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The word startup has become synonymous with high-growth entrepreneurship. As a result, cities that have tried to focus on meeting the needs of startups by providing them with resources and high caliber talent. However, catering only to startups is not always effective because it is scaleups that drive economic growth. The Endeavor Insight Team, via research and data analysis from World Bank datasets, have found that scaleups create economic growth 2.4x faster and generate 5.4x more jobs than other companies comparable in size and industry. In Michigan, 2 out of 100 startups end up as a medium to large (50+ Employees) sized business. These size companies are responsible for almost 50% of jobs created. According to research from Dun & Bradstreet and American Express, middle-market firms – companies with annual revenue between $10 million and $1 billion – represent less than one percent of U.S. companies but employ 28 percent of the U.S. private-sector workforce. So what differentiates a startup from a scaleup? RocketSpace explains a few perspectives, but let’s take a look at five key differences we think you should know:
Startups might have no funding, seed funding, or have gone through Series A funding. This funding usually comes from angel investors, crowdfunding, friends and family, bootstrapping efforts, and other services, like incubators. The funding is commonly used for concept development, acquiring initial/test customers, and product and/or market experimentation.
Scaleups usually have raised more capital, typically from institutional investors and have established product-market fit with recurring/repeatable revenue. At the scaleup stage, funding is used to scale operations, increase revenue, and add new infrastructure.
If the market is not ready for the product or service, a startup will not be able to scale because a company cannot grow faster than the market will allow. Startups are testing the market readiness for their product by considering product/service features, customer profiles, and customer segments. In addition, the market may require substantial education or infrastructure changes in order to accommodate the product or service at scale. Until such issues are resolved, a company will remain at the startup level.
Scaleups, on the other hand, have already validated their products in the market with profitable proven unit economics, identified key customer bases, and have repeatable sales. They are no longer experimenting with what will work but are instead focused on scaling what’s working.
When there aren’t many customers and a company is trying to figure out what features will best fit the market, risk taking is high. Companies can try new things, experiment, and learn from failed ventures to undertake new experiments.
Once a company has gained the backing of venture-level investors or reached a level of maturity, acquired a steady customer base, and many employees rely on the organization’s success, risk taking capabilities diminish. Instead, the focus becomes replicating proven successes and building systems/process around it to scale faster.
In the early stages, startups hire talent expecting them to wear many hats and step-up to take care of whatever tasks or challenges may arise. For example, in the tech industry it’s not uncommon to see team members who both engineer a product and provide marketing content for sales enablement.
Once a company reaches a certain growth point, however, this stops being a sustainable approach. Instead, it becomes necessary to allow team members to focus on specific roles. Because the company now has specific growth priorities, team members now need to be able to focus on specific areas and not be spread too thin.
Startups do not stop innovating to set up specific, repeatable processes. Instead, they focus on putting out fires as tasks arise. New hires are put to work immediately to problem solve and dive in quickly. Likewise, leadership is less structured in companies of two to ten people and corporate leadership experience is often not as relevant in day-to-day operations.
Scaleups, on the other hand, require a system of repeatable processes to be in place in order for companies to scale. Brand alignment begins to take priority, and new hires go through an onboarding or training process before being set to work. Leadership becomes more structured and new talent with corporate management experience is often required to manage larger groups of people.
All leaders, both in and outside of the entrepreneurial ecosystem, should be focused on supporting the growth of scaleups in their community. Founders who are looking to turn their startup into a scaleup need to think beyond the product market fit stage and work on the next phase of growth where scaling challenges will only become more apparent. At Endeavor, we focus on supporting the entire entrepreneurial ecosystem and specialize in supporting scaleups because we believe doing this will have a lasting impact on our community. Our services focus on helping high-impact entrepreneurs get access to talent, market and capital programs that accelerate company growth on a local and global scale.
If you know of a company that is a good fit for Endeavor, head to our application page. We’d love to hear from you.
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