What is a Scaleup Company? What is a Scaleup Company?
While you may have heard of a startup before, scaleups are a less familiar concept in the business world. Broadly speaking, startups are fledgling companies that focuses on new technologies as part of their product or service offering. Startup founders build their business from the ground up, from developing their own business model to raising funding to foster business growth.
Key Takeaways:
- A startup is a new business that focuses on offering a product or service centered around new or emerging technology.
- A scaleup company is a startup that has experienced exponential growth and thus changed scale.
- The biggest differentiator between the two is that a scaleup has a proven scalable business model to promote long-term growth.
- Scaling companies must have a proven business model, revenue increases, a high growth rate, established cash flow, and likely a streamlined marketing and sales operation.
Scaleups often share many of these traits with startups, and in fact pretty much every scaleup was a startup at one point. So what's the difference? We'll get into that and more below.
What is a Startup?
First, let's get into more detail on what a startup is. As mentioned above a startup is a new business that focuses on offering a product or service centered around new or emerging technology, and as such most startups are often classified as tech companies. Often, startups are also focused on delivering their product or service to a market segment that is currently underserved. While the product offering might be considered niche at first, all startup founders intend for their product to be widely-adopted across the market segment in the future as startup enterprises must have the potential for rapid growth and profitability in order to attract funding and experience long-term success.
Most startups receive funding from a variety of sources including the founder's savings, loans from friends and family members, traditional loans, small business loans, angel investors, venture capital firms, and private equity firms. Startups use funds from investors to fuel their growth and achieve a variety of business goals including product development, job creation, expansion into new markets, and more.
Startups that are lucky enough to experience high-growth and navigate through the various stages of funding may consider initiating the process of taking their business public by offering shares on the stock market through an initial public offering, or IPO.
Going public is an avenue for founders to continue to grow their company by raising significant capital on the public markets while also generating a return on investment for themselves and other early investors. However, the process is an extensive use of time and company resources, and public companies have to comply with a raft of regulatory requirements, which can significantly impact a company’s decision to go public.
Businesses that go public can continue to raise capital through secondary offerings which can be used to stimulate future growth as well as to pay off early investors and any members of the leadership team. Public stock is also a benefit companies can use to attract top talent to their team.
So What is a Scaleup Company?
As mentioned briefly above, almost every scaleup was a startup at one point – a scaleup is just a startup that has grown into a certain level of success. But what exactly is a scaleup and how does it differ from a startup? Broadly speaking, a scaleup company is a startup that has experienced exponential growth and thus changed scale. If this still sounds a little vague to you, the Organisation for Economic Co-operation and Development (OECD) provides a more detailed description with some specific metrics. OECD defines a scaleup as a company that has experienced 20% average annual growth over a period of at least three years in terms of turnover or number of employees with a minimum of 10 employees at the beginning of the period.
Let’s dig into this a little bit deeper…a scale-up company is a startup with a scalable business model that has successfully implemented a customer acquisition strategy, revenue growth, increased its team size, and had some level of market impact. Essentially, a startup is either successful enough to become a scaleup, goes bankrupt, or is acquired by or completes a merger with a larger company.
Scaleups vs. Startups: What's the Difference?
So now that we've outlined what a startup is and what a scaleup is, let's get into some of the key differences between startups and scaleups. The biggest differentiator between the two is that a scaleup has a scalable business model to promote long-term growth. While startups may have sparse team structures, fewer internal business model constraints, and a more entrepreneurial culture before they enter the scaleup phase, scaleups have larger teams, more defined company culture, and modern business protocols and procedures. As such, a scaleup's employees will have more defined roles than those of a startup. From an investor perspective, scaleups are usually companies that have at least achieved a Series C round of funding and are less risky investments than a startup. However, because scaleups more often than not have already achieved a certain level success, they offer less return on investment than a startup would.
How Does a Startup Become a Scaleup?
There are many different paths for businesses to use as they go from startup to scaleup, and each company grows differently. Scaling companies must have a proven business model, a streamlined marketing and sales operation, revenue increases, a high growth rate, and established cash flow. Some other benchmarks that a company must reach to be considered a scaleup include a product-led growth strategy that can handle the increased demand that comes along with scalability, more efficient systems and processes, and as mentioned above scaleups need to have completed enough fundraising to support a more robust organizational structure and continued growth. Again, these are just a few of the milestones a business should look to achieve as they transition from the startup phase to scaleup business and each company will approach their path to profitable growth differently.
If you're a founder wondering how to go about making the leap from startup to scaleup, Leader Bank's Startup Banking team is here to help with an invaluable knowledge base, personalized relationship banking services, and flexible solutions.
