What entrepreneurs should consider when expanding their business

by Linus Hietaniemi (IESE Business School)

Should entrepreneurs align their team’s growth with market demand, or should they anticipate it? That choice, and the profile with which a startup is hired, can play a major role in future success. there is. Conventional wisdom dictates that entrepreneurs start lean to avoid overextending their tight resources. But this is only one side of the story.

My new research, conducted in collaboration with Simone Santamaria, Aleksandra Kakperchik, and Juhana Peltonen, shows how and why different entrepreneurs follow different team expansion strategies. One important factor is whether they are an independent entrepreneur or a portfolio entrepreneur running multiple startups.

Running multiple startups creates opportunities to move staff elsewhere if one venture stalls. This option reduces the sunk costs of overcommitment and allows entrepreneurs in your portfolio to hire more aggressively early on. Active hiring can help these entrepreneurs develop their capabilities faster and can have a significant impact on the success of their companies.

Flexibility to win

Using 10 years of employee-employer matching data for all Finnish startups, my co-authors and I show that an entrepreneur’s profile is a key factor in determining when to scale a team. I discovered that.

Some entrepreneurs focus on a single, independent company. Hiring too quickly increases the risk of overproduction. And where labor laws are strict and layoffs are costly, overcapacity can be a big reason for alarm. We find that these entrepreneurs only expand their teams once market demand is proven.

Portfolio entrepreneurs, on the other hand, may redeploy employees to other businesses if one business fails. Our analysis shows that these entrepreneurs are more likely to expand their teams ahead of market demand.

In addition to scaling quickly, we find that portfolio entrepreneurs are looking for profiles that allow them the flexibility to move and redeploy staff depending on where they see growth. Staff redeployment is less relevant for independent entrepreneurs, so they are less likely to look for people with transferable skills.

This flexibility gives portfolio entrepreneurs an advantage over standalone entrepreneurs. If a venture’s product is in demand, portfolio entrepreneurs are well-positioned to meet the demand, create network effects, and develop unique capabilities.

level the playing field

Furthermore, we find that strict labor laws increase the sunk costs of hiring independent entrepreneurs, thereby amplifying the advantage of portfolio entrepreneurs. A more flexible labor market reduces sunk costs and alleviates the advantage of portfolio entrepreneurs. Therefore, reducing startup layoff costs could help level the playing field for all entrepreneurs. However, there are trade-offs. What is beneficial to a budding entrepreneur can be detrimental to the employees of a start-up company.