Filling The “Scale-Up” Gap - Why supporting growth companies is critical for businesses and communit
What happens as start-up companies grow up, and why should we care? In Seattle, as in most innovation economies, there is an intense focus on start-ups. Start-ups are critically important for the health of an innovation economy because they create great value in the form of new employment and economic growth. This has led to investments in entire start-up ecosystems within communities that include incubators, accelerators, angel networks, early stage venture capital firms, co-working spaces, pitch contests, showcase events, innovation districts, and more. Start-up ecosystems are a good thing - but not enough for the health of an innovation economy.
In truth, start-up employment growth is often temporary due the high failure rate of start-ups, which in some cases approaches 90%. The real value for companies, shareholders, and communities, comes when start-ups become adolescents and scale up. According to the Bureau of Labor Statistics, “2 percent of all firms in 2009 were high-growth firms during the 2009–2012 period, yet these relatively few high-growth firms were responsible for 35 percent of all gross job gains over that period”. The value of scale-ups is clear, but the networks needed to support them often are not.
Successful innovation economy scale-ups in the greater Seattle area include the likes of Expedia, Zillow, Concur, Tableau, Redfin, and Smartsheet, among others. And then, of course, there are the giants that were founded in Seattle and grew to be global successes such as Microsoft, Amazon, Boeing, and even Starbucks with their online presence and move to implementing technology in everything they do. The value these companies have created for shareholders and the Seattle community overall has been immense. In fact, one could argue strongly that the vibrant Seattle economy we enjoy today is a direct result of these companies.
So why aren’t there more scaled up companies within innovation communities such as Seattle? In part, this reflects the reality of innovation economies, which include a lot of failures before there is one shining success. In other words, the funnel is very narrow with lots of companies started and few that scale-up. The department of labor statistics reports that of all the companies that exist today, fewer than 2% grow to have greater than 500 employees. Another reality is that growth companies face different, much more complex, leadership challenges than start-ups, and there is a lack of coordinated support to help.
Start-ups must accomplish one important milestone. They must identify a real problem, and come up with a solution for which customers are willing to pay. This is referred to as product-market fit, and it is no easy task. Most start-up entrepreneurs fight for survival most of the time. They constantly work to attract the talent, money, and customers to gain traction and achieve product-market fit. Few entrepreneurs are able to accomplish this goal right away, but instead must pivot several times, before they gain traction. This takes more money than most entrepreneurs anticipate. As a result, many start-up entrepreneurs spend significant time begging for cash to survive long enough to achieve this milestone.
Once product-market fit is achieved and start-ups begin to grow, they enter the scale-up phase. The scale-up phase is marked by constant change as companies must lead and manage real businesses, hire talent, grow sales and customers, create a scalable organization and culture, expand solutions, create a successful financial model, and more. With this kind of complexity you would expect to see vast numbers of organizations making up a cohesive scale-up support ecosystem to help these companies as they grow - This is not the case.
A strange thing happens during the transition from the start-up phase to the scale-up phase of a company. There is a kind of hand-off from early stage angel investors to VCs and growth investors. During this hand-off, Angel investors relinquish control to growth investors, and almost say, “you take it from here”. In truth they don’t have much choice as VCs require a measure of control when they make an investment. Still, Angels practically high five each other because they have created value on paper for their investments. In reality, however, they know that no real value is created until a company exits either through a sale to another company or through a public offering.
As entrepreneurial leaders start to scale up their companies they need significant support. Sometimes they get this support from a few high quality venture capital firms. The top VC firms often help companies by providing experts, support services, recruiting, and a vast network that can lead to additional investment and introductions to customers. At the same time, however, VCs are extremely busy, sit on many boards, and are limited in terms of the time they can commit to helping companies in a deeper way.
Given this reality, you would expect to see scale-up ecosystems to help companies as they grow, similar to the start-up ecosystems within innovation communities. In Seattle, with the very large and critically important exception of extremely limited growth capital, the resources and expertise exist to support scale-ups, however, they are extremely fragmented and difficult to access. There are talent recruiters, strategy, growth, and operationally oriented consultants, service providers for HR, finance, sales, marketing, executive coaching, investment banking, and more. They are not, however, organized into a cohesive or easily accessible ecosystem, and they have varying degrees of expertise to support technology-enabled companies.
The net result is a need to strengthen the scale-up ecosystem in most innovation economies, including Seattle. There is an opportunity to bring the right knowledge, resources, and support together to help scale-ups grow, and ultimately create value for shareholders, company leaders, and employees. It is not only important for companies, it is an imperative for communities if they wish to thrive in a future marked by rapid change, innovation, and globalization.
Joe Ottinger is the Founder and CEO of the
Iinnovate Leadership Network, which provides
peer leadership forum groups, scaling up excellence
leadership education, and executive advisory and consulting
services for growth companies in the innovation economy.
Joe is also a management consultant and author of multiple books
and articles about innovation, entrepreneurship, and leadership.