in the start-up and/or smaller enterprise segments, a fairly common and (near-)fatal error involves overextending too quickly. While there are many good examples of firms making large bets early that yielded fast growth and a foundation for long run success, there are also too many instances where companies tried to grow too quickly only to flame out and leave investors and employees scratching their heads.
As a cautionary tale for others, I think a “great” example of this lies in the ed tech space. Company X made a logical decision a few years back to expand its business into a very closely related vertical. X had a thriving business in its original market niche and this new area of opportunity overlapped so closely that the company was able to enter this new market without any significant investment of capital or additional employees. As a result, the company was able to offer a more compelling product to its customers at a dramatically lower price than the established competitors in the space. After some early success in grabbing share as a result, the company’s leadership reasoned that if they invested heavily in this new market segment, they could accelerate growth even more and capture much more of the market. That’s where things got rocky. The company created a whole new division to focus on this area and hired a number of new employees. As a result, their cost structure changed overnight, and they were no longer able to sell on value. At the same time, the management team within the new organization also brought with it ideas and assumptions from their experience with other competitors in the same space. In just a short span of time, the company went from offering a unique (in a compelling way) product at an attractive price to offering a mostly non-differentiated product at a price close to the rest of the market. Not surprisingly, the result was not just a failure to realize the desired growth but actually a loss of share as existing customers no longer saw a good reason to go with the upstart.
So, what’s the moral of the story? Before investing heavily to accelerate your growth, be certain that the changes wrought by that investment will not fundamentally—and negatively—alter your position in the market. It is easier said than done, but if you cannot say with a high degree of certainty that your product and company narrative will not be altered, think twice about chasing growth.