You’ve probably heard talk of the latest startups and scale-ups to watch in your sector as well as the ones set for success. There’s always a buzz around the latest startups to watch and predictions for startups and scale-ups for the coming year. Whilst they sound very similar, these terms each carry their own meanings and implications for the business. Some startups do become scale-ups, but not all startups do. We’ll walk you through exactly what you need to know about startups and scale-ups, and the differences between the two.
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What is a Startup?
A startup is an innovative business that’s in its infancy. Startups are generally in the early stages of determining their specific product-market fit and are often looking to position themselves in an underserved market segment.
Startups need to find the right balance between choosing a niche and having the ability for rapid growth. Here, they’ll begin to work out a repeatable and scalable business model that positions them as the answer to a gap in the market.
Being a startup is temporary. By the nature of startups, young innovative companies will not remain startups forever. As these companies grow and solidify their offerings, they will evolve into scale-ups.
Are All Young Companies Startups?
No, not all young companies are startups. The label of a startup is reserved for companies that make use of new technologies or those that are innovative. Startups typically have to define their own business model and invent their own processes.
What is a Scale-Up?
A scale-up is a young company that has proved their business model and viability. Scale-ups have already established a viable business model, so are primarily focused on growth to reach the whole of their potential market.
There’s some criteria that usually need to be met in order for a company to be classed as a scale-up. These are:
- The average team growth is at least 20% per year.
- The company employs at least 10 employees on long-term contracts.
- The company has a clear ambition to become a global leader in its market
Are Startups the Only Companies That Can Become Scale-Ups?
No, startups are not the only companies who can become scale-ups. Small and medium-sized enterprises (SME) that are renewing their offering can also become scale-ups.
The UK government’s definition of SME includes:
- Micro businesses – less than 10 employees and an annual turnover under €2 million
- Small businesses – less than 50 employees and an annual turnover under €10 million
- Medium-sized businesses – less than 250 employees and an annual turnover under €50 million
What is the Difference Between Startups and Scale-Ups?
It’s easy to get startups and scale-ups confused, but there are some key differences that establish startups and scale-ups respectively.
Stage of Funding
Startups and scale-ups are usually at different levels of funding as well as growth. Usually, startups will have seed funding, Series A funding, or none at all. When a startup begins its second round of funding, it has usually established itself enough to be considered a scale-up.
Product Fit in the Market
Generally, startups are still trying to find where they will fit best in the market. To do this, they’ll often trial things such as product features, customer segmentation, and customer acquisition cost. Scale-ups have found their fit in the market and have established their viable business model.
Aversion to Risk
As startups are new to the market, they don’t have much to lose if a bold idea doesn’t work out. This often means that startup companies are more experimental and try new ideas. However, scale-ups have a lot to lose if an innovative idea doesn’t quite work out. As such, scale-ups are often more reserved about experimenting with new ideas.