What's the difference between a startup and a scale-up?
These days, everyone seems to have their own definition of what a startup or scale-up is.
Heck, last year's Top 10 UK Startups by LinkedIn named the likes of Revolut, Monzo, and Starling in their list. These are practically household names, boasting literally thousands of employees each, and founded as early as 2014. Not quite the bean bags in a garage vibe...
But things seem to get a little greyer when we enter the startups vs scale-up arena. Surely startups are trying to scale? And scale-ups are still fairly early-stage, right? Is the difference defined by team size, by revenue, by investment received... ?
We're here to de-bunk the confusion for once and all.
Startup and scale-up describe two different stages of company growth.
A startup is a newly established business with a heave tech component that is determining product-market fit, experimenting with customer segmentation and working towards a positive contribution margin.
A scale-up is a business that is in the process of expanding. According to the OECD, a scale-up has an average annualized return of at least 20% for its last three years. It should also have at least 10 employees at the beginning of this period.
The key differences
Stage of funding
Startups and scale-ups are at different levels of funding. Startups normally have zero funding, a seed round, or Series A backing. Scale-ups are beginning their second round of funding, or have already secured it - meaning they have the money behind them to scale up.
Team member roles
When startups start experiencing their first stages of growth, the founders and any other employees are expected to be able to do a little of everything. Normally the founder of the startup will bring people on board who have a range of skills. This saves on hiring costs as often at this stage, there is very little money floating around.
Once a company starts to scale up, it's important to start hiring more people and delegating out roles. For example, if you have someone who does the marketing but also the operations, you need to cut their role in half. Scaleups have to start hiring specialists and creating departments all in the pursuit of growth.
Startups can take more risks. They have a small team, an un-proven product and not a huge amount of money. They have less to lose if it all goes wrong and more to gain if it goes right. Scale-ups have built something, they have an established team, they have investors money and a product (or service) that needs to be protected. They need to focus on avoiding as much risk as possible.
Systems in place
When a startup is created, everything is new and happening for the first time. Systems are not in place yet but are being created by the people who have started the company. As they do things over and over again, they are figuring out the best way to complete things.
Scale-ups need systems to run efficiently. Normally, a scale-up has new employees and it is important that they can hit the ground running. Systems mean that scale-ups can maintain quality control and complete things quickly. It keeps the company moving forward.
Startups normally require a small management team of 1-3 managers. Scaleups need larger management teams. As departments multiply, it's important that every employee has a manager to answer to. Managers can make sure that their department is running the way it should, pushing for growth.
While the managers are working directly with the team, the founder can focus purely on growth and scaling the company to new heights.
Employees working for startups are normally around from the beginning. Even if they are not they have the advantage of working closely with the founder and knowing what everyone does. They are a lot more invested in the company as they have watched it grow.
When it's time to scale up, companies have to have an onboarding process. New team members need to be properly inducted into the company so that they can understand the company values and objectives.
One of the main differences between startups and scaleups is product-market fit. Startups are still unsure if their product will make them any money. Therefore they continue to experiment with their product so that they can perfect it. Scale-ups on the other hand have perfected their product. They have proved that their product (or service) is economically sustainable. Their funds can be used to grow the business on a bigger scale whereas startups have to use their funds on perfecting their product.
The evolution of the scale-up
Scale-ups used to be startups until they crossed the growth chasm. You cross the growth chasm after you have overcome the challenges startup's typically face. These are things like completing market research, development and identifying a scalable business model. Once a company becomes a scaleup they face different problems like continuing to grow while maintaining the operational controls.
Read more about this: Crossing the Chasm by Geoffery A. Moore
Is your business ready to scale up?
If you have an established startup that has a product and a sustainable business model that supports real growth, it might be time to scale up. Professor Daniel Isenberg once said:
"Without growth, there is no real entrepreneurship; it is growing companies, not starting them, that gives entrepreneurship its unique contribution to employment, taxes and wealth."
Here at Bloom, we have worked with both startups and scale-ups. If you are an ambitious business ready to scale up, it's time to get a little more sophisticated. It's time to bloom and join the business class.