Scaleup Company: Beyond Product-Market Fit

A scaleup company is any company with a validated product and an average annualized growth rate of at least 20% over three years. The growth rate can be measured in terms of revenue or employees. Therefore, the scaleup company has usually reached its product-market fit, and it has created a scalable business model. Thus it’s in a phase where this business model needs to be scaled up.

Understanding a scaleup company

In a typical start-up, the company tries to determine its product-market fit and works toward a repeatable, scalable business model. Employees are willing to sacrifice job stability for the promise of tremendous growth later.

startup-success
According to Bill Gross, founder of Idealab, the five key factors influencing startups’ success are the idea, team, business model, funding, and timing. Among them, timing is extremely important but can’t be controlled. That is why startups often need enough funds to keep going until the business becomes viable.

With market fit and a scalable business model identified, the start-up should in theory experience a period of rapid growth. At this point, it becomes a scaleup company. The Organization for Economic Co-operation and Development (OECD) defines a scaleup company as any with 20% year-on-year growth for the past three years and at least 10 employees.

While the significant growth experienced by scaleup companies is beneficial to the bottom line, scalability does present some challenges. We will look at some of these challenges in the next section.

Common challenges for scaleup companies

Difficulty in sourcing talent

Many scaleup companies find it difficult to source adequately skilled talent, with some estimates suggesting at least a quarter of vacancies remain unfilled.

To some extent, this problem can be mitigated by not leaving the recruitment process until the last minute. Scaleup companies should begin the process of hiring new talent before it is needed. By securing talent ahead of time, this strategy can be seen as a forward-looking investment in the future success of the company.

Finance

financial-structure
In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.

Research by the ScaleUp Institute discovered that the majority of scaleup businesses lack a clear understanding of their finance options. 

Some believe bank loan finance is a barrier to growth, while others tend to rely on an attractive balance sheet to garner interest from investors.

In truth, there are many funding options available and most investors want to see a clear growth strategy that displays agility, innovation, and vision. A key component of this strategy is the identification of weaknesses or gaps in knowledge or skill and how the business intends to overcome them.

Market expansion

market-expansion
The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.

Maintaining growth momentum for a scaleup company invariably means accessing new markets. There can be a tendency for scaleups to seek growth for the sake of growth and not consider the financial risks, regulatory pressures, or logistical issues of doing so.

Expansion into new markets can also result in a company messaging becoming diluted in a larger, less-targeted audience. Proper due diligence on market demographics and viability should be undertaken before any growth strategies are undertaken.

Key takeaways:

  • A scaleup company is any company with a scalable, repeatable business model and average annualized growth of at least 20% over three years. Growth can be measured in terms of revenue or employees.
  • A scaleup company is a more evolved form of a start-up. With a validated product and market fit identified, scaleup company employees have greater job stability.
  • The rapid growth seen in a scaleup company presents its challenges. These include difficulties in sourcing talent and misconceptions around attracting investment capital. Scaleup companies can also become preoccupied with new markets to sustain growth momentum.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"