Our research on Scaling Up Technology firms was presented today at the Academy of Management’s Annual Meeting in Boston. Here is a summary of what we found.
The research paper “The Scaling Process: How do High-tech Start-ups Transform during Scaling” dives deep into digitalised or technology-based firms. Specifically on those exceptionally rare firms that successfully transition from a product-focussed start-up to a high and efficiently growing firm capable of growing to a level of scale that only a few percent of start-ups ever attain.
The reality is there is no single best way for firms to grow (despite what may be allude to during pitching feedback sessions!) In fact, scientific research examining large datasets of new firms for answers to factors driving growth has failed to consistently explain differences in growth between firms. While there are some common themes across firms like founder ambition, education and experience and access to funding, most start-ups growth rates fluctuate dramatically - both within the firm from year to year and between firms!
In this research we took another path.
Rather than look at determinants or what factors influence scale-ups, we just opened the black box to first understand how Technology Start-Ups scale – i.e their Scaling Process.
To do this, we interviewed tech elites who had been with the firm from the start up stage and had the most experience with successful scaling. We captured the lived experience and learnings from founders of successful Technology Scale Ups.
Specifically, we wanted to understand the change taking place inside their organization as distinct from their start-up phase. What did the founders do differently at the start of scaling?
This information is usually hidden from public view and unavailable in databases – it is in the mind of successful scale up operators. So we set out to conduct the interviews with the founders themselves.
Then we hit a major blocker.
We found that while some founders we spoke with were identified as leaders of potential scale-ups, we were unsure if they actually qualified as scale-ups. In fact, we found most founders asked us for a definition in the first few minutes of the interview - “so what do you classify as a scale up?”
The funny thing was – they were right.
There is no aligned, definitive definition of a “scale up” in academia or practice that cut across markets, sectors and industries. It’s a bit like “we know it when we see it”.
What is meant by a scale up?
Scale ups are often mistaken for high-growth firms, growing at 20% or more over 3+ consecutive years and with >10 staff. (Common used OECD definition and many research and policy institutions use this interchangeably with scale ups).
However, using this definition, many large organizations and even corporates could count as scale ups. While many well-funded technology firms would say 20% is a low growth rate! Alas, using different labels to mean the same thing doesn’t hold up to the rigour of scientific research.
So we adopted the following scale up definition as the best fit:
Scale ups are firms at intermediate stage of life, who grow both rapidly and efficiently in that they pursue strategies aimed at the attainment of economies of scale[1]
Once we had our definition, we realised it is the focus on scale economics and how efficiently scale ups grow that potentially differentiates them from other high growth firms. How does this nuanced but important difference influence decision-making, priorities and dominant activities in their scaling process compared to start ups, SMEs or even high-growth firms?
Findings and Conclusions
Jumping ahead about 30-pages, here is a high-level summary of our draft research findings. Based on 14 semi-structured, elite interviews, further desk research to validate the information and inductive analytical process triangulated between three researchers - myself and co-authors, Dr. Nora Zybura and Thomas Hipp, lecturers and PhDs from the University of Mannheim Institute for SME Research (ifm).
We found Scaling Up in Technology based firms is a complex mix of related internal activities, priorities, and trade-offs synchronistically managed in pursuit of both high and efficient growth.
Four primary goals are in focus during scaling:
· Increasing organizational size
· Increasing customers
· Increasing (exponential) returns to capital
· Founder’s role transformation to CEO makes the fourth scaling goal.
Each goal is associated with a key priority, emphasized during scaling compared with the founders’ previous start-up period:
· Build capacity
· Synchronistic technology and organizational process innovation
· Pursue of scale economics
· Founder learning, which is stage-relevant knowledge from more external sources.
Scaling sounds simple right?
Well it’s clearly not statistically speaking.
When examining 13-years panel data from Germany's ZEW database of 25,000+ new firms we found that after five years of operating, among those firms still reporting revenue in our panel, only 7% were scaling beyond a few million dollars in revenue annually and 22% were high-growth >20% yoy. The remaining 72% were either slow growers or stagnating and had never made it beyond a few million in sales.
The science of scaling is largely complicated by four tensions, many of which present a challenging trade-off for founders and leadership during scaling.
How founders and leadership balance these tensions during scaling are still predominantly a black box! (Perhaps relying on judgement and sheer “talent” i.e. experience and management skill. )
Scaling Process Tensions require frequent balancing and management:
between structure and culture as the organization grows.
resources between short-term vs. long-term outcomes (e.g., between product and process innovation)
fast, agile decisions and the impact on performance in a larger, more complex business.
autonomy or delegation and the founders need to stay connected to the firm operations and decisions.
Conclusions
Scaling is an important topic and scale ups are among the most productive in an economy.
Yet the contributions from our study are predominantly directed towards founders and operators of Technology Scale Ups and start-ups seeking to become the exception and ambitious to scale.
Our research contributes towards a new Scaling Process framework for Scaling Up Technology startups. We continue to work on this research and framework to help tech scale up and start up founders with a more structured approach to transitioning to scale-up. Rearranging priorities and allocating resources in different ways at the start of scaling.
Founder to CEO transition
We learnt to successfully navigate the scaling process, founders must evolve alongside their technology scale up. Alongside experience and education, it helps of founders have learning agility.
External knowledge and impulses such as from other scale up founders or operators who have been there before or from a Scaling Up coach.
New, external sources of knowledge should be stage relevant. In this way founders and leadership can become more adept at leading and managing the scaling process including new goals, priorities and challenges that come with balancing tensions. Successfully transforming to avoid stagnation, or remaining small, despite being faced with seemingly insurmountable odds.
To receive a two-page summary of the draft research findings and the Scaling process framework, please email me directly on claire@made4scaleup.com
[1] Piaskowska, D., Tippmann, E., Monaghan, S., 2021. Scale-up modes: Profiling activity configurations in scaling strategies. Long Range Planning 54, 102101. https://doi.org/10.1016/j.lrp.2021.102101
[2] Mula, C., Zybura , N. and Hipp, T. (2023) The Scaling Process: How Do High-tech Start-ups Transform during Scaling? Academy of Management Annual meeting proceedings, 2023 vol. 1. https://journals.aom.org/doi/abs/10.5465/AMPROC.2023.12854abstract
