We, as investors and/or management consultants, who mainly work with private equity financing, are always on the lookout for a unicorn. You know what a unicorn is? The elusive mythical unicorn is used to describe that rare startup that has the potential to be “the next” billion-dollar company. Ah, the business of which dreams are based.
What we should be looking for instead are gazelles! According to Investopedia, ”a gazelle is a high-growth company that has been increasing its revenues by at least 20% annually for four years or more, starting from a revenue base of at least $100,000. This growth pace means that the company has effectively more than doubled its revenues over a four-year period.”
The business term for the gazelle is a scaleup. Dave Butler the VP of Innovation at Coca Cola commented that a scaleup is the startup’s next iteration.
There are a few variations but, essentially, it’s a company that has found its product or market niche, has a good team and developed a repetitive process that enables it to grow. It’s an accelerated growth phase typically found on the Greiner Growth Curve. As a management consultant in private equity financing, I’m always looking for a good management team, obviously with a great idea but it must be scalable – able to grow exponentially.
One might assume that the gazelle is always a high tech company but many years ago I had a client who ran a heavy lift crane service that met the criteria. He had found that elusive niche and focused on it. He used large cranes to install twenty-ton air conditioning units in hi-rises or put a fifty-foot tree on a penthouse balcony. His revenues doubled every quarter for two years.
Business guru and VC Dan Eisenberg once said, “One venture that grows to 100 people in 5 years is probably more beneficial to entrepreneurs, shareholders, employees, and governments alike, than 50 which stagnate at two years.”
Is the scaleup actually a startup that has succeeded? Not really! Certainly the scaleup can evolve from the startup but it doesn’t necessarily work the other way. There are many startups that were duds from the get go and went nowhere fast.
The startup by definition is a business that is looking for a starting point whereas the scaleup has defined its model and has found the system that allows it to repeat the process and increase revenues. It’s certainly more stable than the startup because it has reached profitability already.
The startup is looking for the scalable model while the scaleup’s challenge is perfecting the existing growth model while maintaining control over the process.
While the startup is innovating to create a product and searching for the business model the scaleup is simply creating a repetitive process.
The startup typically has loose systems, is bootstrapping the business and an untested product in the market while the scaleup already has applied systems in place. The startup’s loose structure eventually forces it to move in the direction of a scaleup because generalists wearing many hats need to be replaced by specialists focused on narrow aspects of the company structure.
I’m always saying that founders tend to stay too long in the role of CEO. They reach a point in the startup process, maybe after the first or second seed round and the minimum viable product (MVP) that they know instinctively they need to bring on more qualified people to run the company. They need a CFO, instead of neighbor Bob, and a real human resources VP to recruit new hires and manage the process.
Scaleups require more energy, focus and processes in place, but you know when you see one by the way investors start eagerly looking at the company. Instead of creating an MVP and struggling to finance the family and friends seed round you get investors who can see that you have more than a MVP, have a senior management team in place and can show the scalability opportunity of the business.
A successful startup can and probably is a scaleup if it has passed the inevitable hurdles most startups face, but they won’t necessarily coexist. I see the startup as its own entity and the scaling process as the natural progression of the startup process.
If you look at the normal growth of a business, it increases costs as well as profits. When the typical CEO looks at the financials and sees that although he has made more revenue, he is still taking home the same profit, there’s a problem. I think there are more CEOs in this situation that one can imagine.
He’s reached the growth paradox with the belief that as he “scaled” the company — and increased his exceptional management team, client leads and resources — things should have gotten easier, but they didn’t. Things actually became harder and more complicated.
His company is obviously not scaling and issues need to be addressed. If you can find the magic sauce that enables your systems to scale you may have reached that mantra a lot of entrepreneurs love to repeat: start, scale and sell!
So, do you want a scalable business or do you want to keep running your company like a startup?
Gary is CEO of Bizzo Management Group Inc. in Vancouver. He has mentored over 1000 business leaders, investors and entrepreneurs. London-based Richtopia placed Bizzo on the Top 100 Global Influencers in the World for 2018