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.
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
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 growthstrategy 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
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.
Related Businesses
A Startup Unicorn is a company that has passed the billion dollars mark of valuation. Based on CB Insights’ research on Startup Unicorns. Variants of Unicorns include a Decacorn, made of companies valued at over $10 billion. And a Hectocorn, made of companies valued at over $100 billion.A hectocorn is a company with a valuation exceeding $100 billion. In some cases those are referred to as super-unicorns, in some other cases, those are called tech giants, or big tech.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
