When many people think about the future of work, they look to the start-up scene for clues. Where they really should be focusing is the scale-ups. These are the companies that are creating jobs and shaping local economies and where many of us will be working in the future. And they require far more attention from our leaders than they're getting.
Although scaled-up middle-market firms with annual revenue between $10 million and $1 billion represent less than 1 percent of U.S. firms, they employ 28 percent of the private-sector workforce nationwide, according to research by Dun & Bradstreet and American Express.
The reality is similar in many developed economies around the globe. In Canada only 1 percent of companies reach the 100- to 499-employee mark, but they had the strongest revenue growth of all size businesses from 2001 to 2013, with a 43 percent uptick, according to the Business Development Bank of Canada.
"Companies are like humans," said Claude Martel, founder and president of Inno-Centre, a leading Canadian accelerator that advises more than 300 companies a year. "They go through a natural life cycle. If they grow, it is because they are competitive. They represent tomorrow's economy."
Consider companies such as Airbnb, DropBox and WeWork. Airbnb, founded in 2008, now has more than 4,000 employees. DropBox, launched in 2007, now has about 1,900 employees. And WeWork, which came on the scene in 2010, now employs about 4,500 people. Cities that want to make sure their residents have ample job options in the future should be focused on nurturing scale-ups. This requires a different approach than sparking start-ups.
For leaders who want to turn start-ups to scale-ups, here is what is necessary.
Start-up leaders need to move beyond the visionary stage, especially with hiring decisions.
The primary task for many founding entrepreneurs is selling others on their vision so they can raise start-up capital, the lifeblood of any start-up. However, if a start-up is going to become a scale-up, the leadership team will need to change its mindset and focus on a new tasks.
One is operations. A start-up can often get away with handling functions, such as hiring and new product development, informally. In contrast, leaders of scale-ups will need to identify the four to six critical functions that need to be created to grow the company in an organized way. They may, for instance, need to add an HR department or formalize R&D. To make the most of the resources available to do this, leaders typically need to know how to set priorities and establish the one or two areas that are most pressing first. Most often, functions such as operations, sales and customer experience may have to get set up right away.
Leaders may need to get coaching to learn how to build the right lineup and change it mid-game if necessary. That means not only thinking strategically but tactically as well — or what I call "stractically."
Leaders also need to prioritize team building. Start-ups may need to bring in experienced executives to lead their core functions. If you are at $2 million to $3 million in sales, your CFO may be someone who came on board when the company was very small and function more like a comptroller than a traditional CFO. Similarly, the company may not have someone with the HR experience needed to scale up. "You are not equipped to do what you should do in order to grow," Martel said.
States with the highest density of late-stage start-ups
| State | Local capital per VC-backed start-up | Outside VC investment |
|---|---|---|
| Massachusetts | $6,800,000 | 26 percent |
| California | $5,500,000 | 21 percent |
| District of Columbia | $11,000,000 | 44 percent |
| Colorado | $381,000 | 23 percent |
| New York | $2,800,000 | 39 percent |
| Washington | $1,400,000 | 28 percent |
| Utah | $1,500,000 | 32 percent |
| Oregon | $61,000 | 22 percent |
Source: PitchBook Q2 2018 VC Ecosystems report
Training and recruiting are essential to helping a team grow. Leaders may need to get coaching to learn how to build the right lineup and change it mid-game if necessary. That means not only thinking strategically but tactically as well — or what I call "stractically." They also need to learn how to build a strong culture. Great people with the capability to thrive in a scale-up are going to be in demand.
Founders of start-ups may not have the network to attract this talent. That's where cities can come in. By creating and supporting economic development programs that connect start-ups in their communities with executive talent, they can help create the businesses we all want to see employing people in our communities. Many cities don't yet have a well-developed ecosystem to turn startups into scaleups, as a recent report by the financial data company PitchBook underlined, but some are ahead of the pack.
In the United States, Massachusetts had the highest density of late-stage start-ups — one indicator that an ecosystem is hospitable — followed by California and the District of Columbia.
Patience is critical; some of the best scale-up opportunities need years for their market to develop.
Even the hottest start-ups can only grow so fast. Many start-ups' transformation into scale-ups depends on market penetration of other products, so it is important to put into place systems — whether that is government-backed funding or subsidized rent — that gives them the runway they need to reach maturity. Deloitte defines scale-ups as companies that grow to more than $10 million in revenue by their fifth year in business, but there are many exceptions to the rule and some firms that reach this level and then fizzle out, so it's important to assess them on a case by case basis.
One scale-up that took time to mature is AddÉnergie, founded in 2009. The Quebec City-based scale-up, which now has an office in San Francisco, makes charging stations for electric cars. Although it has grown quickly, Martel said, "you cannot grow faster than the market is developing." Market conditions may need to hit a tipping point. This is especially true in sectors where infrastructure is needed for products to be sold.
Nonetheless, many scale-ups achieve substantial growth once their market does develop. Now that more people are driving electric cars, AddÉnergie has grown to more than 120 employees and has expanded its infrastructure into North America. It now runs more than 7,500 charging stations in both commercial and residential settings.
An innovative culture doesn't need to be lost. There are systems to preserve innovation.
One thing that often gets lost as a company scales is the creative spirit that contributed to a successful start-up. It's not hard for a company to hold onto its edge as an innovator if it puts into place disciplines such as creating an electronic system to track and follow up on innovative ideas that might otherwise get lost on sticky notes and whiteboards.
A surprising number of companies don't put systems like these in place and would benefit from the guidance of experts on scale-ups so they don't evolve into corporate bureaucracies. Quasi-public regional innovation centers like those in Canada can be invaluable in helping scale-ups grow without losing their entrepreneurial mojo.
Bringing together resources from both universities and government, they offer leaders access to advice from seasoned entrepreneurs in residence, extensive angel networks and programs to help with team- and culture-building. Outside of the regional innovation centers, programs like Creative Destruction Lab at University of Toronto and the Council of Canadian Innovators are also offering much-needed strategic guidance, but we need more of them.
The future of work potentially could be very bright for many people, including those whose jobs are being lost to forces like automation, but only if we embrace scale-ups in an organized way.
— By Ken Tencer, CEO of consulting firm Spyder Works and author of two books on business innovation, "The 90% Rule" and "Cause a Disturbance"
