What is a startup?
A startup company is a young company that has not yet established itself on the market. An important characteristic for a startup is an innovative business idea. In the true sense, the term startup refers to a very early phase of your company foundation. To found a startup, however, you need not only an innovative idea, but also a well-developed business model that can be adapted to concrete economic scenarios. Another core element of a startup is a detailed business plan. This often determines whether your young company is attractive to Business Angels.
What is a scaleup?
A scaleup is a startup that is in a special and already advanced phase: The phase of rapid growth. A scaleup company is therefore a startup that has left the initial phase. Specifically, it has the following important characteristics, among others:
- A scaleup already has a Product Market Fit (PMF for short) and has thus proven that its products are well received on the market. Or at least it shows that the concept appeals to certain target groups.
- The products sell, revenue is generated.
- The cash flow is ok. But debt capital is still needed to scale the business model quickly
Differences: startup vs. scaleup
There are several aspects that distinguish a scale up company from a startup. The following differences are particularly striking:
- A startup usually consists of a founding team and a few initial employees. A scaleup company has already established a real team with various departments.
- While a startup is largely looking for its first customers, a scaleup already has good customer relationships.
- Startups need seed funding, for example via business angels. Scaleups are interesting for much larger financiers, for example VC investors.
Your journey begins: The development of your startup
For a successful development of your startup, you should definitely know in which development phase your company is. Only then can you locate the stages of your company’s journey and know exactly which priorities should be set and work steps pursued.
An exact overview of the current status of your startup is not only important for your own strategy development: The investors you attract also prefer a concrete localization of the current development phase of your startup.
In this blog, we will therefore introduce you to the three most relevant stages in the development of your startup and enlighten you on important steps, possible challenges and appropriate prioritization of tasks within each stage of development.
Based on your own research in this context, you may have already heard about the startup development terms “Series A” or “Series B”. We would like to inform you that these terms are neither particularly up-to-date nor precise enough to adequately describe the development status of your company.
In order to be able to localize your startup unambiguously (also with regard to a professional investor search), we therefore speak in this context instead of gates, which your company must pass through in order to be able to develop profitably. They therefore denote the elementary development stages of your startup.
3 Gates, three elementary stages of development
Gate 1: Product development
The first stage of development of your startup is the beginning of your business journey and leaves room for creative ideas, the refinement of your innovative concept and the design of your product or service prototype. It is therefore the important and creative visioning phase of your future company, in which you give your initial business idea room to unfold and start thinking about how to market it profitably.
Every product concept should start with ideation, where you first define a customer problem and an attractive possible solution.
Important: Already during the development phase of your product, it is advisable to talk to potential customers to determine whether they really have a problem that is worth solving with your vision. If this is the case, you can start building your first prototype.
If you are in the initial product development phase with your startup, we talk about the pre-revenue phase, i.e. the stage in which your startup is not yet generating revenue and you have to accept numerous expenses.
Therefore, the prioritization of your company in this phase should be directed specifically to the profitable acquisition of suitable investors. Investors who are interested in financial participation in a very early phase of your company are Business Angels. These are usually private individuals who once built up a company themselves and now want to put their private money into exciting business ideas.
Consequently, they bring know-how in business management with them and usually also want to participate in your startup outside of financial support. The financial participation framework of a business angel ranges from ticket sizes worth 50,000 to 500,000 euros, whereby the investment exit is usually sought after 5 years.
up4d helps you to find the right Business Angels for your startup and to attract them in an attractive and sustainable way.
Gate 2: Market entry
Once your prototype has been developed and your concept has been worked out to your satisfaction, it is now time to bring your product to market. We are therefore in the dynamic transition phase from pre revenue (no revenue generated) to post revenue (revenue generated).
This step is a challenge for most startup, as they do not have realistic resources on a financial or perseverance level to fall back on over a longer period of time. Metaphorically speaking, they lack the “staying power” to bridge the post revenue phase to the actual revenue generation of their startup. Thus, almost 30 percent of startups fail at market entry.
A typical mistake of young companies is often an almost artificial and unnecessary extension of the development phase. This is usually due to the constant optimization of their prototype, which is to be improved to avoidable perfection. Behind these optimization thoughts are often developers and inventors who are specialized in their field and who are not sufficiently familiar with the basic economic principles.
Many young founders are not aware that such a highly time-consuming optimisation of the prototype means financial ruin for most startup and thus an unavoidable failure of the start-up.
A sad example of this is often university-founded startup whose founding team consists of highly intelligent people who are primarily interested in refining an ingenious idea – but not of business-experienced experts who are already focused on a smart market entry.
In this transitional phase, design thinking is much more economically effective. In this context, this means a simultaneous focus on product development and market entry. This is the only way to create a commercially profitable symbiosis of product and market acceptance and to test the prototype for efficiency and customer appeal. It is therefore advisable to go to market with a pre-prototype already in order to test possible interactions in order to finally be able to adapt the product in a customer-oriented manner and optimize it in a way that promotes sales.
By the way, for experienced investors there is the following “rule of thumb” in this context: For a successful market entry it needs about twice the invested money and twice the spent time it took a StartUp during its product development.
Gate 3: Scaling (Up)
Scaling is the biggest and most difficult gate your business can go through. This is because it now comes to crossing the break-even point (BeP). The BeP is reached when the costs and the turnover of your company are exactly the same. Therefore, the BeP separates the loss zone (pre break even) from the profit zone (post break even) of your company. If the scaling of your startup can be carried out successfully, it will continuously develop into a scaleup.
But why do so many startups fail to scale their business?
First of all, the process of scaling is associated with a major change within all areas of your company. While market entry (with its challenge of developing a sought-after product and placing it within a niche market) is still relatively successful for many founding teams, scaling is much more demanding.
Above all, the expansion and enormous enlargement within all areas of your company that goes hand in hand with scaling presents your founding team with far-reaching challenges:
Whereas your startup up to now most likely worked on demand and while the team used to communicate on a more personal level, it now has to switch to a new and generally transparent form of communication – due to the necessary staff expansions. This is usually associated with some misunderstandings within the team, as well as necessary briefings and employee introductions. The step from a small, well-rehearsed team to a large company with several hundred employees should therefore by no means be taken for granted and requires a well-structured organization in implementation and execution.
Another challenge is the associated, necessary process development of your company structure: Various departments have to be founded, systematized and efficiently incorporated. In addition, numerous new questions arise, such as: How can you improve your processes? How can you make your company more efficient? How can you avoid misunderstandings in communication? How can you ensure good employee satisfaction?
The scaling phase is also risky, as your product now has to gain a foothold within foreign markets and leaves the net of the known niche market. Also, the support of friends and family can no longer be guaranteed at this point. Figuratively speaking, your business is leaving its nest and must rely on its own flapping wings. Many startup fail to scale up their business because they lose sight of the big picture within the expanded work environment and overestimate their own economic actions due to a lack of forecasting and expertise.
However, if you succeed in the challenge of scaling your startup or if it is likely that you will reach the BeP in the near future, your company will eventually become attractive to larger financiers and investors such as venture capitalists or family offices.Venture capitalists are investors whose business is to strategically reinvest money invested in your company and then resell their holdings – with a corresponding increase in value.
Their professionalism allows venture capitalists to invest between 500,000 and 1 million euros in your company.
Thus, the venture capitalist is a suitable companion for your already advanced StartUp that is on a promising path to ScaleUp. Among other things, VCs require for their investment that your company can show a quite consistent annual turnover.
Unlike the Business Angel, the VC has little interest in actively supporting your startup or further developing your product. Accordingly, he also grants you greater freedom of decision in your company management and the already professionalized design of your scaleup.
An already scaled startup (i.e. a scaleup) is also interesting for family offices. Family offices are companies whose purpose is to manage the large private assets of a family of owners. In addition to pure asset management, they often also provide other classic secretarial services such as mediation, accounting, office organization, travel planning, or the security management of your ScaleUp.
Since family offices are usually only interested in pure growth capital for your company, they invest almost exclusively in already advanced ScaleUps. Ticket sizes of around 5-35 million euros are considered appropriate. An investment exit is usually targeted after about 15 years.
More growth tips for your startup
In summary, the different development phases of your startup can be seen as a dynamic and sequential business growth. It should also be noted that not every startup necessarily has to aim for scaling. Numerous startup end their economic growth phase with the successful market entry (post revenue) and establish themselves within the initial niche market. However, a really large revenue gain can only be achieved with the help of a targeted scaling and the achievement of break-even.
To get more users or customers, there are also some essential actions that your business can strive to take within its growth process:
- Your company needs space for so-called growth hacking experiments. (The goal of growth hacking is to grow extremely fast in one area with small changes or actions that don’t cost a lot of money. For example, many growth hacks are about getting as much exposure as possible. This awareness then has a massive impact on traffic to a website or usage of an app). Growth hacking can increase the awareness and popularity of your business via simple and cheap implementation.
- Your company needs to collect and evaluate numerous metrics to find its so-called Northstar Metric. This selected metric serves as the fixed star of your company and represents the most important measurement of all your business analyses. The Northstar Metric is the most important performance indicator (KPI) to drive the growth of your startup.
- Your business needs more staff and manpower to drive the development of your startup.
- Your product should be constantly adapted to the market and profitably optimized.
- Your company has to leave its niche market and position itself outside the established comfort zone.
Start with us and let us accompany you on your individual growth path! Together we locate the current position of your company and help you with tasks that are important right now for the successful development of your startup.
