Onerous selections: How Europe’s fastest-growing start-ups grow to be unicorns

Incomes a $100 million valuation is an distinctive achievement. In all of Europe, solely about 850 start-ups reached this milestone between 2010 and 2017. But these corporations have little time to have fun. The enterprise capital (VC) corporations that spend money on them count on their worth to succeed in $1 billion or extra—and to take action shortly (Exhibit 1). Lower than one in ten of them handle this feat in underneath 4 years.

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Why is it so onerous for already profitable start-ups to keep up their fast tempo of development?

Earlier this 12 months, we surveyed and interviewed dozens of founders, prime executives, and board members of 100 scale-stage European start-ups to know the strategic choices and finest practices that differentiated the quickest growers from their friends (see sidebar “About our analysis”).

What shortly turned clear was that scale-up leaders wrestle with making trade-offs. Once we requested founders and executives to call their largest errors, 39 % (the biggest group) described a failure to focus consideration and sources in the precise locations—or a failure to focus in any respect.

In recent times, extra liquidity has allowed scale-ups to place off making such trade-offs, however elementary worth creation has at all times required robust choices amongst competing priorities. It is a common lesson that applies throughout enterprise varieties, financial cycles, and capital environments.

By way of our analysis, we’ve recognized rules to information leaders of European scale-ups by means of a number of the vital trade-offs and choices that mark this era of their improvement, even when it takes longer than 4 years to succeed in the elusive milestone.

1. Strike the precise stability between development, effectivity, and moat constructing

Nearly all scale-ups agree on three strategic imperatives: to succeed, they have to drive development, improve effectivity, and construct a moat to guard their market place. But in our evaluation, we discovered that 40 % of corporations wrestle to stability effectivity and development.

Deciding the place to focus could be a perform of two issues.

The primary is an organization’s strategic play. In a earlier article, we described the overarching strategic performs pursued by scale-stage corporations.

Scale-ups in our analysis recognized themselves with regard to those performs primarily based on their core enterprise drivers:

  • Community performs (equivalent to ridesharing companies, social media, and communication platforms, and different advertising-based companies) profit from community results and may give attention to rising customers and utilization, as this naturally enhances their worth proposition. Former scale-ups that utilized this strategy embrace Airbnb and LinkedIn.
  • Product performs (equivalent to software program corporations) are sometimes susceptible to copying or commoditization and thus give attention to repeatedly enhancing or increasing their providing to keep up differentiation, improve customer-switching prices, or develop a one-stop-shop worth proposition. Examples embrace Revolut and Stripe.
  • Scale performs (equivalent to e-commerce and supply corporations) have excessive mounted or marginal prices and need to give attention to producing income and enhancing operational effectivity. Examples embrace Picnic and Zalando.

The second issue that may drive how a scale-up allocates effort and sources throughout development, effectivity, and moat constructing is the macrofunding setting. This needs to be no shock; scale-ups are usually cash-flow-negative and are thus extremely delicate to modifications within the availability of capital.

When capital is plentiful, because it was for a lot of the previous ten years, scale-ups can lean extra closely into development. On this setting, not being aggressive sufficient could be a deadly mistake. As one government warns, “We made choices that capped development to succeed in profitability, however rivals rising sooner than us attracted more cash, higher buyers and, in the end, higher unit economics too.”
This attitude is supported by our analysis: profitability, effectivity, and money circulation have been cited as prime three priorities by simply 12 % of the scale-ups that made it to $1 billion in 4 years within the interval between 2010 and 2021.

When capital tightens—for instance, because it has in 2022—scale-ups could wish to focus extra on effectivity.

2. Pursue product growth earlier than geographic growth

Geographic growth is the commonest strategic precedence amongst scale-ups: 61 % of the businesses we surveyed included this amongst their prime three. Nonetheless, greater than half of those corporations got here to remorse that prioritization. In actual fact, the fastest-growing scale-ups started geographic growth greater than two years later than their slower-growing friends,

and 20 % of our respondents cite overly fast growth as their single largest mistake.

The fastest-growing scale-ups started geographic growth greater than two years later than their slower-growing friends.

“We have been pushed to develop as a result of we had raised all that cash, and that was anticipated,” stated an government at a German scale-up. “However we weren’t prepared, and we ended up leaving a few of these markets just a few years later.”

In distinction, product growth offers a clearer path to worth creation, partly as a result of it may
drive all three strategic imperatives of scale-stage corporations:

  • Drive development. New merchandise can open new buyer segments or improve spend from current prospects.
  • Improve effectivity. New merchandise that concentrate on current prospects drive income with low (or no) acquisition prices.
  • Construct a moat. Broadening product touchpoints with prospects will increase switching prices.

The fastest-growing scale-ups in our pattern have been twice as prone to cite product enchancment as a prime three precedence, in contrast with slower-growing friends—and none expressed remorse for that call.

The advantages of product extensions are particularly related for scale-ups pursuing two strategic performs:

  • For corporations pursuing scale performs, new choices that improve income per buyer may also help overcome excessive mounted prices or low margins. For instance, a meal-kit deliverer added luxurious meals to its providing, growing the typical basket measurement whereas leveraging its current distribution community.
  • For corporations pursuing product performs, product extensions can improve differentiation from rivals and broaden buyer touchpoints, elevating switching prices. For instance, an information intelligence firm added merchandise and governance companies to grow to be a one-stop store for purchasers’ knowledge administration wants.

Community-play scale-ups stand out as exceptions to this precept of specializing in product extensions earlier than geographic growth. As a result of first-mover benefits are particularly helpful to enterprise fashions with community results, network-play scale-ups typically have extra to achieve from fast growth than corporations pursuing different methods. As such, a extra aggressive strategy to growth could also be definitely worth the threat (Exhibit 2).

Network-play scale-ups are more likely to prioritize geographical expansion, and less likely to regret it, than other European scale-up types.
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3. When embarking on geographic growth, prioritize accessibility over measurement

In some unspecified time in the future, scale-ups do have to look past their borders to seek out development. Once they do, many are tempted to focus on the most important market they’ll discover, however that is typically a mistake.

That’s as a result of increasing is difficult, but it surely will get simpler with observe. Starting with an accessible, acquainted market close by—slightly than the one with the biggest income pool—reduces the diploma of problem and helps corporations develop a playbook for reaching sustainable operations and constructive unit economics in different markets. Attempting to construct this playbook whereas battling sturdy rivals, wooing prospects whose tastes and habits are formed by a unique tradition, and managing a staff a number of hours and time zones away isn’t a recipe for fulfillment. As one founder informed us, increasing to unfamiliar markets is “95 % like beginning a brand new firm; there are virtually no synergies” (see sidebar “US growth: Go all in or don’t go in any respect”).

A profitable on-line grocer offers a greater instance. It launched its first growth right into a neighboring nation with an analogous tradition and no dominant rivals. The corporate refined its playbook and optimized operations earlier than tackling bigger and extra aggressive markets farther away.

Variations on these approaches may be kind of acceptable, relying on a scale-up’s overarching strategic play:

  • Scale-ups pursuing scale performs (equivalent to supply or e-commerce corporations) could wish to give even larger choice to price and ease of entry when choosing preliminary growth markets, given the excessive price of organising native infrastructure and logistics.
  • Scale-ups pursuing product performs (equivalent to software program corporations), against this, may be extra daring in concentrating on bigger markets, even when extra distant, just because the price and complexity of launching a brand new market are usually decrease. In lots of circumstances, these companies can launch with no bodily presence in any respect.

4. Purchase corporations for his or her merchandise, folks, and mental property—not their presence in different markets

Shopping for one other firm may be an efficient mechanism for fast development, and scale-ups with tens of hundreds of thousands of {dollars} in VC capital are—typically for the primary time of their existence—ready to take action. Nonetheless, many scale-ups get their first acquisitions fallacious.

One clear sample from our knowledge means that the aim of acquisitions closely influences their doubtless final result: acquisitions undertaken for the aim of launching in a brand new market are greater than 5 occasions extra prone to fail than these geared toward buying merchandise, folks, or mental property (Exhibit 3). Absorbing a brand new firm is tough sufficient, however layering on variations in tradition, distance from administration, and technical integration of extremely redundant product elements will increase the issue considerably.

Acquisitions for territorial expansion are five times more likely to fail than those for products, people, or intellectual property.
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One government put it this fashion: “Most of our acquisitions geared toward coming into new markets failed. They have been simply too distant from the staff, there was too little administration oversight, and we couldn’t execute.”

In distinction, bolt-on product acquisitions current fewer challenges—94 % of the businesses that tried these thought-about them profitable. “Once we purchased for product, we have been way more profitable,” provides the identical government. “We might co-locate folks and combine quick. When one thing goes fallacious you recognize it, and you may react straight away. The synergies that exist in your Excel—you may make certain they really occur.”

There may be one principal exception to this lesson. Scale-ups pursuing community performs typically face a chicken-and-egg downside in every new market: How do you entice customers from one aspect of a market (equivalent to consumers, riders) earlier than securing a vital mass of customers on the opposite aspect (equivalent to sellers, drivers)—and vice versa. For these corporations, buying an organization with an current person base can present a shortcut to reaching vital mass in new markets. A ridesharing participant employed this technique to shortly develop to cities throughout Europe. Notably, this strategy tends to work finest when the acquired firm itself already has a vital mass earlier than the deal. Shopping for an organization that’s nonetheless combating its personal chicken-and-egg battle provides little profit, with all the aforementioned threat.

5. Don’t shrink back from making modifications to the management staff

The dimensions stage just isn’t just like the seed stage, and the management staff that was profitable within the former might not be within the latter (Exhibit 4). Almost one in 5 scale-up leaders we surveyed claimed their largest mistake was performing too slowly to interchange folks within the fallacious roles. Corporations ought to attempt to be sincere about roles which can be outgrowing their present occupants.

The fastest-growing European start-ups are more likely to replace people in key roles after their first scale round.
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This contains founders, who could have to take a tough look within the mirror.

Those that efficiently create a scale-up from nothing could not have the total ability set or mentality required to develop a scale-up into an enterprise. In some circumstances, a powerful CFO or chief human sources officer (CHRO) can function a counterweight to founders and deal with weaknesses or blind spots within the authentic management staff.

In different circumstances, founders could understand that they don’t truly benefit from the day-to-day work demanded by their evolving position and will want to step again from their government place whereas retaining their board and shareholder roles. One founder informed us, “As a founder, I didn’t wish to run the enterprise at that measurement, it didn’t excite me. I’m a zero-to-one man. So, I left and simply remained as a shareholder.”

Begin-ups that attain the $100 million valuation milestone have already outperformed scores of their friends, however the development crucial solely will get tougher. In consequence, scale-ups are pressured to make onerous selections amongst competing priorities. Typically (as with a US growth), the choice could also be all or nothing. Different trade-offs (equivalent to in allocating sources throughout initiatives that drive development, improve effectivity, or reinforce moats) could require a extra balanced strategy. The frequent thread amongst all is that leaders needs to be able to embrace the problem full on, perceive the ramifications of varied choices, and be daring in plotting a path ahead.

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