There’s a common misconception that fast-growing startups are out of the woods when it comes to business uncertainty. That these companies are on the fast-track to making millions. Unfortunately, that’s not the case — high growth equals high unpredictability.
Highland Europe, a venture capital firm investing in growth businesses, wanted to produce an accurate picture of the challenges facing businesses that are seeking to grow in Europe in 2017. This exclusive research was conducted in April and is based on the opinions of 173 European company leaders, two-thirds of whom were founders.
The research found that company founders see themselves and their ability to evolve and adapt from being a founder to being a chief executive as the biggest risk to their businesses, as they begin to scale. Almost half (49 percent) the businesses asked said that the ability of the founder to effectively manage the business, was a key risk for startups that are starting to scale. Some 47 percent of businesses said the ability to execute quickly on changes in strategy was also a risk.
Startups in the UK are also consistently less confident than similar companies in Europe and the rest of the world. While almost two-thirds of all business leaders think their company has unicorn potential – the possibility of achieving revenues of at least $1 billion – that figure falls to 47 percent for UK businesses, compared with 69 percent for European businesses and 73 percent for companies outside Europe. Yet British businesses are no less confident than their international peers about the prospects for tech businesses in general in the UK.
Highland questioned a mix of businesses that are starting to scale or pre-scale, as well as growth stage companies that have already successfully scaled in multiple markets.
The challenges to scaling businesses
The research found that the challenges start to flood in once businesses begin to scale. For both businesses that are preparing to scale and businesses in the process of scaling the biggest challenges are:
- Building sales and customer acquisition (61%)
- Finding senior talent and professional management (58%)
- Establishing the right organizational structure (54%)
- Access to capital (44%)
- Establishing processes to standardize areas (44%)
For businesses that have scaled, the research found that the biggest issues when scaling were less around sales and more about bringing in experienced talent and transforming the organizational structure so that the right teams, processes and people are in place:
- Finding senior talent and professional management (64%)
- Establishing the right organizational structure (49%)
- Building sales and customer acquisition (47%)
The research also highlights that it is vital for founders to evolve and embrace change as their business grows and the structures and relationships within it evolve. Founders of businesses that have already scaled said their biggest challenges were to adapt their role (74%), stay focused on the big picture and not get bogged down in operational detail (63%) and delegating effectively (60%).
Growth perspectives and risks
Almost all those surveyed (93%) said it is vital that their business grows but only two fifths (40%) have identified an optimal rate of growth for their company, while fewer than two thirds (62%) carry out regular growth-planning or strategic planning exercises.
Asked how they measure growth, 43% of entrepreneurs surveyed said they use revenue as their main metric, while 36 percent of scaling businesses say that they measure growth in customers. Only 12 percent look at growth in profits and just eight percent look at growth in market share.
These pre-scale and scaling businesses also identified the chief risks they face as they expand. Foremost among these are the ability of founders themselves to stay in control and to ensure the business remains nimble:
- The ability of founders to effectively manage the business – 49 percent say this is at risk as the organization scales
- Ability to execute quickly on changes in strategy (47%)
- Company culture and values (38%)
- Quality of products and services (30%)
An overwhelmingly optimistic outlook
European founders are extremely upbeat about prospects for their business and for digital businesses in general:
- 80 percent of founders were optimistic that their digital business can grow in the country in which they are based
- 67 percent think that their business has unicorn potential
Tony Zappala, partner at Highland Europe, believes that scaling a business successfully is an incredibly difficult thing to do. That:
There are challenges at every turn and the ones that can really trip up a founder are not always the ones you’d expect.
But the research shows that entrepreneurs are naturally optimistic. In fact, two-thirds of growing business leaders are certain that their business has the potential to obtain unicorn status. But this doesn’t mean they are naive towards pitfalls – especially that of maintaining their visions and being able to access finances. Zappala also said:
Interestingly, as a business grows, its major concerns over building sales and customers become slightly less critical. In fact, this research suggests that pre-scaling businesses may overstate the challenge of sales and customer acquisition. As growth continues, increasingly management issues surface, including the ability to hire senior talent and managers.
For instance, Gordon Willoughby, chief executive of WeTransfer, explained that the company is “squarely in the ‘scale-up’ phase where building both organizational infrastructure and organizational capability are the main challenges.” He understands that “having supportive investors who can contribute to solving these issues through their prior experience or network of business contacts has been incredibly helpful.”
Lea Lange, Co-Founder and Managing Director of JUNIQE, a European market leader for curated and affordable wall art, home accessories, fashion and stationery, believes in sustainable growth and is excited for the challenges that lie ahead. He understands that the company’s focus “extends far beyond monthly sales targets. All elements of our daily work are geared towards long-term profitability. In many markets our journey has only just begun and we still see tremendous potential for further growth. It has taken a substantial amount of hard work and dedication to get to where we are today.”