Scaleups in Europe : An untapped potential

New study looks at success factors behind high-growth companies. No, it’s not just a numbers’ game.

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We need to demystify the world of scale-ups. This is vital if Europe is to remain economically competitive in the merging digital landscape. Understanding and effectively supporting those high-growth firms makes for the creation of a coherent, impact-oriented ecosystem, which in turn will allow Europe to look confidently into the future.

OKAY. WHY SCALE-UPS?

Scale-ups are defined by the OECD as companies with at least 10 employees that average annualised growth of 20% or higher over a three-year period. These high-growth firms represent a fundamental growth engine as they sustainably protect existing jobs and generate new economic power, contributing to growth and employment, talent attraction, capital and tax income.

While Start-ups remains a crucial piece of the puzzle and creating more of them is a priority, scale-ups are the real rainmakers. A widely reported figure is that of all new startups created, only about 10% survive longer than three years. Of those that survive, only 10% of them generate 80% of gross revenue and total employment, and only 4% make it to the growth-stage, i.e. scale-ups.

This leads to the question of how start-ups can systematically overcome growth challenges. In a study we produced alongside Goethe University and Yi Foundation, “Scale-ups in Europe: An untapped potential”, we decided to take a holistic approach in order to look at the most important success factors of European scale-ups. What we found out will BLOW YOUR MIND. (Okay maybe not. But it’s pretty darn interesting.)

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The study focuses in particular on the growth challenges of European scale-ups and the results of the study are subdivided into both internal and external success factors. External factors include in particular easier access to the pan-European market and a coherent understanding of the European start-up landscape.

“In order to create a competitive European start-up ecosystem, we must not focus solely on the number of start-ups and their output. Rather, we must concentrate on the key human competencies of high-growth entrepreneurship in order to lead European society into the future,” stresses Dr. Thomas Funke, Co-Director of TechQuartier.

Over and above scale-up creation stats, there are a lot of internal factors to consider.

#1. Diversity of experiences.

One important internal success factors, i.e. factors that can be influenced by the start-up, is the most optimal composition of a successful founding team. This has been a matter of great debate and to be very clear, there is no such thing as the perfect mix of abilities. Personality kicks in at one point or the other, and this is far from being 100 percent foreseeable. Nevertheless, successful founder teams often show a diversity in competencies and backgrounds. Naturally, prior start-up experience among a team of founders also helps to more rapidly build an organisation and a product that is set for rapid growth, thereby shortening the phase dedicated to pure trial and error. Therefore, prior founding experience within the founding team has a significantly positive effect on the growth and thereby, the success of the organisation.

As a startup scales, the structure of the founding team is bound to change. One of the original founder leaving the company, for example, or the addition of new founders, can pose serious challenges for a company’s identity and direction. Therefore, it is important that there is a gradation of company shares as well as decision rights if more founders join the founding team.

#2. Authenticity.

Another internal factor not as often looked but as equally insightful is authenticity. Being diverse and growth-oriented alone is not enough. There must be a fit between the founders’ vision and their everyday behaviour and communication. Authenticity is a basis for employee loyalty, motivation and credibility. Founders and CEOs who act as role models for entrepreneurial thinking and action help the aspiring team to develop a proactive and creative way of thinking and acting.

Many of the founders we interviewed were young and almost none had previous start-up experience — yet they were all outstanding in terms of authenticity. Authentic founders, who are firm in their inner values, are able to articulate their vision, and to find people who share those values and that vision. They are also able to develop an effective strategy to realize that vision. They withstand external influences that contradict their values and constantly reflect on these values in everything they do. They reflect on their own actions, inspire others and create a corporate culture that motivates employees to live these values, to carry them out, and to contribute their own ideas and improvements to bring the venture one step closer to realizing its vision. In addition, a high level of willpower and self-efficacy is required to sustain the project against criticism and obstacles that arise. This tenacity and drive serves to inspire employees and customers.

Many other studies have underlined the importance of experience as an essential success factor. Experience can help founders convey more authenticity in laying out their vision, but it is not a prerequisite for authenticity.

#3. Transparent, accessible leadership

In addition to be solidly-backed by data, leaders of scaleups need to show transparent leadership and a proximity to operations. By providing the entire team with access to all decision-relevant data and insights by modern means, employees are enabled to take initiative in the phase of great uncertainty. By having the founders accessible to the company and every employee and offering proximity to those same employees, project development, internal communication, personal development and employee retention are promoted.

#4. Culture of failure

In the beginning of the growth process, there are usually no employee development programs or trainings offered to prepare employees for the changes that will be accomplished to the growth process. Instead, founders initially trust their employees to be proactive and drive their own development forward. In order to be able to guarantee this self-organising process, founders must create the appropriate framework and set of conditions in the company.

Since employees are expected to show initiative and expected to continuously test, try out, improve methods and develop their own best practices, it is essential to create conditions where failure is part of the game and accepted. This means creating a culture of error, in the sense that failure or errors are accepted and nurtured with new employees.

A culture of failure is necessary to quickly gain new insights. Managers who want to stay ahead of their competitors need to experiment quickly and often. This also means that it must be possible to make mistakes within a team, also in order to gain new insights into non-functioning business models and techniques.

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More about the study :

The complete report looks at a variety of other internal and external factors. There is also a deep dive into the Frankfurt startup ecosystem, one which uses a number of interviews and primary data collected with local scale-up founders and their teams.

Our goal with this study is to explore the famous magic ingredients that lead to scale-ups’ impactful growth. We have also kept our perspective mainly European. We have spoken to and interviewed dozens of top people at different scale-ups to give us their perspective. Not because we refused to know better: we know about the supremacy of Silicon Valley and the lightning speed catch-up China has undergone in the last decade. But perhaps, after twenty years of trying to imitate the Valley, it might be reasonable to dare to take a different route altogether, to explore what a European growth story is like. And if in the end, it might lack just a pinch of courage, to at least give a distinct European approach a try.

You can find the complete report at : scaleupsineurope.techquartier.com