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How to scale: Seven qualities of successful scale-up CEOs
Most startups will fail, but a few will achieve extraordinary scale. While there’s no silver bullet, being humble, identifying key metrics, and partnering with anchor customers are some of the traits that might help CEOs beat the odds and reach “scale-up” status.
The OECD defines a scale-up as a company that has achieved 20% annual growth in headcount or revenue over the past three years. Simply put, they are startups that have started to gain market traction and achieve significant growth, without having to multiply their workforce or investment to the same extent. Examples could be Unit8, a data services company based in Lausanne, that has grown 44 times between 2017 and 2021, or the global employment platform Oyster, founded by IMD alumnus Tony Jamous, that has grown from two founders to almost 500 people in three years.
We define a startup as “an organization formed to search for a repeatable and scaleable business model”, so what is a scale-up? This could be defined as “a transitional organization built to develop the ability to execute growth and attract capital”.
Europe still lags behind the United States when it comes to nurturing fast-growing businesses. A 2019 report for innovation advisory firm Mind The Bridge found there were almost 23,000 scale-ups in the US, versus 7,000 in Europe.
There is no one-size-fits-all approach to transition from a startup with steady growth to a company with scale, but what unites all successful scale-ups is great leadership. As Ed Catmull, co-founder of Pixar, and the former President of Walt Disney Animation studios, said: “If you give a good idea to a mediocre team, they will screw it up. If you give a mediocre idea to a great team, they will either fix it or throw it away and come up with something that works.”
But what makes a great team and leader? Over 30 years, working for and with hundreds of early-stage companies, co-founding three myself, I have identified what I believe great leaders and teams do to transform their businesses from promising startups into fast-growing scale-ups:
1. Design for product-market fit before scale
While it may be tempting to design your product or service for scale from the get-go, this is a recipe for failure. A great founder/CEO and his or her team will be willing to experiment, and admit that they won’t necessarily know what the perfect value proposition for a customer segment is from the start, or how to design for future scaling. They will prototype, measure, learn and repeat, focusing on what drives customer conversion. The holy grail is product-market fit: a scenario where a company’s customers are buying, using and telling others about the product in large enough numbers to sustain growth. It also helps if customers are willing to pay a high enough price and there are few serious competitors.
Once they are serving their target customers with the right product, startups can then re-design for scale: designing your product for high-volume manufacturing, or your service for speed and efficiency. This may require bringing someone into the team who has done it before. Be humble.
2. Identify your North Star metric
The North Star metric refers to the one measurement that can guide and predict a company’s long-term success. At Busuu, a language learning platform founded by Adrian Hilti, they defined this as active premium users (i.e., the number of active, paying monthly users), focusing on making sure that this number increased over time. The North Star metric might be the measurement that converts prospects into paying customers, or converts a pretotype into a testable prototype, then finally into a beta product that early customers can play with.
It can also be the metric that pauses growth when not met: for example, the time between the first meeting with a client and revenue generation. At Green Motion, a Swiss EV charging provider, CEO and Founder François Randin recognized that it was taking key potential customers 18 to 24 months to decide whether to purchase his car charging stations. Randin therefore changed his business model, offering to make all the investment himself, and only asking his customers for a concession. Green Motion would cover all the costs of setting up an EV charging station in, for example, a supermarket parking lot, and then earn back its investment from the energy it sold. Using this method, Green Motion’s evpass has grown to be the largest network of charging stations in Europe.
Examples of North Star metrics from scale-up hopefuls in a recently finished IMD/Innovaud program include:
- CashSentinel, a payment system for marketplaces uses GMV, the Gross Merchandise Value, of everything sold on their platform each month.
- Tayo, a property management company, closely follows growth of “objects under management” (apartments, parking spaces, basements, etc).
- Zaphiro, creating smart grid solutions, tracks the time to close contracts with new customers.
- Drinkotec, similarly, tracks the pipeline of new projects, and the speed of the prospect-to-delivery process.
- Veertly, which runs hybrid and virtual events, used the classic Monthly Recurring Revenues (MRR) together with Monthly Event Attendees, and then, with the creation of their new platform, Gomada, moved to Monthly Active Teams, recognizing that it was team use of the platform that predicted growth.
Hopefully, growth in these metrics creates a flywheel effect: moving faster and building momentum. Leaders who know what their growth vector is, know which actions are likely to bring new anchor customers or attract star investors. They are ruthless in prioritization, and know which numbers, whether lagging or leading, will identify areas of potential hyper-growth.
3. Avoid opportunity overload by knowing how to say ‘no’
One of the main challenges facing promising startups is handling opportunity overload. Taking every opportunity offered risks creating a hodgepodge strategy that may well deter investors. By focusing on too many customers, companies also risk paying an “optionality tax” by trying to adjust the product or service to different groups with varying requirements.
In the first year of event platform SpotMe‘s existence (formerly known as Shockfish), we were asked to adapt our technology for a different market. Together with my co-founders, after much agonizing, we turned this opportunity down, as we knew it would distract us from our target market. SpotMe remains alive and well some twenty years later.
Sometimes, scaling involves waiting for the right customer or market context to come along. To do this, you have to make sure you are clear about your chosen opportunity and are cash efficient. “I knew I had to stay afloat long enough and be ready for when the context was right, and the opportunity came,” said Inderpreet Wadhwa, former Chairman and CEO of Azure Power Global Ltd, which developed India’s first utility-scale solar project in 2009.
4. Understand how to structure your firm to achieve the desired outcome
At a company’s founding stage, you do everything yourself to get your business up and running. But at a certain point founders must delegate. Otherwise, the CEO risks becoming a bottleneck, with team members waiting for decisions. A CEO can’t let himself be the limiting factor. Busuu’s Hilti advises hiring functional experts like designers and marketeers early, rather than trying to do these things yourself.
To get out of the way, CEOs need to understand how their company operates and see how structure, processes, people and rewards mesh with strategy. At the same time, the challenge is how to put those in place without losing the agility and creativity of a startup.
“In the first year of event platform Spotme’s existence, we were asked to adapt our technology for a completely different market. [...] We turned it down, as we knew it would distract us from our target market. I’m proud to say that Spotme is alive and well some twenty years later.”
5. Leverage your customers as partners, or choose customers who create the opportunity to get more and better customers
In the same way that it’s important to turn down too many small customers, it’s also essential that you strike partnerships with customers that can help you scale. Take the example of CompPair: a developer of sustainable composite materials that can repair themselves. Composite materials – fiber glass, carbon or natural fibers embedded in resin – are present all around us in bikes, windmills, boats, surfboards and even planes. But if they crack, these items can be difficult and time consuming to repair, and today, 90% of composites are not recycled. With its HealTech technology, CompPair can repair a crack in a racing bike or boat in just minutes. Due to the vast range of potential applications, the challenge for CompPair was learning to focus on its biggest customers, rather than spreading itself too thin.
CompPair was able to bring some anchor customers on board early. It teamed up with sporting goods giant Decathlon to conduct an industrial proof-of-concept with its technology. Together, the two companies successfully produced a bicycle shoe sole using recycled fibers.
Returning to Green Motion as another example: Randin could have continued to sell one EV charging station after another, but by switching to a concession model with customers that had many parking lots, and a desire to see people spend more time in those parking spaces, he leveraged his business development efforts exponentially.
6. Be humble and accept failure as learning
Though we can never know in advance if someone knows how to scale, great scale-up leaders will give their team the opportunity to show whether they can scale, or not. The alternative is to bring in a seasoned older executive, but they probably don’t know your technology or early market as well as your existing team does. Can they work in a small team? And what will that hire do to the motivation of your founding team? All of these aspects must be carefully considered.
Some aspect of the venture is always in the unknown, whether that’s the business model, the technology or the customer segment. The only way to get answers to these unknowns is through experimentation, which may include giving responsibility to people on your team who have never scaled a company, including the CEO. They must be prepared to accept that risk, and to fail; anything else means accepting incremental growth as being “good enough”.
7. Make a clear commitment that you are going for scale
Great scale-up leaders understand the difference between growing and scaling. They make a clear announcement to themselves and their teams that they are striving for scale and shape team culture accordingly.
Years ago, I was on stage with a young entrepreneur who told me and the audience that they had just had their best month ever, and they were on a trajectory for hyper-growth. His key metrics were great. He said he was trying to raise $5 million for their next stage. When I asked him, “Why not raise $50 million and grow even faster?”, he replied that he was happy with the safe, incremental growth that they had plotted. I accepted that: there is absolutely nothing wrong with growing a few percentage points a year, as long as the competition doesn’t intrude on your plans.
So?
If you’re a founder, please don’t assume that I am saying that world domination has to be your goal. But if you’ve taken the leap to create a business that has scaling possibilities, and you have that ambition, I hope these seven points are useful to you.
If you’re an investor, don’t assume that I’m suggesting that you only invest in scaleups. Small profitable businesses can be great investments. But if your fund and investment thesis require big and fast growth, perhaps you can use these seven points to assess your portfolio and future bets.
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