It is without a doubt the main question that gravitates throughout the startup industry: what does it take to beat the odds and create a scale-up, or even a unicorn? New research from Deloitte and THNK among nearly 900.000 startups shows that, unfortunately for the millions of ambitious entrepreneurs working their way towards fame, there is no formula to success. The good news however for entrepreneurs is that there are a number of common elements that can boost the probability and scale of success, with experienced leadership, design for scalability, and patience deserving a top spot on the management agenda.
In a recent report, titled ‘Scale-up: The Experience Game’, Deloitte and THNK joined forces to analyse the startup landscape. The researchers assembled a database with nearly 900,000 companies, of which 400,000 new enterprises across the Western world, spread over 24 countries and 790 industry subsectors*. Per startup, financial figures were collected (e.g. revenue over time, # employees, etc), as well as leadership characteristics (e.g., # founders, gender diversity of founders, founder education level, founder’s corporate experience, etc.). The data was in addition supplemented with economic/statistical data, for among others analysis and benchmarking purposes.
The findings of the massive research study provide an insightful picture of the evolution of start-ups globally, revealing that becoming the next Facebook, Watsapp, Uber or Airbnb is a daunting task, one that beats all the odds in the marketplace. According to the dataset, 50% of new enterprises fail before their fifth year of revenue, the authors reflecting that “creating even a small from scratch business is a real accomplishment”. In the case a startup does classify as successful, it realises a median revenue of $300.000 of after five years, and books 5% annual top-line growth thereafter.
Interestingly the researchers uncovered that the variation across functional areas and industries is negligible. “These figures stay the same whether the startup is founded in Geneva, Amsterdam, Shanghai, Beirut, and even Silicon Valley”, whilst the same applies for whether the startup is in software or hardware, healthcare, energy, financial services, or consumer goods.
Startups that take-off in terms of potential and growth, also called scale-ups (they grow to more than $10 million by their 5th year of revenue), constitute a very small share of the startup landscape. The chances of a new enterprise to ascend as a scale-up are around 0.5%, which means that only 1 out of 200 surviving new enterprises will become a scale-up. Yet when they do manage to reach maturity, they form an important player in the economic arena, accounting for a “large chunk of employment and revenue of all startups” write the authors.
An analysis of the development of startups versus scale-ups reveals several differentiating traits, of which time to market is a key one. Scale-ups typically are more patient and take more time to get ready. Deloitte and THNK measured the time between establishing a legal entity and obtaining the first revenue, and the data showed that scale-ups took more than two times longer for market launch. “They have the stamina to do all necessary preparation and wait until the conditions are right for market entry”, state the researchers.
A scalable business model is another differentiator. 85% of the scale-ups utilise a business model which is easily scalable, both nationally and internationally and across product-market combinations, while in the case of start-ups the percentage is “just” 25%. When scaling, timing again is key, with the majority of scale-ups distinguishing themselves by ensuring the scale while hitting the “wave” in the market. Waves typically have an S-curve pattern: the wave starts to slowly gather momentum, then accelerates, until it grows to full impact and stabilizes or tapers off. The large majority of scale-ups timed their market introduction just before or exactly as the wave took off, allowing them to reap a large fraction of potential.
Reaching the Mecca of starting entrepreneurs, growing into a unicorn status (startups with revenues of over $1 bilion) is only reserved for the truly ground-breaking business models. Only 103 startups of the entire dataset investigated classify as unicorn, demonstrating the uphill battle against the odds. Although there is no recipe for success, the authors have uncovered a number of commonalities across unicorns that will undoubtedly provide food for thought to entrepreneurs and investors. Almost all unicorns (except for true outliers like SpaceX) aim for large homogenous target markets, launch products with high “must-have” appeal that is easily accessible (e.g., mobile based) and require to be used frequently, preferably several times a day. Furthermore, they stimulate users to engage friends, peers, and colleagues to use the product: think of Whatsapp, Snapchat, Pinterest, and, of course, Facebook and Twitter.
The role of the founders turns out to be a decisive factor. 85% of all unicorns are active in a market where at least one of the founders had extensive market know-how and insights before embarking on their success story. In fact, the majority of cases saw the founders come to their breakthrough moment of insight while working at industry leaders like Google, Microsoft, or Apple. It is this experience within their specific market that allowed them to recognise a business opportunity that would outperform and outsmart the incumbents in their own field. Consequently, founders of unicorns are older, typically in their forties – building on twice as much work experience as startup founders. They also have experience-rich backgrounds, both in a professional and a personal sense (e.g. diverse education, extensive travel, etc).
Finally, as soon as unicorns pick up substantial growth, the dataset reveals that their development turns into a big-spending game. The 103 unicorns studied for example had jointly acquired $404 billion of investment money – almost $4 billion per company.
* All startups were established in or after 2005.