The factors behind successful scaleups

The Common Concept of Scaleup is Misleading

The traditional definition of a scaleup company is one with 20% p.a. growth in revenue or staff for three years or more. This is the Eurostat-OECD standard adopted by the European Commission.

Why focus on staff?

The problem with the definition is the focus on staff numbers. No one buys your product or invests in your company based on how many people you employ. Piling on costs before you’ve generated revenue is a path to failure.

A Superior Definition

As an alternative, Startup Genome proposes using a valuation of $50 million or more as the definition of successful scaleups. This reflects both the necessary growth and the crystallisation of value by investors.

Bootstrapped companies are excluded from the definition because there is little data available about unlisted, self-funding companies. The purpose of this letter is to identify the trends marking out successful scaleups and examine what is appropriate for bootstrapping businesses to adopt.

The Sources of Scaleup Success

Startup Genome identifies a number of traits common to startups that achieve scale. They’re shown here in five categories.

Geography

Startup hubs are categorised by their number of companies. The largest hubs with >5,000 startups, such as New York and London, are 3.5x more likely to deliver a scaleup than the smallest with <1,000 firms.

These smaller hubs, including Manila and Calgary, focus on Seed and Series A funding, while regional and global reach increases as the hub gets bigger.

When bootstrapping, you are where you are and location should not put you off starting your business.

Network

While you can only start from where you are, you can focus on building a network. The more founder-to-founder connections you have the more likely your business will scale.

You may also want to pick the brains of investors. It can take two years from first meeting to securing funding and it’s never too early to start discussions, even if only as backup to bootstrapping.

The more international your network the more likely you are to scale. This includes founders, investors and customers.

Team

Experience has a high correlation with scaleup success. This goes for leaders, consultants and employees and particularly those with experience of the US and UK markets.

Flexible hiring and at least 40% remote workers correlates with higher scaleup rates, but companies with 100% remote workers see a drop-off in success.

The Equity Conundrum

Venture-backed startups use equity to incentivise both advisers and staff. The former require skin-in-the-game to avoid becoming an echo chamber to the founder’s views. As a guide, consider 1% ownership at the early stage, 0.5% at Series A and 0.25% at Series B.

Startups with employee share option schemes for all staff are 3.3x more likely to scale than those without schemes. While many companies reserve equity rewards for key staff, the data doesn’t lie and covers 100,000 startups across 40 countries.

Equity is an incentive if there is the prospect of an exit. Venture backing allows companies to provide that while remaining private companies. Bootstrapping companies offering equity need to have a realistic plan for shareholders to cash out shares. Without this a rift may develop between a founder who believes they are giving away their company, and advisers and employees who treat it as worthless.

There are ways to do this but these require the company to be profitable in a predictable time period.

Founder DNA

Serial entrepreneurs outperform newbies by virtue of having more connections to begin with and this is particularly the case in B2C. Experience of previous hypergrowth scaleups leads to 85% increase in the likelihood of a win, because these leaders have knowledge and attract talent as well as having networks.

Motivation plays a role and founders seeking to get rich and to change the world are most likely to scale. The more existing resources founders have, the less hungry they are and this is born out in the scaling statistics. Younger founders do better in Asia and the Middle East, outside of Israel, which is a function of local demographics and customer base. Successful B2B founders are more likely to be older.

Startups with multiple founders have higher success because they tap into broader networks and experience.

Lastly, and busting the myth of the dropout success story, the most common education level for successful scaleup founders is an undergraduate degree.

Target Market

The final factor in scaleup success is the nature of the business. Generally, B2B companies are more likely to scale than B2C, although Asia is an exception because it has weaker B2B infrastructure.

What to do next

You can be a startup founder wherever you are, but your location will influence the network opportunity and the speed with which you develop. Tapping into talent wherever it is will increase your chances of success.

If you are bootstrapping your startup and want to mirror the most successful venture funded scaleups, then consider:

1. Focusing on building your network of founders, advisors, investors and customers

2. Tapping into experience through hiring and advice

3. Cutting ties with your old life and going all-in.

If you’d like a no-obligation chat about how to scale and how to award equity in a bootstrapped company, hit reply or book time from my LinkedIn profile.

I'm Simon Maughan and I write The PROFIT Elevator as a guide for startup businesses looking to bootstrap to scaleup.

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