What is the right size of a startup? This paper constructs and tests a novel theory of how the scale of an entrepreneurial firm relates to its performance. In particular, it questions the common assumption that an increase in resources leads to an increase in output. Instead, it suggests that growth-phase startups exhibit the markers of weak-link production, which is a mode of value creation with an ambivalent input-output relationship. Weak-link production processes are those in which an underperforming factor of production – such as a resource, routine, or employee – degrades the overall performance of the firm. A larger firm has more resources, meaning if resource performance varies, a larger firm faces more problems due to degradation. Formalizing this institution, the prediction is made that for increases in size to be value-generating, a proportional reduction in output variation is required. Alternatively, a firm can choose an internal organization that reduces weak-link problems, but this constrains the strategies available. Two implications of this theory are tested and found to hold in a large sample of startups producing web technologies. First, high variation of output is associated with lower performance benefits from hiring new employees. It is also associated with lower long-term survival. Second, these relationships depend on the startups’ strategies: Those startups pursuing the currently popular approach of “product-led” growth are more susceptible to weak-link problems and their growth is therefore more easily constrained.
