The take-away
- Start-ups normally scale up when they have a stable client base and when they generate profit. They also should be able to raise $1 million.
- Entrepreneurs should find role models among companies that have successfully scaled up. Europe is lagging behind.
Getting a company off the ground is only the beginning. After making it over the first few hurdles, a start-up has to shift into high gear, or “scale up”. Alberto Onetti, an expert on entrepreneurship at the University of Insubria in Varese, Italy, explains the key stages of this process.
TECHNOLOGIST: At what point does a start-up need to scale up?
Alberto Onetti: Generally, when it has a stable client base and is generating profit. It must also be able to raise a significant amount of money – approximately $1 million.
T. Specifically, how does it go about doing that?
AO. It will look to grow its financial revenue and number of employees by systematically carrying out its concept on a large scale. The start-up phase is for testing the company’s business model, but the scaling up phase is about implementing that model and making the company come to life.
T. What are the biggest challenges in the process?
AO. The start-up has to recruit and learn to manage a large team of employees, which often requires establishing a human resources department. It must also find and manage more clients, which means involving marketing experts. Additionally, it must follow very strict financial reporting regulations.
T. What are the odds that a start-up will make it through the scaling up process?
AO. Approximately 90% of start-ups go under before even raising $1 million. According to an Israeli study, among the 10% of remaining start-ups, only a quarter manage to make a profit, which is the second step in scaling up. Only around 2.5% of start-ups are actually successful.
T. How can the success rate be improved?
AO. Ecosystems such as Silicon Valley, where there is a very close relationship between the academic community and investors, are the places in which companies have the most luck in scaling up. Similarly, it is very important for entrepreneurs to be able to watch companies that have successfully scaled up as role models. Europe is lagging behind in this regard.
T. And what about the unicorns?
AO. Indeed, start-ups like Airbnb, Uber, Transferwise and BlaBlaCar have raised significant funds and are valued at $1 billion or more. But they still haven’t found a business model that leads to regular income. They are still in the investment phase with no stability. The day that Uber is leading the on-demand taxi market and Airbnb has won the private lodging battle is when we can consider them true entrepreneurial successes.