Startup to scaleup and perhaps Unicorn in 2021

Startup to scaleup and perhaps Unicorn in 2021

There is no quick and easy formula to success, and 99.6%of new ventures either stall or fail. For ambitious entrepreneurs to grow from a startup to scaleup to a unicorn - founders need ingenuity, good timing, and growth hustle for a scalable business model.

Early stage companies have an obsessive drive for growth and scale. Whether it's scaling a startup of 8 employees to a scaleup company of more than 100, or getting from a scaleup to the grand prize of unicorn status.

In many cases, chasing hypergrowth or premature scaling without an operational excellence mindset can lead to an implosion. But don't worry, in this article, I apply our experience of scaling companies and Product Market Fit (PMF) to empower you to maintain your enthusiasm and belief in your business model and to inspire you to take focused action to scale and succeed.

What is a scaleup?

Scaleups, are high-growth market innovating ventures that disrupt and revolutionise entire industries with new business models.

According to the OECD, a scaleup is defined as a company that has an average annualised growth of at least 20% over three years with 10 or more employees at the start of the period.

Whilst another widely adopted definition of a scaleup is a business that grows to more than $10 million by their 5th year of revenue.

Scaleups make up a large chunk of employment and revenue of all startups once they reach maturity. According to a report by Deloitte, the chances of a startup to become a scaleup is around 0.5%, which means that only 1 out of 200 surviving startups make it to the coveted title of a scaleup.

“Unicorns” make up a tiny subset of scaleups; currently only 600 startups are valued at over $1 billion in the world.

Startup vs Scaleup

A startup is searching for its PMF, experimenting with customer segmentation driving towards healthy margins. A scaleup is beyond this stage and has already validated its product, the market, and has proven sustainable unit economics.

Scaleups topple incumbents that have been around for a long period with a fresh new outlook and accumulating an unprecedented amount of wealth for the founders.

Aside from different stages of funding and revenue growth, other distinctive characteristics differentiate a startup from a scaleup:

  • Leadership maturity
  • Design for scalability
  • Market timing  

What is a Scaleup?
What is a Scaleup?

Experienced leadership

We all have a stereotypical image of a 20-year-old college dropout that goes on to become a billionaire, but the reality is the stark opposite of that.

7startup research found that scaleup founders largely had prior corporate experience under their belt. Many already had industrial, entrepreneurial experience, and academic degrees. Interestingly, a startup founding team is more likely to reach scaleup status, as opposed to just an individual founder.

Scaleup founders typically have a research background and corporate experience that qualifies them as leaders of a particular discipline. The bulk of their qualities and abilities can't be learned from reading books or listening to leadership lectures, these are developed through years of experience.

There are a few ingredients that every startup founder needs to be successful:

  • Motivation
  • The right mindset
  • Independence
  • Street smarts
  • Agility
  • Persistence and drive

Leading a scaleup requires added leadership foundations, a functional edge: a capability that’s difficult to copy has a broad market application – distinguishing the scaleup from the incumbents:

  • The ability to inspire
  • Empowering large groups
  • Risk appetite
  • Low employee turnover
  • Core strengths to develop scalable products 

A 2014 Deloitte report on scaleups in the UK showed that 61% of leaders said they'd grow faster if hiring specialists from established businesses was an option. 85% of all active unicorns had at least one founder with extensive market expertise at the beginning of their journey, contributing to a comprehensive understanding of the target audience and the market.

I think implementing the right tools and metrics at the scaleup phase can transform existing teams and dramatically increase confidence in the leadership:

  1. Employee Net Promoter Scores as Manager Thermometer – asking whether employees would recommend their place of work to a friend is a gauge of their satisfaction at the scaleup and its leadership. These data-led insights can then be used to evaluate the confidence in any division.
  2. Enterprise Value > Team Value > Self Value – In a scaleup with hypergrowth, I think the leadership team needs to solve challenges for enterprise value first, then for their team, and then finally for themselves. If this equation is reversed then employees will lose confidence in their manager, leading to a lower employee net promoter score.
  3. Success is Interconnected – In a scaleup interdependency within business functions and processes (or lack thereof) is great, so, if one piece breaks there’s a ripple across the entire business. Scaleup leaders should stress test and systems and operation functions.

Transition from startup

Startups follow a specific mantra: launch as quickly as possible to maximise the limited resources, gain traction, and hopefully profitability before running out of runway.

Early stage businesses work on the assumption that as long as the customer base likes the product and customer retention rates are good, it will generate revenue, company growth, gain growth investment and success is not far.

In 2021, many incubators and accelerators promote and propagate the fastest-time-to-market model, working on the premise that:

  1. Once the product is in the market the startup can quickly pivot.
  2. Insights enable constant improvement along the way
  3. Leading to investors being convinced of the future potential While this approach has proven results in achieving a minimum market position, it says little about the company's scaleup potential.

Scaleups have an “open” business model which takes advantage of customer networks to scale. This allows the product or service to garner traction quickly. Uber is a prime example of an open business concept that is sustained by taxi drivers volunteering to join and a comprehensive feedback system to motivate drivers and customers.

Scaleups need to demonstrate that the product has reached PMF, is scalable, and is therefore ready to be distributed profitably. If this milestone isn't achieved then the business isn't ready to scale and move to a stage of high growth.

Product Market Fit
Process towards Product Market Fit.

Aggressively raising capital to grow your startup without first achieving PMF usually ends up in failure. As an investor, imagine investing £50 million+ in a startup that shows promise of profitability but ultimately fails to reach the unit economics required. This is, of course, not ideal.

The market timing

Your scaleup success and exponential growth depend on great product features, smart marketing channels, and marketing automation but even more on riding the wave, unlike a salmon that swims against the stream. But how do you get the market timing right? Even experienced entrepreneurs can struggle with getting their market timing right.

Startup to Scaleup Timing
Scaleup Business Timing.

Conclusion

Data shows that six in ten (57%) scaleup leaders experience moments of uncertainty when they were afraid that their business would collapse. In reality, I think this number is far greater, facing doubts is par for the course for entrepreneurs. For scaleup leaders growth can also be scary – especially if investment in systems, operations, the right team, and infrastructure is crying out for attention.

Timing a startup determines much of the outcome. Getting from a startup to a scaleup and beyond also depends on the product, highly successful scaleups create either a shift in user behaviour, a shift in technology, or both.

If you’re a scaleup founder or a budding startup entrepreneur consider the size and phase of the market you’re entering:

  1. Don’t waste your time with small markets that are not growing.
  2. Large markets with incumbents that have advantages in distribution, funding, and product are extremely difficult.
  3. Entering a small market with a lot of growth potential in the long term could work well but to be too early is the same as entering the wrong market.
  4. In my opinion, you should try to find a small market that’s growing quickly, supported by a technology or behaviour shift.

We understand the unique challenges that entrepreneurs face because we’ve lived them personally. At 7startup we build a strong foundation for your business that can supercharge your company’s growth, from a startup to scaleup, faster than ever. Our Objective and Key Results (OKRs) planning service creates the right infrastructure for your scaleup. OKRs are a Unicorns-adopted management methodology and incorporate best practices improving alignment, productivity, engagement, and performance.

Amit Khanna - 7 startup Advisory
Amit Khanna, Founder, 7startup

Amit has 18 years of experience in the industry and an MBA. He supports entrepreneurs with every aspect of their business including concept and product development, investor presentations, and fundraising.

You may also like this blog: Scaling Your Business with OKRs