Why founders are their own worst enemies when scaling up

New research from VC firm Highland Europe reveals that entrepreneurs see the evolution from founder to chief executive as posing the biggest risk to their businesses as they begin to scale. Here's why.

During the recessionary years, the business focus in Europe was on start-ups, rather than scale-ups. Now, with the economy bounding back, fledgling start-ups are firmly on the growth path, bringing its own challenges with the opportunities.

Currently the UK lags behind America and a number of other countries regarding its proportion of ‘scaleup’ companies (i.e. high-growth, rapidly expanding businesses), highlighting a ‘scaleup gap’ that Britain is suffering from. If this gap can be bridged, an additional 238,000 jobs and £38 billion additional turnover could be created within three years of the issue being addressed.

Given that just one per cent of Britain’s scaleup population should drive an additional 238,000 jobs and £38 billion to GVA within three years, harnessing this potential is essential for the future of the UK economy.
Across the continent, a number of EU initiatives contribute to job creation and growth: the European Fund for Strategic Investments (EFSI), and its extension and reinforcement, but also the Single Market Strategy, the Digital Single Market, and the Capital Markets Union have also provided a framework for further improvement. In addition, a stronger on innovation and SME support, includes venture capital support to 140,000 start-ups and scale-ups. EFSI agreements already target 377,000 SMEs, including start-ups.

But rather than flourishing and expanding in Europe and beyond, too few European start-ups survive beyond the critical phase of two to three years, with even fewer growing into larger firms. According to figures from the European Commission, 45 per cent of start-ups grow by less than 5 per cent, or not at all. 

If these start-ups were given room and financing to grow to match that of the US, they could generate up to 1 million new jobs and up to €2,000 billion in added value to the EU’s GDP over the next 20 years.

So why is there a scale-up gap in Europe’s strongest economies?

New research from VC firm Highland Europe reveals that entrepreneurs see the evolution from founder to chief executive as posing the biggest risk to their businesses as they begin to scale. The research was conducted in April 2017 and is based on the opinions of over 175 European company leaders, two-thirds of whom were founders.
The research found that company founders see themselves and their ability to evolve and adapt from being a founder to being a chief executive as the biggest risk to their businesses when scaling up. 49 per cent essentially doubt the ability of the founder to effectively manage the business as it grows, and 47 per cent said the ability to execute quickly on changes in strategy was also a risk.

Start-ups in the UK are also consistently less confident than similar companies in Europe and the rest of the world.

While almost two-thirds of all business leaders think their company has unicorn potential – the possibility of achieving revenues of at least $1 billion –  that figure falls to 47 per cent for UK businesses, compared with 69 per cent for European businesses and 73 per cent for companies outside Europe. Yet British businesses are no less confident than their international peers about the prospects for tech businesses in general.

“Scaling a business successfully is an incredibly difficult thing to do. There are challenges at every turn and the ones that can really trip up a founder are not always the ones you’d expect. With this research, we see that entrepreneurs and leaders of growing businesses are naturally optimistic, with two-thirds certain that their business has unicorn potential. However they are also aware of the pitfalls – from not being able to maintain their clear vision to being unable to access finance,” says Tony Zappala, partner at Highland Europe.

“Interestingly, as a business grows, its major concerns over building sales and customers become slightly less critical. In fact, this research suggests that pre-scaling businesses may overstate the challenge of sales and customer acquisition. As growth continues, increasingly management issues surface, including the ability to hire senior talent and managers.”

The challenges to scaling businesses

The research found that the challenges start to flood in once businesses begin to scale. For both businesses that are preparing to scale and businesses in the process of scaling the biggest challenges are:

  1. Building sales and customer acquisition (61 per cent)
  2. Finding senior talent and professional management  (58 per cent)
  3. Establishing the right organisational structure (54 per cent)
  4. Access to capital (44 per cent)
  5. Establishing processes to standardise areas (44 per cent)

For businesses that have scaled, the research found that the biggest issues when scaling were less around sales and more about bringing in experienced talent and transforming the organisational structure so that the right teams, processes and people are in place:

  1. Finding senior talent and professional management (64 per cent)
  2. Establishing the right organisational structure (49 per cent)
  3. Building sales and customer acquisition (47 per cent)

The research also highlights that it is vital for founders to evolve and embrace change as their business grows and the structures and relationships within it evolve. Founders of businesses that have already scaled said their biggest challenges were to adapt their role, stay focused on the big picture and not get bogged down in operational detail, and delegating effectively.

Growth perspectives and risks

93 per cent of those surveyed said it is vital that their business grows, but only 40 per cent have identified an optimal rate of growth for their company, while fewer than two thirds carry out regular growth-planning or strategic planning exercises.

Asked how they measure growth, 43 per cent of entrepreneurs surveyed said they use revenue as their main metric, while 36 per cent of scaling businesses say that they measure growth in customers. Only 12 per cent look at growth in profits and just 8 per cent look at growth in market share.

These pre-scale and scaling businesses also identified the chief risks they face as they expand. Foremost among these are the ability of founders themselves to stay in control and to ensure the business remains nimble:

  1. The ability of founders to effectively manage the business – 49 per cent say this is at risk as the organisation scales
  2. Ability to execute quickly on changes in strategy (47 per cent)
  3. Company culture and values (38 per cent)
  4. Quality of products and services (30 per cent)

Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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