The Mid-Sized Market Trap in Entrepreneurial Scaling

Abstract

Why do startups from mid-sized markets struggle to scale? This study theorizes that a local market that is big enough for a product to gain early traction but not big enough in which to scale can incentivize startups to delay expanding into new markets necessary for high-growth outcomes. This delay introduces adjustment costs that constrain growth. Using large-scale website language data of about 20,000 software startups from around the world, the study finds that startups headquartered in mid-sized markets delay targeting English-speaking markets that are crucial for software growth, subsequently incurring higher adjustment costs. Those startups that do initially orient toward these top markets attract over 30 percent higher valuations and funding. While prior work highlights the advantages of local market size for entrepreneurs, these results suggest that a mid-sized market can also introduce a "satisficing" dilemma that hinders startup growth. 

Keywords: Entrepreneurial Strategy, Technology Entrepreneurship, Digitization, Global Strategy