Sitting around the table at our final InnoGames board meeting before the transition to MTG, I wondered just how likely it was that three university drop-outs in Germany could found a start-up with their pocket money, grow it to 500 employees and several hundred million in revenues, then exit for over $300m in one of the biggest tech exits in Germany in 2016.
The answer: not very likely. In fact, according to the US statistic quoted in Scaling Upby Verne Harnish, the likelihood that an entrepreneur will build a very large business with over $500m in revenue is about 1:11,200 - out of 28 million firms in the US only about 2,500 make it to a scale of $500m in revenue. That’s roughly the same as the chance of one of us being struck by lightning in our lifetime at 1:12,000. Without a doubt these are some pretty disheartening odds.
Many of the firms counted might be lifestyle businesses and not every entrepreneur aspires to build a very large company, but scaling over time continues to be fraught with risk and pain. Even for successful companies that make it to say $10m in revenues, only 15% of those will hit the $50m mark.
At the same time, as we look across our portfolio we see companies managing to master the scale-up challenge with higher probabilities than those outlined above. In our European Fund I, 80 per cent of the portfolio has made a transition to the next category of revenue level (e.g., from >$1m to >$10m) and over a third have passed the $50m mark. We certainly spend time choosing specific businesses that are likely to scale better, but our overall hypothesis is that successful outcomes can be influenced despite the fact that things like market timing play a critical role as well.
Studying scale-up challenges over time is especially worthwhile here in Europe. More and more companies are embarking on a path to grow from 30-50 employees to 500+, and from a couple of million of revenues to $100m+, and ultimately $1bn+. Understanding entrepreneurial ambition and company scale-up challenges should help our ecosystem do better on average and in absolute. And for some it might clarify what path they are on e.g., attempting to be one of the rare $10bn outcomes or building something more moderate but equally gratifying.
Here are some common questions entrepreneurs should explore as they go through the scale-up challenge:
1) Market – How big is my market, and more importantly, how big will my market get? Some of the biggest opportunities are in markets that are just forming (e.g. Criteo and the market for re-targeting) where new category winners are created in large emerging categories
2) Sales – Is the customer well understood and go-to-market model scalable beyond the first couple of millions of sales across geographies and market segments (e.g., SME, enterprise)?
3) Product – How unique is the product offering and agility to innovate especially as large companies focus on the segment as it proves ever more successful?
4) Team – Is the core team, including the founders, aligned on the mission and definition of success? Are the founders willing to share equity upside to bring onboard the talent that can help scale the company 10x or 100x?
5) Funding – Do I have the right patient capital to support me through different phases of growth and are we aligned on what success looks like and over what period? Successful stories can take a while - Eight Roads has been an investor in Alibaba for coming up to 18 years
Learnings from successful founders also need to be further understood and then propagated. Initiatives including the ScaleUp Institute and Upscale help entrepreneurs tackle the key questions and recycle the nuggets of knowledge from successful (and importantly unsuccessful) entrepreneurs, their advisors and investors. But lots more should be done in Europe as we work to close the 30-year maturity gap with the US, with a further challenge of collecting and sharing the insights across the highly fragmented talent pool across numerous European cities.
With this in mind we’ve been working on a piece of research. We’ve talked to 300 entrepreneurs who’ve founded businesses with $1m in annual revenue, in Spain, France, Germany, UK, Sweden, and Denmark, about the ambition that drives them and the scale up challenges they have tackled as their businesses have grown. We’re going to weave this together with advice and lessons from some of our champion entrepreneurs – those individuals who have built record-breaking European tech businesses over the past decade.
We’re looking forward to sharing all of this with you over the coming months. If you would like to hear more about it please click here to leave your email address.