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- To be scaleups, companies must grow by 20 percent annually for at least three consecutive years
- They differ from startups by having a clearer structure and investment approach
- It is likely that they will remain in the business arena longer
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As if it is no longer cool for a company to say it is a startup, in the business community, a new term has been increasingly heard in recent years – scaleup. Companies that have outgrown the startup phase but are not yet large like unicorns (companies with a market value of over one billion dollars) could be classified as scaleups.
According to some definitions, a scaleup is a company that grows by 20 percent for at least three consecutive years and has revenues greater than one million dollars, while, for example, the OECD also defines that a scaleup must have at least ten employees in the first year. There may be more requirements, but the best description of scaleups can be given by the companies that are in the scaling phase. So how do scaleups differ from startups, and what follows after this scaleup phase has been revealed to us by the leaders of three Croatian companies.
‘Grown-up’ startup
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—– Startup is a company looking for a scalable business model. This means that it is not yet sure whether there is a product-market fit, i.e., it does not know who its customers are and how to find them. A scaleup is a company that has found that model and is now implementing it. Simply put, a scaleup company is actually a startup company that has succeeded. This means that the startup has ‘grown up’, found its users and customers, and is now rapidly growing and expanding its market – explains Tomislav Car, director of the scaleup company Productive, explaining that their transition from startup to scaleup occurred when they acquired their first hundred customers.
That was the moment when they decided to scale the company more intensively, focusing on solving real problems for customers with their product, which ultimately paid off.
– Many products today are ‘solutions looking for a problem’, not the other way around – notes Car.
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Simply put, a scaleup company is actually a startup company that has succeeded
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Founded eight years ago as a project management tool for agencies, Productive now employs 70 people and plans to end 2023 with six to seven million dollars in annual recurring revenue. Their biggest challenge comes from much larger competitors who have been on the market longer or are better funded. However, Car notes that in the software business,’with a higher quality product or better customer experience, you can compete even with competitors that are multiple times larger than yourself’.
Productive is a bootstrapped company, meaning it has not received external investments like many startups. Another scaleup that is growing without external financing is Determ, a company that develops a software tool for media monitoring.
Mindset Change
Determ finances its operations from its own revenues, which amounted to 2.2 million euros in 2022. For comparison, in its first year, 2014, when they started operating under the name Mediatoolkit, they achieved 11 thousand euros in revenue, and the average annual revenue growth since inception has been around 50 percent. From the 12 employees at that time, they have now grown to 46. They describe their strategies for scaling the business as constant listening and analysis of market needs.
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—– We rapidly developed our product and brought new functionalities to users that align with our mission to help find and understand relevant information from the media so that users can make timely and good business decisions. Along with the client, a significant focus was also placed on employees and building a healthy and transparent company culture, as we believe that such a culture is reflected in the final product. As a bootstrapped company, we ensured that our costs were always investments aimed at increasing revenue – says Igor Kranjčec, marketing director at Determ.
Kranjčec explains that, in their opinion, a startup transitions to a scaleup after proving product-market fit and defining its business model, which means it can generate recurring revenue.
– Simply put, a scaleup is nothing more than a successful startup – concludes Kranjčec.
They realized that Determ had become a scaleup ‘along the way’, adds Kranjčec, because besides financial indicators, there was also a change in mindset.
– We think more long-term, recognizing the importance of establishing good and sustainable processes, and when hiring, we turn more to specialist roles that individually hold a part of the process, all with the aim of sustainable growth – explains Kranjčec.
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—The biggest challenge on that path, adds Ivor Bihar, chief operating officer at Determ, concerns hiring quality professionals.
– On the other hand, there are internal specializations – generalist roles are gradually shifting to specialist roles, often as the first role in the company, so the challenge is to build all these things from scratch. The third thing is certainly scaling the leadership team. Quality department and team leaders are crucial as the company grows, and if you want to prepare and scale that effectively and on time, it is certainly a challenge – says Bihar.
Maturity and Stability
That a scaleup is not only a larger organization in terms of the number of employees and revenues but also a company with proven experience in working with business clients and more mature processes is considered by Igor Lasić, senior vice president for technology at the scaleup ReversingLabs. Lasić also confirms that they face challenges in finding employees in Croatia and training them to work in the field of cybersecurity.
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Scaleup is not the last in a series of buzzword terms. Terms like shakeout and stabilized companies have already formed, describing the next phases of startup development after scaling.
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Unlike Productive and Determ, the path of ReversingLabs from startup to scaleup has been marked by two investments. They entered the scaleup phase in 2017 thanks to an investment of 25 million dollars, and after a second investment of 56 million dollars in August 2021, they stepped into the territory of late funding. Since 2012, a few years after its founding, the number of employees has grown from a dozen to over 260. However, Lasić notes that one external factor influenced the development path of ReversingLabs.
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—– It was a major attack by Russian secret services on the American IT company SolarWinds, via the software supply chain. Discovered at the end of 2020, it was carried out months earlier. This attack launched our expertise, which is supply chain security, into the spotlight of American authorities and influenced the increase in demand for our knowledge and products – explains Lasić, adding that their combination of strong branding for file analysis and cybersecurity, along with a product that solves a specific problem, paved the way to their first clients.
– Because our sales and marketing have been based in Boston from the beginning, we have been close to both customers and investors, which has been important for our growth. Our strategy is to clearly communicate our value proposition to organizations through strong investment in marketing, ensuring that our message reaches relevant markets and key customers. Of course, in addition to investing in sales and marketing, we are developing our employees and our products – says Lasić.
What comes after ‘scaleup’?
Unlike the startup phase when a company focuses on experimenting and testing a business idea, characterized by the energy and vision of the founders, but also great uncertainty, Lasić emphasizes that in the scaleup phase, the company invests differently – in sales and marketing.
– Greater financial discipline comes into play. ‘Post-sales’ departments are being built to support existing customers. A scaleup has successfully exited the startup phase and continued to operate, with the perspective and desire for further growth. It is likely to remain in the business arena longer. It has better-developed departments and a clearer structure, and it has probably gained some recognition in the market. It has completed more serious jobs. In the scaleup phase, you can already see employees brought in from other organizations to help implement concepts that are lacking in the startup. Different planning concepts are adopted in the scaleup, the product portfolio is more mature, and the client base is more stable – explains Lasić.
However, a scaleup is not the last in a series of buzzword terms. In foreign markets, terms like shakeout and stabilized companies have already formed, describing the next phases of startup development after scaling, on the path to becoming unicorns. Shakeout represents a phase of the mature life cycle of a company, while a stabilized company clearly has an established market position.
Car believes that Productive still has plenty of room for growth, while Determ, as Bihar says, has a long-term goal of becoming a global leader in media monitoring for small and medium-sized enterprises. Lasić, on the other hand, emphasizes that ReversingLabs aims to reach a high level of sales and profitability that allows for further growth.
– In a way, the scaleup phase ends when a company no longer needs external investments and finances itself. At that point, the sales level is high, the market is stable, and the company is recognized as one of the top two or three companies in the market, with its size measured in billions of dollars – concludes Lasić.
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– Every startup goes through development phases, sometimes starting with the so-called seed round of financing, or angel investors providing smaller amounts to develop and demonstrate the concept.
After that comes the A round of financing where the rest of the team and key members are hired. In this phase, the concept is further developed and shown to initial customers. This means that in the A round, further investment is made in product development, and the focus is not yet on large hiring for sales and marketing.
B round financing is spent with a focus on sales and marketing, and less on product development itself.
C round is still scaleup territory. At that point, the focus is on further market expansion with marketing and sales and investing in post-sales teams such as customer support.
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