WHAT DOES TO SCALE UP MEAN IN BUSINESS?
What is the technical definition of a scale-up business? What does scaling up mean? What is the difference between scaling up and just business growth? There are some complex models to measure growth and thereby define a scaling-up organisation. I think having an absolute growth rate for organisations above a particular size over time is a more useful insight into a scaleup company model.
What is a Scale Up?
The Organisation for Economic Cooperation and Development (OECD) suggests that the absolute growth number is 20% year over year for three years and can come from growth in revenue, team member headcount or both. They also indicate a lower level of 10 employees for the scaleup phase at the beginning of the period. At £118,000 per head (the average for UK SMBs), this puts the lower limit of a definition of scaleup company top-ups at £1.2m in annual revenues in the UK. Beauhurst (a data provider) is tracking 30,000 scaling-up organisations in the UK. The ScaleUp Institute, with the ONS (The UK Office for National Statistics), will continue to analyse this data and provide further updates.
Before the OECD created its definition of scale-up, David Birch had developed the idea of the Gazelle Company during his work on employment growth in the USA in his 1987 book “Job Creation in America: How Our Smallest Companies Put the Most People to Work”.
Birch argued that small businesses (SMBs) were major economic job creators, particularly gazelles. Despite making up only 4% of the market for all U.S. companies, they were responsible for 70% of new job creation. These gazelles outpaced large corporations, known as “elephants,” and small, family-owned “mice” businesses regarding job creation. However, maintaining this rapid growth often proves challenging for gazelles with internal business model constraints appearing beyond five years.
The term ‘gazelle’ has recently broadened to include any fast-growing company, diverging slightly from Birch’s original definition. Nevertheless, it remains true that gazelles are significant job creators, especially in open, entrepreneurial economies like the United States and the United Kingdom (UK). While many are tech companies, there’s a diverse spread across other market sectors like food and beverage, retail, and apparel, contributing to growth in various industries.
At Monkhouse & Company, our purpose is to unlock entrepreneurship’s transformative potential. If we can help 200 UK firms to scale up their proven business models, from 50 to 250+ employees, those firms will create 300,000 jobs and £52 billion in turnover – 2014 Scale Up Report by Sherry Coutu.
A definition of scale up
20% annual revenue or headcount growth for 3 years. Minimum annual revenue of £1m
The Rule of 40
Verne Harnish, the author of “Scaling Up: How a Few Companies Make It…and Why the Rest Don’t (Rockefeller Habits 2.0),” advises scaleup businesses to aim for high-profit margins akin to those in the software industry – aiming for 70% gross and 20% net margins. Additionally, he emphasises the importance of the ‘rule of 40’, a crucial metric originating from the tech sector used to identify small yet high-growth firms that demonstrate exceptional performance and command high valuations. This rule serves as a balance between investing in long-term growth and maintaining short-term profitability. It’s calculated by adding a firm’s annual revenue growth rate to its profit margin, with the target sum being 40 or higher. While earnings before interest, taxes, depreciation, and amortisation (EBITDA) are commonly used to measure profit in this context, in certain scenarios, other metrics like free cash flow or net profit might provide a clearer picture of a scaleup company’s financial health and performance.
A definition of scale up
Rule of 40: (annual revenue growth rate) + (EBITDA) should be ≥ 40
What’s the difference between growth and scaling up?
Growth vs. Scaling Up: A Tale of Two Journeys
Imagine two ambitious companies, both B2B tech firms with grand ambitions. One, “Growth Ltd.,” takes a steady, linear approach. They diligently hire more employees, open new offices, get professional services, get new customers, and invest in additional marketing campaigns. Their revenue climbs steadily, but so do their expenses. It’s a predictable path, like climbing a mountain step by step.
Across the valley, “Scaling Stars” takes a different route. They focus on building efficient systems and processes. They streamline operations by automating tasks, utilizing technology effectively, minimizing customer acquisition cost, and developing consistent sales funnels. Their revenue skyrockets, but their headcount remains flat. It’s a thrilling, exponential ascent, like soaring in a hot air balloon.
So, what’s the difference? It’s all about the relationship between resources and results.
- Linear progression: Revenue and expenses increase proportionally.
- Resource-intensive: More resources like people, equipment, and space are needed to fuel growth.
- Sustainable but slow: Growth is predictable but may not be explosive.
- Example: Hiring a new salesperson for each new client acquired.
- Exponential growth: Revenue outpaces expenses, creating a virtuous cycle.
- Resource efficiency: Focuses on leveraging existing resources and technology for maximum impact.
- Disruptive and fast: Growth can be sudden and transformative.
- Example: Automating customer onboarding process, eliminating the need for additional staff.
Here is an example to illustrate the difference:
- Growth: A bakery opens a second location, doubling its staff and production capacity. This increases revenue, but expenses also rise due to rent, equipment, and payroll.
- Scaling Up: A SaaS company develops a self-service customer portal to handle inquiries without additional customer service agents. Revenue increases from new subscriptions while expenses remain relatively constant.
Ultimately, the goal for most businesses is to transition from growth to scaling up. It’s not about scaling companies avoiding growth but about finding ways to grow without adding significant overhead costs. This allows companies to become more profitable, efficient, and resilient in the face of increased demand and competition.
Remember, the path to scaling up scalable business model isn’t always linear. It may involve experimentation, innovation, and even some bumps along the road. But the rewards can be immense for companies willing to embrace the challenge.
So, which profitable growth journey will your company take? Choose your business growth path and start scaling up towards success!
There are three areas of focus for an organisation looking to scale up.
These three characteristics can be simply stated as vision, strategy and execution, in that order. A clearly differentiated business strategy is not just aiming to be bigger or better than a competitor. Developing a system for getting the strategy implemented at scale. Hiring and retaining the right people, building a people system that attracts and retains A-players. Growth sucks cash, so make sure you have enough. Pulling this strategic plan together and sharing it with all employees on a one-page strategic plan (OPSP) is a great start and creates alignment.
Scaling Up in the UK
Scale-up ventures, spearheaded by innovative entrepreneurs and startup CEOs, deserve recognition and support. Their monumental contributions to both the UK’s and the global economy are undeniable. To navigate the journey of scaling up successfully, there are five foundational principles that should be adhered to.
The interest in scale-ups within the UK is notably high. UK scale-ups are at the forefront of economic attention, employing approximately 3.4 million individuals and boasting a combined turnover exceeding £1.3 trillion. This enthusiasm for scale-up ventures has led to the establishment of The ScaleUp Institute (SUI) in the UK. As a private sector, non-profit organisation, the SUI is dedicated to working in tandem with both the private and public sectors to forge a tangible and significant impact. It aims to assist UK high-growth businesses in amplifying their growth and scaling efforts. Through dedicated research and thought leadership, the ScaleUp Institute champions disseminating sustainable business model best practices, underlining these businesses’ critical role in driving economic expansion and innovation.
Scale-ups are the engine drivers of local economies. They are twice as innovative as large firms, employ twice as many apprentices, are twice as likely to be operating in international markets and, significantly, they create high quality jobs. On average, scale-ups are 42% more productive than their peers.
The Critical Role of Scale-Ups in Bolstering the Economy
Scale-ups play a pivotal role in the vitality and expansion of the economy for a myriad of reasons:
1. Job Creation: The transformative potential of scale-ups in job creation cannot be overstated. The 2014 Scale Up Report by Sherry Coutu highlighted that all net new job opportunities created in Europe over a five-year span originated from organisations less than five years old. This underscores the essential nature of young, rapidly expanding businesses as engines for employment .
2. Productivity Growth: Scale-ups are synonymous with higher productivity levels. For instance, a selected group of UK scale-ups reported an impressive average turnover of £240k per team member, showcasing their efficiency and productivity relative to non-scaling firms of a similar size.
3. Economic Growth: With consistent annual growth in sales revenues or team size by 20% over three years, scale-ups significantly fuel broader economic expansion.
4. International Trade: The engagement of scale-ups in global trade is crucial for diversifying the UK economy and lessening reliance on the local market.
5. Impact Across Industries: Scale-ups are not confined to the tech sector but span across engineering, construction, retail, logistics, and more, indicating their widespread influence on the economic landscape.
6. Prospect of Becoming Large Firms: The potential for scale-ups to evolve into large firms is significant. Aligning the proportion of large businesses in the UK (5%) with that of the US (7%) could potentially introduce 2,000 more large firms, create three million job opportunities, and contribute an additional £516 billion in turnover.In essence, scale-ups are indispensable to economic dynamics, catalysing job creation, productivity, and economic growth. Their innovative contributions, engagement in international trade, and broad industry impact underscore their value. Moreover, their success in attracting further investments and the potential to develop into large-scale enterprises further accentuates their importance in the economic fabric.
The origin of the meaning of scaling up or the first use of the term scale up in the context of a growing company’s business model organisational structure is unknown. Previously, these high-growth firms had been known as gazelles.