The Difference Between Startup and Scale-Up Companies (and Why it Matters)

Startups are essential to any tech ecosystem. Every industry needs fresh and new innovations to stay relevant, and startups bring needed capital, ideas, and solutions to the market that can further support the bigger tech ecosystem.

It’s crucial during the initial introduction of a startup tech company that they find their niche and stride, quickly. Growth is imperative to moving products and services forward, but also aiding in the transition of converting to the highly-coveted scale-up phase. 

It’s no small feat to take the leap from startup and enter scale-up territory. While scale-ups are equally essential to any tech ecosystem, the challenges companies face during the scale-up phase are exponentially greater and more challenging. For any startup, it’s important to set goals that are attainable to reach the scale-up phase as not every startup can or will be able to take their company to the next level. A balanced tech ecosystem needs the right startups to thrive so they can naturally evolve into the next phase.

What is a Startup Company? How is a Scale-Up different?

A startup is considered “a company that is newly established as a necessity in the market, generally in the technology field, with growth potential,” whereas a scale-up is “a relatively young, rapidly emerging, innovation-driven company” that’s experienced a high level of growth over the past three years.  Essentially, in order to enter the scale-up phase, you need to see tremendous growth and high output. In order to really compete, the product or service you’re providing as a startup must provide high value and your company has to be able to keep up with the demand. This is a tall order for any brand new business, which is why so many don’t move on to the next stage and why funding is so incredibly important.

Setting Up Your Startup.

Any entrepreneur will tell you that a great idea is just the beginning of creating a business; getting your startup moving and off the ground is easier said than done. A lot of work goes into executing your big idea, including setting up a sound infrastructure for your organization to grow and thrive. 

Entrepreneur created a great article on what you should do to get started, but some of the most important things you can do to set up your startup for success are: 

Create an intentional and strategic business plan.

This may seem like a tedious task, especially if you’ve never had anyone to help guide you through the process, but anyone who has been in your shoes will tell you how absolutely necessary this step is. It’s also crucial when outsourcing capital. Without a basic guide or plan, how will you know where you want to go or if you’re even heading in the right direction? Take the time to create a business plan that can be adapted as your business grows and evolves. 

Nurture a brand.

 It’s important that the message you send into the world about your product or service matches what you’re actually selling and who you are—as an entrepreneur, a business, and, of course, a startup—is consistent. Everything from logo to color palette to business cards to the website and beyond. The more people resonate and recognize your brand, the better off you’ll be. 

Plan and execute an effective digital marketing strategy.

This is going to be a challenge for all startups. Finding what works for you from a marketing perspective is going to take time, but the sooner you leverage and message digital marketing, the better.. There are countless resources on the web to help you learn new marketing strategies,until you can either hire internally or pay an outside firm to manage this aspect of the business. Regardless, digital marketing is your most assured way of reaching your targeted audience, so start putting your brand out there now.

This list is important, but fails to highlight a crucial element during the startup process: funding. Even the best entrepreneurs have met some of their greatest challenges by not finding financial backing from the start. That doesn’t mean you should give up. Startup money can come from many places, including angel investors, friends and family, personal loans, bootstrapping, and local grant applications. There are many ways to help fund your startup, and once you get it off the ground, a solid business plan will support growth to help pay back any initial loans and investments necessary.   

Understanding Startups vs. Scale-ups.

When comparing startups and scale-ups, it’s important to understand the nuances of each. Endeavor does a great job of exploring some key differences between startups and scale-ups and why they matter. Here are just a few considerations:

Stage of Funding.

According to Endeavor, it’s extremely likely that startups “have no funding, seed funding, or have gone through Series A funding.” What this means is that the capital a startup leverages to grow comes from sources like crowdfunding (asking friends and family for loans or early investment loans), bootstrapping efforts, bank loans, and the like. The money is generally used for testing concepts, marketing strategies, and even audiences. 

When a company has reached a scale-up phase, however, there is typically more capital raised, which is used to support things like operations and infrastructure. The capital is leveraged to refine and further establish the business so that it can support additional growth. 

Market Validation.

When creating a business around a new product or service, it’s imperative to find out quickly if the market is ready for it (and potentially test before investing too much money into a company). Many entrepreneurs face the challenge of market readiness. While the service or product they created may be a true “game changer”, if the market isn’t ready for it, a startup will not succeed.

A scale-up business has overcome the challenges of market readiness and has proven they are able to sustain profits with repeatable sales and customers. Instead, they are looking for ways to expand what’s already proven to be a winning formula. 

Level of Risk.

As a startup, the ability to pivot quickly is a great advantage. Identifying problems and addressing them in a timely manner is easier when the customer base is still small, and monitoring what’s working and what’s not can be handled by quick fixes and easy communications. It’s generally easier to add new features, gather meaningful feedback, and experiment. However, the risk is still high in the startup stage as your model isn’t tested yet. 

With a scale-up, the margin for error goes down dramatically as your product or service has already been tested and successful. Scale-ups are typically supported by outside investors because they have proven their reliability and the risk level is lower than a startup. 

Now that we’ve defined the DNA of startups and scale-ups, what makes them different, and what it takes to make that leap, let’s dig in on what it really means to be a startup.

What are the characteristics of a Startup?

Startups are a necessity for any tech ecosystem. Often, startups create new jobs and new industry growth in their specific sectors, driving positive economic outcomes and new opportunities.

Successful startups can look vastly different, depending on the product or service, but they typically have these traits in common:

• They can quickly adjust and adapt based on new information
• They are scrappy and dedicated
• They are tiny but mighty (small team doesn’t mean small results)
• They listen to their customers
• They continually add infrastructure and operations to improve
• They address problems quickly

If you’re a startup with these traits, then the likelihood you’ll succeed is high! 

What are the types of Startups?

While there are an array of ways to classify startups, we found 3 types that best fit the structure of what a tech startup might look like: Scalable Startups, Small Business Startups, and Buyable Startups.

1. Scalable Startups – This is a rapid-growth type of startup with high-revenue and high ROI. These startups are usually a tech-centric company that addresses a common need.  A scalable startup requires robust market research and “exploitable” market opportunities. Most startups aim to fit into this category.
2. Small Business Startups – You might be thinking, isn’t a small business the same as a startup? Technically, no. A small business startup is looking to maintain financial stability within their market, meanwhile maintaining steady growth. The goal is longevity not scalability. While increased sales and growth are in the short- and long-term vision and plan, the strategy is not focused on how to corner the market and take over. Sustaining and maintaining a solid client base, while producing a truly great product or service, is where these startups thrive.
3. Buyable Startups – A buyable startup is not a business that is built on the premise of longevity. A typical buyable startup is tech-focused and is quickly sold to a larger company for millions of dollars. Think of apps that are often acquired by larger conglomerates that have similar target audiences and shared services, but are niche products. While a buyable startup will exploit the market, the better outcome is to be sold instead of trying to compete for market share in a highly competitive market.

While there are more types of startups, these are the ones we typically see in the marketplace. We know that startups are great at generating jobs and innovation, but once they enter the scale-up phase, the likelihood of becoming a major job creator for the industry and the community increases greatly. The impact of a scale-up business will enhance diversity, growth, and prosperity for all, which is why these types of startups are integral to the tech ecosystem, especially in Indiana. 

When thinking about your startup, it might help see some other inspiring startup stories. Forbes has ranked their recommendations for best startup employers for 2022. The top five are in totally different industries, while the top 10 cover eight different industries. California and Massachusetts are the leaders in locations for startups, which likely indicates  strong diversity in those regions. 

Forbes also created the Next 1000 List, which is a “year-round initiative showcases the ambitious sole proprietors, self-funded shops and pre-revenue startups in every region of the country—all with under $10 million in revenue or funding and infinite drive and hustle.” This can be a great resource for growing startups and scaleups who are looking to be inspired. What’s most exciting is that there is representation from all over the country on this list, including nine Indiana small businesses. With this kind of press focusing on how integral small businesses are to local communities, it’s no wonder startups have become such a mainstay and backbone of all tech ecosystems. 

TechPoint’s own Mira Awards also has a focused category for startups as we recognize the vital importance of “trailblazing ventures which demonstrate the creative, strategic and innovative entrepreneurial spirit of Indiana’s technology community”. This highly attended and highly anticipated award allows us to showcase the Hoosier state’s most exciting entrepreneurial talents.

How and when to Scale Up?

It’s not easy to predict when your business will be ready to scale up. The timeframe indicated in a business plan doesn’t always present the way we plan, and things could move faster or slower than we anticipate. Let’s look at a couple of real-time examples that might help give a better sense of what it entails to hit the next level and actually be ready for scale. 

• Uber – It took this company less than 5 years to scale (which is incredibly fast for a company of its size). It was evident early on that the business model needed to be drastically overhauled with what . started off as a fairly unorganized work model. With the launch of services abroad, constant increase in employees, strong leadership, and dedicated investors (not just capital), this company was able to scale up in 2011 and has seen key and continued growth since.
• Hubspot – As one of the first inbound marketing companies. HubSpot was founded in 2006 at a time when alternatives to traditional marketing were slowly starting to come about. By 2007, they had already begun their scaling process by increasing sales and employees. In less than 10 years, they experienced an average revenue growth of 35.18%, which is incredible.

With these examples, scaling wasn’t a clear-cut plan for the immediate future, but market demand accelerated the growth of both of these companies. While it’s not always possible to plan for scaling, there are ways to prepare for those measured targets. Here are a few ways to help you prepare your startup to scale.

• Timing is everything: Don’t jump the gun or wait too long. 
• Cash flow is important: How much do you have in savings? Do you have solvency? It’s important to have cash to keep operations going.
• Focus on customer retention:  Loyalty, loyalty, loyalty. The more customers you can keep, the better off you’ll be. 
• Implement an effective marketing strategy: If you want to grow your business, you have to reach new and relevant audiences. Have a sound marketing strategy in place and be able to execute on it.
• Be clear on goals: Have goals and measure them on a regular basis.
• Automate what you can: Find ways to streamline operations as much as possible. 
• Build the right team: It’s so incredibly important, especially as a startup, to hire the right people. Define your hiring process and find the right people to support your business.

It can be scary to take the leap to scale your company and brand. Think back to when you came up with the idea and started your company; it’s a similar feeling, but with much more at stake. The good news is that you’ve already built your business. Consider some questions before you consider scaling.

1. Can you scale your brand successfully?
2. Have you got the right product or service?
3. Can you continue to innovate?
4. Can you delegate more?
5. Do you have the right people to support you?
6. Do you have the funding you need to go to the next level?

With scaling up there is a lot of reward, but the tremendous effort it takes to grow can be tough.  That’s why, at TechPoint, we believe it’s important to recognize what kind of work goes into building companies and our Mira Awards showcases that very kind of ambition and tenacity. As an example, the 2022 Scale-Up of the Year winner grew 46% in 2021 and is expecting double digit growth in 2022 as well. 

There are a lot of available resources out there for your business, especially in the Hoosier tech ecosystem to help get your company off the ground or to the next level. Get a business plan. Stick to it. Nurture a brand—one that really speaks to who you are and your company is. Find your customer base and start growing as much as possible. As long as your service or product meets the customer’s needs, your possibilities are endless.