Understanding business evolution: What is a scaleup?
In recent years, the term “scaleup” has been added to the list of buzzwords used to describe the intricacies of modern business. But far from mere jargon, this label captures a critical and distinctive phase in a company’s lifecycle, bridging the gap between initial launch and mature operation.
Startups are typically characterized by a spirit of innovation, the search for product market fit and an experimental approach to market strategies. In contrast, a scaleup can no longer be just an idea with potential — it has to be a solid business that delivers on its promise and is ready to amplify its impact. This evolution from startup to scaleup is a crucial transformation replete with new opportunities and challenges; your company’s long-term success depends on how well you manage it.
In this post, we’ll dive into what a scaleup is, how it’s different from a startup and how you can make this crucial transition between these two business growth stages. We’ll also present a few examples of high-impact scaleups that successfully crossed the chasm and explain how they did it.
So what is a scaleup company?
The precise definition of a scaleup company remains subject to a degree of ambiguity. The Organization for Economic Co-operation and Development (OECD), for instance, defines a scaleup or high-growth enterprise as a company with an average annualized growth rate (AAGR) greater than 20% over at least three years while having ten or more employees at the start of the period.
While this high-growth approach can be useful, a more holistic definition would include factors such as market impact, innovation, job creation and process optimization. After all, what’s the point of growth if it doesn’t impact the bottom line? You can have more customers, employees or offices, but you’re not scaling if you’re making the same or less profits.
The second perspective is to look at a scaleup as the next stage in a startup’s lifecycle. At this pivotal stage, the company has already found its product market fit, has a proven business model and is ready to expand its market reach, revenue and team at an accelerated pace. It’s no longer a question of survival but of scale.
Defining characteristics of a scaleup business
Regardless of the precise definition of a scaleup company, we can still draw out some standard features that characterize these fast-growing companies:
- The ability to achieve and maintain high growth levels
- Strong impact on market norms with potential for disruption
- More established brand perception
- Significant job creation
- Focus on overall process optimization
- Proven business model and long-term resilience
- Major investment in leadership and organizational development
Types of scaleups
Scaleups can be classified into different types based on factors such as the speed of their growth, their industry and their business model.
Differentiating on the basis of growth speed, on one extreme, we find scaleup companies that aggressively pursue a strategy called “blitzscaling,” rapidly doubling or even tripling their revenues and workforce size each year.
On the opposite side, we find scaleup businesses that adopt a more tempered approach to expansion. These businesses emphasize risk management and control, carefully growing within stable, mature industries through partnerships, acquisitions and steady market expansion.
Occupying the middle ground are the scaleups that strike a balance between growth rate and profitability. They methodically expand their customer base and scale their operations, always with an eye on maintaining financial health. Importantly, each scaleup’s pathway is uniquely carved out, influenced by leadership style, the funding landscape and resource management strategy.
Scaleup vs startup: What’s the difference?
Understanding the differences between startups and scaleups can help you manage and prepare for the transition period. Let’s compare the two stages across several key dimensions:
|Objective||Proving the concept and finding a product-market fit||Scaling the successful model for significant growth|
|Business model||Often experimental, trying different approaches to see what sticks||Proven and repeatable, designed for scaling|
|Growth||High potential but often unpredictable growth||Proven and repeatable, designed for scaling|
|Stage of funding||Typically seeking initial or early-stage funding (seed round or series A)||Typically have secured financing, are generating steady revenue and seeking expansion capital (Series C and beyond)|
|Risk level and appetite||High level of risk and a high appetite for it due to uncertainty and lack of a proven model||Lower level of risk and a more balanced appetite/aversion, given the proven business model, but with new challenges related to scaling|
|Organizational structure and roles||Flat and flexible, often with blurred role boundaries. Team members often have general skills and wear multiple hats||More structured with defined roles and responsibilities, with a growing emphasis on management and leadership specialization|
|Market strategy||Exploratory and seeking a sustainable customer base||Focused on optimizing the most successful channels and expanding market share|
|Culture||Dynamic, agile, often “all hands on deck”||More defined roles, processes and a need to maintain healthy culture amidst rapid growth|
|Success metrics||Focused on validation and learning (e.g., user engagement)||Focus on efficiency, profitability and growth (e.g., customer acquisition cost, lifetime value)|
When does a startup become a scaleup?
While all scaleups are, by our definition, former startups, the reverse is not true. Only some startups will eventually morph into a scaleup. Startups that successfully make this transition have their own unique timelines. Their journey is shaped by many variables, including market conditions, the nature of the business, its leadership and sheer luck.
Some viral outliers can reach scaleup status within a year, while others may struggle for several years before they can move a rung up the ladder, but most startups, unfortunately, never make it past the early stages.
A 2021 study by Wakefield Research found that, despite the economic recession, 80% of software as a service (SaaS) scaleups continue to increase their investment in scaling. More than half (56%) of respondents anticipate reaching their scaling objectives within 3-5 years.
As indications that your startup might be ready to graduate to scaleup status, be on the lookout for these signs:
- By following a product-led growth strategy, you have obtained some degree of product market fit, and your product resonates so well with your target customers that it sells itself.
- Your revenue streams show signs of stability and predictability.
- You have efficient systems in place that can handle increased demand without compromising quality or customer satisfaction.
- Your team is ready to embrace change and take on the larger challenges of operating effectively at scale.
- You have access to funding to fuel your business growth. These funds can come from profits, investments or loans.
- You have identified a market opportunity, such as a gap in the market, a new geographical area to expand into or an underserved customer segment.
The role of extrapolation in scaling up
According to Professor Jeffrey Rayport, senior lecturer in the Entrepreneurial Management Unit at Harvard Business School, scaleup companies often experience a distinct developmental stage he refers to as “the extrapolation phase.” In a recent article, he explains that while exploration and exploitation are well-known business development phases, it is extrapolation that bridges the gap between the two and sets the foundation for successful scaling.
The principles of extrapolation
Extrapolation involves pursuing two primary goals: confirming the extent of product market fit and achieving profit market fit. We already know that achieving product market fit is one of the necessary conditions for scaling up. However, just as important is profit market fit, which demonstrates how a venture can rapidly scale, increase revenue and generate profits with each new customer while incurring only marginal costs.
Scaleup companies that succeed at extrapolation follow these three principles:
- They recognize and leverage the critical conditions for success, such as a thriving market and a solid monetization approach.
- They employ a systematic process of identifying and removing internal business model constraints on growth.
- They are able to stay agile, lean and modular, experimenting with different ideas while exploiting their core business model.
Mastering the transition: How to become a scaleup
Making the leap from startup to scaleup requires a fundamental shift in mindset, strategy and organizational design. Navigating this transition is a unique challenge that often unearths internal vulnerabilities even as it offers opportunities for exponential growth. You’ll have to take care of these six fundamentals to navigate this stage successfully:
1. Achieving profit market fit
The scaleup stage starts at the first sign of product market fit. Beyond that point, ventures need to pursue and achieve a profit market fit. This process entails not just creating a product that customers desire, but also doing so in a manner that generates sustainable profit margins.
It is the interplay between revenues, costs and profits that determines the economic viability of your business model at scale. After accounting for all variable costs, you must ascertain how to generate repeatable sales while ensuring each unit sold or service delivered contributes to the company’s bottom line.
Consider a SaaS startup as it transitions into a scaleup. The management needs to evaluate not just the appeal of the software but also the costs of customer acquisition, the infrastructure expenses and the scalability of the customer support system, among other factors. It’s about asking the tough questions: Can we acquire new customers without straining our resources? Does the economics work in our favor as we scale? Can we maintain, or even improve, the quality of our offering as we add more customers?
By embracing the challenge to achieve profit market fit, companies build resilience, creating a firm foundation for sustainable growth and gaining the ability to weather economic volatility, competition and evolving customer needs. This mentality is why profit market fit is also integral to the extrapolation process, as it ensures the scaleup phase is not just a fleeting stage but rather the gateway to long-term success and industry leadership.
2. Structuring for scale
As your company grows, so must your organization. The informal, everyone-does-everything approach that characterizes most startups must evolve into a more structured, specialized and process-oriented model. This transformation involves creating departments or teams based on function, such as sales, marketing, HR, finance, product and so forth.
Scaling up also requires efficient systems and processes to handle increased demand without compromising quality or customer satisfaction. As you experience rapid growth, optimizing workflows and investing in technologies that enable scalability becomes essential. You can support your expanding operations by implementing robust customer relationship management (CRM) systems or leveraging cloud-based infrastructure to ensure service delivery.
Adjusting your organizational structure for scaling is a dynamic process, and your ability to monitor workflows and adapt to the changing business environment can be a determining factor in your success. Your company culture must also be open to embracing these changes, value innovation and foster collaboration.
3. Securing adequate funding
Scaleups often need significant capital to fuel their growth. Although bootstrapping can work during the early stages, scaling requires heavy investments in infrastructure, talent, product development, marketing and sales. Due to their need for capital and by virtue of their proven business models and predictable cash flows, scaleups tend to have access to significantly more funding than startups.
Multiple ways to secure funding include venture capital, private equity, debt financing or even public offerings. The key is understanding the implications of each funding method, balancing the need for capital with the desire to maintain control and choosing the most suitable option for your business.
For example, while venture capital and private equity financing can infuse substantial cash into your SaaS scaleup business, they can also dilute ownership and control. Debt financing offers an alternative route, particularly for tech scaleups with predictable cash flow and a proven business model. However, the debt must be repaid, often with interest, and requires a solid plan for generating the necessary revenues.
🚀 Is your startup ready to take off? Read our guide on securing seed funding for startups.
4. Establishing strong leadership
As a founder, one of your primary tasks is to ensure that your leadership team is equipped with the necessary capabilities to navigate the complexities of scaling operations. As a company transitions to a scaleup, leaders should be domain experts who can take ownership of their functional areas, providing strategic insights to guide decision-making and driving operational effectiveness.
One approach is to recruit industry veterans who have been through the scaling process in the past. These executives can bring tried-and-tested strategies to the table, anticipate common pitfalls and make informed decisions under uncertainty.
In 2001, despite the successful innovation of their search engine, Google founders Larry Page and Sergey Brin recognized the need for more experienced organizational management. They brought in Eric Schmidt, a seasoned technology executive, as CEO. Schmidt’s leadership led to significant expansion, including the successful 2004 IPO, the launch of innovative products (e.g., Google Maps and Gmail) and strategic acquisitions such as YouTube. In 2011, with the scaleup phase well managed, Larry Page returned as CEO, demonstrating the evolving nature of leadership needs in a growing tech company.
💡 Don’t hesitate to seek out mentors. Having a mentor, particularly one who has successfully managed this transition before, can provide pragmatic advice, share insights and offer emotional support and encouragement. You’ll need it.
SaaS startups are our bread and butter. Reach out if you’re prepping to scale and need help to increase your online share of voice, build thought leadership and generate leads.
5. Measuring, analyzing and iterating
Key performance indicators (KPIs) provide valuable insights into your scaleup’s health and performance. But first, it’s critical to determine and track the right metrics. Now, profitability, customer retention, market share and operational efficiency should be your focus. The rate of change in these metrics can offer crucial insights into the direction your company is heading and its business traction.
It’s not just about the raw numbers. Consider employing advanced analytical tools and methodologies to make sense of your data. Techniques such as cohort analysis, trend analysis and predictive analytics can help you uncover hidden information and understand the bigger picture.
After measuring and analyzing comes the most crucial step — iteration. Scaling is not a linear path but a cyclical process. You measure, analyze, make changes and then measure again. Doing so creates a feedback loop that allows you to adapt to new information, learn from mistakes and seize opportunities as they arise.
Integral to this iterative process is the cultivation of an organizational culture that embraces this cycle and views setbacks not as failures but rather as opportunities for learning and adaptation. Encouraging this mindset leads to a more resilient, adaptable organization.
6. Focusing on culture and talent
“Take care of the people, the products and the profits — in that order.”
(Ben Horowitz, The Hard Thing About Hard Things)
While business strategy, go-to-market plans and operational dynamics are undeniably critical in the journey of a scaleup, the human element – culture and talent – is equally, if not more, vital. Successful scaleup CEOs and founders invest early in establishing a desired corporate culture, which pays off as their companies grow. They do so by making conscious decisions about the culture they desire from the onset and driving towards it with thoughtful investment over time.
Think of Netflix with their clear-cut approach to developing culture. Netflix employees are told their severance details on hiring day, and the industry-leading four-month package ensures that the company fosters a high-performance mindset. Team members are chosen for their skills and their fit with the task at hand. When their role is no longer needed, the generous severance package provides a safety net for those exiting the company, allowing them to transition gracefully.
This conversation about culture segues naturally into talent strategy. In a scaleup, it’s crucial to remember that your team is not a family but a team in the truest sense. Individuals are part of the team because they play a useful role, unlike a family with unconditional membership. As you bring in new talent, consider not only their skills and qualifications but also their cultural fit. They should align with your company’s core values and be able to contribute positively to your team dynamics.
You should also recognize that retention is as important as acquisition. Scaling companies often face the challenge of keeping their best talent. To combat this problem, foster a supportive work environment, recognize and reward your team’s efforts and offer ample opportunities for career growth and advancement. According to the Work Institute, the cost of turnover (including replacement costs, training and lost productivity) is $15K for the average employee in the United States.
Scaling up metrics and KPIs to track
As your startup transitions into a scaleup, the KPIs and metrics that were once relevant and insightful may no longer serve their purpose. The lens through which you view your startup’s performance must adjust to the new growth-oriented perspective of a scaleup.
Effective leaders know their strongest growth drivers and are relentless in prioritizing unique metrics that can identify hyper-growth areas. However, there are some universally important categories of KPIs that all scaleups need to consider:
Financial performance KPIs
While startups often focus primarily on revenue growth, scaleups need a more nuanced view of financial health. Key metrics include:
Revenue growth rate
This metric remains important, but the focus should be on sustainable and profitable growth rather than just top-line expansion.
Earnings before interest, taxes, depreciation and amortization (EBITDA) margin gives a clear picture of your operational profitability, excluding non-operational expenses and income. A scaleup with a high EBITDA margin indicates a scalable business model that can generate substantial profits as revenue increases.
Net revenue retention (NRR)
A metric used by businesses to measure the growth and revenue retention of their existing customer base over a specific period. Small increases in NRR can compound into exponential growth.
Cash burn rate
The cash burn rate represents the rate at which a company spends its available cash to fund its operations and growth. It is an important metric for financial planning and measuring operational efficiency.
Operational efficiency KPIs
These metrics help assess how effectively you’re managing your resources:
Customer acquisition cost (CAC) and CAC payback
CAC represents the average cost incurred by a company to acquire a new customer, whereas CAC payback is the time it takes for a company to recover its customer acquisition costs through the revenue generated from those customers. These metrics help businesses assess their cash flow and profitability, determine the viability of their customer acquisition efforts and make informed decisions about growth strategies.
Client churn rate
A critical metric for any subscription-based business, churn rate measures the percentage of customers who stop using your product or service over a given period. Churn rate directly impacts revenue and growth — a high churn rate warns of declining satisfaction and typically indicates low customer retention.
New + expansion bookings growth rate
This key growth metric measures overall bookings growth and gives insight into how fast your business is gaining new clients and how well it’s retaining and upselling to existing ones. Investors consider this the clearest indication of go-to-market traction in a young scaleup company.
Market impact metrics
These KPIs help you understand your market position and influence:
Net promoter score (NPS)
NPS measures customer experience and is a proxy for gauging a customer’s overall satisfaction with a company’s product or service. It also serves as an indicator of the customer’s loyalty to the brand. It is measured by asking a simple question: How likely are you to recommend our product or service to a friend or colleague? Promoters are satisfied customers likely to recommend a product or service, while detractors are dissatisfied customers who are likely to spread negative feedback.
Share of voice (SOV)
SOV is a measure of the market dominance of a particular brand, product or service compared to its competitors. It essentially represents a brand’s “piece of the pie” in the conversation happening around a certain industry or product category. A rising SOV suggests that a scaleup’s marketing efforts are working and its influence is growing. However, SoV should ideally be coupled with sentiment analysis to ensure the conversation around the brand is positive.
Case studies and examples of B2B scaleup companies: Lessons from the field
The landscape of business-to-business (B2B) scaleups presents a variety of growth narratives. Still, a common thread that runs through their stories is a persistent focus on meeting your ideal customer’s needs, relentless innovation and strategic decision-making. Let’s examine three companies – Styra, LearnWorlds and QuotaPath – and how they navigated the transition from startup to scaleup.
Styra is a leading name in the cloud-native authorization world. Built on the open-source project Open Policy Agent (OPA), Styra provides businesses with a unified control plane for authorization both within applications and for the infrastructure they run upon.
Styra’s scaleup journey illustrates the value of pioneering, innovating and investing in open-source projects to generate organic growth. By fostering a community around OPA and disrupting the authorization market, Styra was able to lead the conversation in its niche and capture a significant share.
Interestingly, the company is still scaling up. Styra raised $40 million in their 2018 Series B funding round led by Battery Ventures. With this capital at their disposal, Styra planned a bold expansion, doubling its team size by the end of 2021, particularly focusing on roles in product management, customer success, open source and go-to-market departments.
A key leadership appointment in April 2023 further strengthened Styra’s position. Mark Pundsack, with over 30 years of experience in the software development industry and notable roles as Vice President of Product Strategy at GitLab and Chief Product Officer at Replicated, assumed the role of CEO. Pundsack’s breadth of experience and strategic acumen is positioned to be a key catalyst for continued growth.
💡 Key takeaways: Innovate to impact market norms, lead and foster a community around your offerings and choose a leadership team with proven scaling capabilities.
Online course platform LearnWorlds thrives by understanding its customers’ needs and pain points. By offering a unique platform that allows educators to create, sell and promote online courses with minimal technical expertise, LearnWorlds addressed a significant market need. They were able to identify the demand for a user-friendly, all-in-one solution that makes top-quality interactive online learning accessible for educators and learners alike.
In mid-2021, LearnWorlds secured their scaleup funding in the form of a $32 million minority investment from Insight Partners, a global venture capital and private equity firm. The funds were targeted toward propelling the company’s product development, intensifying its customer success initiatives and bolstering marketing and sales efforts.
💡 Key takeaways: Understand your customers’ needs and deliver solutions that solve their issues. Regular feedback and interaction with your user base can guide your scaleup journey.
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QuotaPath offers intuitive and robust tools that streamline the process of commission tracking and earning calculations for salespeople, bolstering efficiency and transparency within sales teams.
In 2021, the company ticked off the “secure necessary funding” box on their scaling up checklist, successfully raising $21.3 million in a Series A funding round spearheaded by Insight Partners. At the heart of QuotaPath’s appeal to both users and investors is its unique blend of user-centric design and high-level functionality. The platform allows salespeople to manage and track their earnings and commissions autonomously, eliminating the need for complicated spreadsheets and back-and-forth communication with sales operations and finance teams.
The company’s rapid scaling journey reflects the broader market trend: businesses across sectors have come to appreciate the power of digitized sales operations and how they can transform their bottom line. Quotapath was able to realize this market opportunity and use it to their advantage.
💡Key takeaway: Understanding your market and specialization in a specific niche can be a powerful scaling strategy.
Scale smarter with SEO-driven strategies
At Productive Shop, we have honed our skills in supporting B2B SaaS startups during the scaleup phase, providing essential guidance and resources to transform growing pains into constructive development. Our focus areas include:
- Strategic lead generation: Our methods are rooted in scalable SEO, thought leadership content and data-driven decision-making. We don’t merely help generate leads; we ensure these leads are valuable, relevant and conducive to your growth.
- Budget optimization with intelligent research: With incisive market research and persona targeting, we identify the keywords worth your investment in paid ads and organic campaigns.
- Website design and development for maximizing conversions: We firmly believe that a website is a growth engine. We design and code websites not just to impress but to maximize conversions. Every aspect of the online interface is carefully calibrated to make the user’s journey more satisfying.
As startups transition to the scaleup phase, it can be challenging to avoid pitfalls and navigate this complex process. With our scaleup solutions, our B2B growth consultants provide the specialized knowledge, skillsets and value creation mindset to catapult your business success.
Let’s talk and explore how we can transform your scaling hurdles into opportunities for innovation and growth.
Imran is the founder and CEO of Productive Shop. He writes on B2B demand generation and SEO strategy topics to help startups understand how to win digital share of voice. Prior to Productive Shop, Imran led demand generation at an Oracle consultancy, ran an e-commerce site servicing LE teams and helped build PMO offices at technology startup companies. When he’s not at work, Imran can be spotted hiking in the Rockies, honing his clay shooting skills and tumbling off of black diamond ski tracks due to overconfidence in his skiing abilities.