Vlerick 2019 Final Copy

European Scale-Up Report

EUROPEAN SCALE-UP REPORT


INTRODUCTION This report, which has been prepared by Vlerick Business School for Scale-Ups.eu, provides a unique look at the ins and outs of European scale-ups. Part A of this report offers a helicopter view of the European scale-up landscape by using information collected on 80,451 scale-ups based in eight European countries – Denmark, Finland, France, Germany, Luxembourg, the Netherlands, Sweden, and the United Kingdom. For Part B, which provides more fine-grained insights into the management practices of European scale-ups, we gathered survey data from 124 of these scale-ups. Overall, the key insights of this report are:

• European scale-ups are active in a variety of industries. Nevertheless, scale-ups active in typical industries like e-commerce and ICT are ahead of the pack in terms of both sales and employment growth.

• About half of European scale-ups aspire to continue on their high growth path. Scale-ups with stronger growth aspirations internationalize more often, especially if they are backed by external equity investors.

• ICT scale-ups have stronger growth aspirations than scale-ups in other industries and they pursue these aspirations with ambitious marketing and sales practices.

• A significant share of European scale-ups are highly innovative, yet many are not. Moreover, scale-ups do not shy away from established markets and consider their customer service to be their biggest key advantage.

• Finding and retaining high quality employees is the biggest challenge for scale-ups without external equity, while both funding and market access are the biggest challenges for scale-ups with external equity.

• Scale-ups with external equity demonstrate superior recruitment and talent management practices compared to scale-ups without external equity. The former are more likely than the latter to recruit beyond their home country, to use recruiting agencies and/or head hunters, and to have an onboarding process in place.

• One in three European scale-ups is advised by at least one independent director. Audit, exit and remuneration committees are extremely rare.

• One in three European scale-ups has considered a possible harvesting or exit strategy. A sale to another firm is regarded as the most likely harvesting/exit route.

We hope you find these insights valuable. Veroniek Collewaert

Professor of Entrepreneurship

Sophie Manigart Professor of Entrepreneurial Finance

Thomas Standaert

Postdoctoral researcher


INDEX PART A: THE EUROPEAN SCALE-UP LANDSCAPE ............................................................... 1

PART B: MANAGEMENT PRACTICES OF EUROPEAN SCALE-UPS .............................. 6

About the surveyed scale-ups .................................................................................................. 6

Growth prospects of European scale-ups ............................................................................. 8

Growth aspirations ......................................................................................................................... 9

Five key challenges faced by European scale-ups ............................................................ 11

First challenge: Finding and retaining employees ............................................................ 12

Lessons from the employees challenge ........................................................................... 16

Second challenge: Funding ....................................................................................................... 16

Lessons from the funding challenge .................................................................................. 18

Third challenge: Market access ................................................................................................ 18

Marketing .......................................................................................................................................... 18

Sales .................................................................................................................................................... 21

Lessons from the market access challenge ................................................................... 26

Fourth challenge: Executive leadership ............................................................................... 26

Lessons from the executive leadership challenge ....................................................... 29

Fifth challenge: Infrastructure ................................................................................................. 30

Lessons from the infrastructure challenge ...................................................................... 31

Harvesting/exit ............................................................................................................................... 31

Conclusion ....................................................................................................................................... 33

Appendix ............................................................................................................................................. i

Method .............................................................................................................................................. i


1

PART A: THE EUROPEAN SCALE-UP LANDSCAPE1

This report focuses on European scale-ups founded between 2007 and 2013. In order to be considered as a scale-up, companies had to (i) have raised at least 1 million USD in funding since foundation and had at least one funding event since 2013, or (ii) have realized an average annualized growth of at least 20% per annum over a three year period (OECD definition). Growth could be in terms of sales, number of employees or cost of employees. Scale-ups active in real estate or in financial services are excluded.

More than 80,000 scale-ups were identified in the eight European countries covered in this report. This part analyses the industries in which the scale-ups are active, their sales and employment levels and the growth they realized in sales and employment.

Only one in ten European scale-ups is active in the ICT industry

A first important observation is that the 80,000 European scale-ups are active in a wide variety of industries. Based on the industry classification by Invest Europe, the largest proportion of scale-ups is active in Business products and services (30%), followed by Consumer goods and services (26%), Construction (17%), ICT2 (12%), Transportation (6%), and Biotech and healthcare (4%). Scale-ups are hence not confined to the traditional high technology industries, but are driven by large societal trends such as the take-up of e-commerce or the ageing society. It should be noted that ICT may be used by scale-ups in any industry to enhance their offer to their customers; scale-ups in the ICT industry have ICT as their core focus.

1 A detailed description of the method used to identify European scale-ups is provided in Appendix. 2 The ICT industry includes scale-ups selling software, computer hardware and services, telecom hardware and services, or online platforms.


2

Industry matters for scale-up size and growth

The average European scale-up generated approximately 1.7 million EUR in sales in 2017 (the most recent year for which company information is publicly available). This represents a 30% growth rate vis-à-vis the previous year. Scale-ups in the Consumer goods and services industry had higher sales levels and the highest average growth in sales (38%) in 2017. This is driven by some hugely successful B2C e-commerce scale-ups, like Showroomprivé in France, Delivery Hero, Zalando and HelloFresh in Germany, and Just Eat in the United Kingdom. The sales growth in the Consumer goods and services industry has largely outpaced sales growth in any other industry. The second industry in terms of scale-up sales is the ICT industry, closely followed by the Transportation industry.

30%

26%17%

12%

6%4% 6%

European scale-ups are active in various industries

Business products and services

Consumer goods and services

Construction

ICT

Transportation

Biotech and healthcare

Other


3

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Consumer goods and

services

ICT Transportation Business products and

services


Construction

Sales by European scale-ups (by industry)

Average sales in 2016 (EUR) Average sales in 2017 (EUR)

15%

18%

18%

20%

21%

38%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Construction

Transportation


ICT



Relative sales growth in European scale-ups during 2016-2017 (by industry)


4

The average European scale-up employed 15.6 full-time equivalents (FTEs) at the end of 2017, which is 14% higher than the size of the workforce at the end of 2016. Scale-ups in the Biotech and healthcare industry employ the highest number of people (27.2 FTEs). This is driven by large healthcare providers serving an aging society, such as Arjessa, Countrywide Care Homes, and Viapath, and human capital intensive biotech companies like Adaptimmune, BioNTech, and Immunucore. Interestingly, scale-ups active in the ICT (25%) and Consumer goods and services (24%) industries grow their employee base at a higher rate compared to scale-ups in Biotech and healthcare (9%).

* The decrease in the average number of FTEs for the Construction industry is driven by three outliers. We removed these outliers for the calculation of the employment growth rates.

0

5

10

15

20

25

30


ICT Consumer goods and

services

Business products and

services

Transportation Construction

Employment in European scale-ups (by industry)*

Average number of FTEs in 2016 Average number of FTEs in 2017


5

9%

11%

14%

16%

24%

25%

0% 5% 10% 15% 20% 25% 30%


Construction

Transportation



ICT

Relative employment growth in European scale-ups during 2016-2017 (by industry)


6

PART B: MANAGEMENT PRACTICES OF EUROPEAN SCALE-UPS In order to gather further insights into the management practices of European scale-ups, we conducted a survey between February and June 2019. Key informants in 124 scale-ups, of which 84% are CEO and the remainder other members of the entrepreneurial team, provided information on their management practices. For each of the items discussed, we analysed whether there were differences across scale-up age, size, industry, level of growth aspirations, previous entrepreneurial experience (77% of scale-ups) and use of external equity3 (30% of scale-ups). The major factor differentiating between management practices in scale-ups proved to be whether or not the scale-up has raised external equity. From our survey, we do not know whether external equity-funded scale-ups are already different before raising equity and therefore have a higher probability of raising equity, or whether the changes are pushed by the equity investors. Nevertheless, non-equity funded scale-ups might be inspired by the more professional management practices of external equity-funded scale-ups, which we will highlight throughout this report. Where possible, we will compare scale-up management practices in our survey with those in other countries. Our findings are hence benchmarked with findings on comparable scale-ups in the United Kingdom (ScaleUp Institute4), France (KPMG5), and Australia (KPMG6).

ABOUT THE SURVEYED SCALE-UPS By the end of 2018, the average scale-up in our sample was 8.5 years old, employed 21.4 full-time equivalents (FTEs), and generated annual sales of approximately 2.5 million EUR. The responding scale-ups are hence somewhat larger than the average European scale-up in 2017. An average employee in a scale-up generated 211,000 EUR in sales in 2018. This ratio is higher for older scale-ups and scale-ups in the Business products and services industry. In comparison, ScaleUp Institute found a very similar 208,000 EUR of sales per FTE in their survey of UK scale-ups

3 Following Drover et al. (2017), we define scale-ups with external equity as having raised funding from venture capital funds, business angels, corporate/strategic investors, incubators/accelerators, and/or through crowdfunding campaigns (Drover, W., Busenitz, L., Matusik, S., Townsend, D., Anglin, A., & Dushnitsky, G. (2017). A Review and Road Map of Entrepreneurial Equity Financing Research: Venture Capital, Corporate Venture Capital, Angel Investment, Crowdfunding, and Accelerators. Journal of Management, 43(6), 1820-1853.). 4 ScaleUp Institute (2018). Annual ScaleUp Review. Available at http://www.scaleupinstitute.org.uk/wp-content/uploads/2018/11/SUI_Review_2018.pdf. 5 KPMG (2018). Hyper-croissance: le défi de l’ecosystème entrepreneurial français. Available at https://home.kpmg/content/dam/kpmg/fr/pdf/2018/10/fr_etude_entreprises_hypercroissance_v2.pdf. 6 KPMG (2019). The Startup Board Report: A new playbook for founders & board members of Australian startups. Available at https://assets.kpmg/content/dam/kpmg/au/pdf/2019/startup-board-report-2019.pdf.


7

The industry distribution of the scale-ups in our sample is similar to that of the population of European scale-ups identified in Part A. The sample comprises scale-ups in Business products and services (31%), Consumer goods and services (28%), ICT (22%), Construction (7%), Transportation (5%), and Biotech and healthcare (5%). 49% (21%) of the scale-ups indicate that they directly sell their products or services exclusively to other businesses (consumers), with the remainder serving both groups of customers.

A significant share of scale-ups are highly innovative, yet many are not

While scale-ups are active in various industries, it is interesting to examine whether innovativeness is a common feature of scale-ups across industries. A first indicator of a scale-up’s innovativeness is its annual expenditures on research and development (R&D). The average scale-up in our sample spent approximately 141,000 EUR on R&D in 2018, or 6% of annual sales. A higher ratio of R&D to sales is present in scale-ups in the ICT or Biotech and healthcare industries, in scale-ups with stronger growth aspirations, and in scale-ups with external equity investors. A second indicator of a scale-up’s innovativeness is the perceived degree of newness offered by the product or service when first introduced on the market. One in four scale-ups provides products or services that are new to the entire world, while one in three scale-ups indicates that its products or services are not novel. This finding suggests that a significant share of scale-ups are highly innovative, yet many are not. Unsurprisingly, more novel products or services are positively correlated with higher ratios of R&D to sales in scale-ups. This suggests that the ratio of R&D to sales and the degree of newness of the product or service are related measures of a scale-up’s innovativeness. More novel products or services are especially prevalent in the ICT industry, in scale-ups with stronger growth aspirations, and in scale-ups with external equity investors.

31%

28%

22%

7%5%5%

2%

Industry distribution of the surveyed scale-ups



ICT

Construction

Transportation


Other


8

GROWTH PROSPECTS OF EUROPEAN SCALE-UPS While the scale-ups in our sample all have a track record of high growth, this does not necessarily imply that they will show the same high growth rates in the future. Indeed, future growth is affected by the growth aspirations held by the entrepreneurial team as well as by the availability of resources and opportunities for growth. It is well established that, even with the right resources in place, a scale-up will not grow if the entrepreneurial team does not aspire to.7 Having ambitious, growth-oriented entrepreneurs is hence a necessary condition to realise high growth, but not a sufficient condition. In order to fully realise strong growth aspirations, resources such as employees and money are crucial ingredients. Below, we provide insights into the growth prospects of European scale-ups by answering the following two questions: 1) do scale-ups aspire to grow in the future, and 2) what keeps scale-ups from achieving future high growth?

7 Wiklund, J., & Shepherd, D. (2003). Aspiring for, and Achieving Growth: The Moderating Role of Resources and Opportunities. Journal of Management Studies, 40(8), 1919-1941.

20%

22%

23%

35%

0% 5% 10% 15% 20% 25% 30% 35% 40%

New to my local community

New to my home country

New to the entire world

No novelty

How do you rate the degree of newness of your product or service offered when first introduced into

the market?


9

GROWTH ASPIRATIONS

Growth aspirations are stronger for ICT scale-ups, scale-ups with external equity and scale-ups led by teams with entrepreneurial experience

The median scale-up in our sample is ambitious: it aspires to double its current headcount and almost triple its current annual sales in 5 years’ time. This corresponds with average annualized growth rates of 15% (24%) in employment (sales). About half of scale-ups hence aspire to continue on their high growth path, while the other half is satisfied with lower growth. Growth aspirations are stronger for sales than employment, indicating that scale-ups mainly aim to boost the average sales per employee and plan to enhance productivity. Growth aspirations are strongest for scale-ups in the ICT or Biotech and healthcare industries. In contrast, growth aspirations are weaker for scale-ups in the Business products and services industry. Scale-ups that have attracted external equity aspire to grow sales with more than 50% per year, compared to 15% annual sales growth for scale-ups without external equity. Finally, entrepreneurial teams that already have experience with a previous start-up also have stronger growth aspirations. They aspire for 26% annual sales growth, compared with 16% for teams without entrepreneurial experience. Scale-ups with strong growth aspirations are hence mainly active in the ICT or Biotech and healthcare industries, have raised external equity and have entrepreneurial experience.

Growth aspirations

Employees

Funding

Market access

Executive leadership

Infra-structure


10

* Due to the limited number of responses, the aspired annualized sales growth for the Biotech and healthcare industry should be interpreted with caution. The number of responses for the Transportation industry is too low to conduct reliable analyses.

20%

21%

16%

48%

122%

0%

10%

15%

28%

26%

0% 20% 40% 60% 80% 100% 120% 140%

Construction



ICT


Growth aspirations (by industry)*

Aspired annualized employment growth Aspired annualized sales growth

15%

53%

9%

27%

0% 10% 20% 30% 40% 50% 60%

Scale-ups without external equity

Scale-ups with external equity

Growth aspirations (by ownership structure)



11

FIVE KEY CHALLENGES FACED BY EUROPEAN SCALE-UPS

Different ownership structure, different challenges

Growing a company is a challenging task and requires access to sufficient resources, next to having the ambition to grow. Five potential challenges faced by European scale-ups were identified. Finding and retaining high quality employees is considered to be the biggest challenge, as indicated by 30% of scale-ups. This is closely followed by raising funding (28% of scale-ups). Another 24% of scale-ups consider market access to be the biggest challenge, while executive leadership and infrastructure are regarded as the biggest challenge by only 11% and 7% of scale-ups, respectively. Scale-ups that raised external equity find both funding and market access to be the biggest challenges, while they consider finding and retaining employees and executive leadership to be less challenging compared to scale-ups without external equity.

16%

26%

11%

15%

0% 5% 10% 15% 20% 25% 30%

Entrepreneurial teams without entrepreneurialexperience

Entrepreneurial teams with entrepreneurialexperience

Growth aspirations (by entrepreneurial team)



12

The remainder of this report delves deeper into these challenges by revealing how scale-ups deal with them. This is a crucial first step in the identification of areas in which European scale-ups can further professionalize, in order to improve their growth prospects. Special attention is paid to practices in scale-ups backed by external equity investors. These investors have been linked to a variety of professionalization measures8, as suggested by the alleviation of employees and executive leadership challenges in scale-ups with external equity. Our results highlight that European scale-ups do indeed act more professionally when an external equity investor is on board. Scale-ups without external equity can hence learn from their peers.

FIRST CHALLENGE: FINDING AND RETAINING EMPLOYEES As a start-up grows into a scale-up, the entrepreneurial team is faced with employee-related questions on matters such as hiring and firing, but also retaining the corporate culture, developing an organizational structure and communication processes, designing compensation, and performance management. Below, we zoom in on how European scale-ups deal with recruitment and talent management.

Effective recruitment channels remain too often untapped

As a company grows, its need for high quality employees increases. It is the number one challenge for most European scale-ups. It is therefore surprising that only 40% of scale-ups are recruiting employees outside their home country. This share is

8 Hellmann, T., & Puri, M. (2002). Venture Capital and the Professionalization of Start-Up Firms: Empirical Evidence. Review of Financial Economics, 57(1), 169-197.

4%

4%

36%

36%

20%

8%

14%

19%

25%

33%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Infrastructure

Executive leadership

Market access

Funding

Employees

What is the biggest challenge you face to accelerate your business plan?

Scale-ups without external equity Scale-ups with external equity


13

lower than the 64% of scale-ups in the UK that employ people from overseas (ScaleUp Institute). Scale-ups with stronger growth aspirations or with external equity investors are more likely to recruit internationally: 58% of external equity-funded scale-ups do recruit abroad, compared to only 32% of scale-ups without external equity. Not surprisingly, international recruitment practices are also mainly found in the ICT or Biotech and healthcare industries. In addition, scale-ups are more likely to recruit internationally if they generate sales abroad or, unsurprisingly, if they aim to expand internationally.

In a similar vein, only 25% of scale-ups use recruiting agencies and/or head hunters to reach out to potential employees. These organizations are more frequently used by larger scale-ups and scale-ups with external equity investors (46% versus 17%).

32%


58%


Have reached out to potentialemployees beyond their homecountry

Have not reached out to potentialemployees beyond their homecountry


14

Talent management practices leading to suboptimal use of employee potential

When scale-ups have eventually hired the right employees, it is important to have a thought-trough onboarding process. A failure to do so might have a long-lasting negative impact on engagement and retention, as well as employee performance. However, only 36% of the scale-ups in our sample have put an onboarding process in place. Again, this share is higher for scale-ups with external equity investors (46% vs 32%). Onboarding processes are more likely to be skipped by smaller scale-ups, which means that scale-ups that are tighter on resources are more likely to let new recruits figure it out on their first day.

17%


46%


Have used recruiting agenciesand/or head hunters

Have not used recruitingagencies and/or head hunters


15

When the workforce’s efficiency decreases, as is the case with sales contractions, scale-ups have to decide on the speed at which they adapt the size of their workforce. The large majority (78%) of European scale-ups prefer an approach of firing employees slowly rather than rapidly. However, scale-ups with external equity investors or stronger growth aspirations seem to be more willing to lay off personnel quickly. Interestingly, there is no link between national employment protection legislations and firing practices.

32%


46%


Have an onboarding process inplace

Do not have an onboardingprocess in place

16%


36%


Fire employees fast

Fire employees slowly


16

Lessons from the employees challenge

The analysis of the recruitment and talent management practices of European scale-ups provides an explanation for the differential degree to which scale-ups with or without external equity consider finding and retaining employees to be challenging. External equity investors play an influential role in the professionalization of HRM practices, leading their investee companies to recruit employees beyond their home country, use recruiting agencies and/or head hunters, put an onboarding process in place, and apply flexible firing practices. Given the importance of effective HRM practices for high growth9, scale-ups without external equity would highly benefit from developing a professional HR unit.

SECOND CHALLENGE: FUNDING

Four in ten scale-ups remain fully internally funded

In order to fund the necessary investments to fuel their growth, scale-ups can decide to tap into their own financial means or use a combination of internal and external sources of financing. By the end of 2018, more than one in three (38%) of all scale-ups in our survey had solely relied on internal funding, which is notably higher than in the UK (26%) (ScaleUp Institute). Alternatively, 62% of the scale-ups had used at least one external financing source. Bank debt (39%) is most frequently used, followed by subsidies (27%), other external financing sources including friends and family (19%), venture capital (17%), corporate/strategic investors (15%), business angels (14%), and accelerators/incubators (8%). Interestingly, crowdfunding, an alternative source of financing that has attracted a lot of interest from policy makers, is only used by one of the scale-ups in our sample.10 Overall, 30% of the scale-ups in our survey raised external equity, which is identical to the share (29%) of scale-ups in the UK (ScaleUp Institute). Scale-ups in the ICT or Biotech and healthcare (Business products and services or Consumer goods and services) industries are particularly more (less) likely to raise external equity. Compared to the population of ‘average’ European SMEs11, scale-ups show a similar frequency of use of bank debt, but a higher propensity to raise subsidies as well as external equity. European banks hence do not seem to discriminate against scale-ups.

9 Demir, R., Wennberg, K., McKelvie, A. (2017). The Strategic Management of High-Growth Firms: A Review and Theoretical Conceptualization. Long Range Planning, 50(4), 431-456. 10 Since there is only one scale-up using crowdfunding, we did not further examine this external financing source. 11 Source: European Federation of Accountants and Auditors for SMEs (2019)


17

On average, the first investment by an incubator/accelerator, business angel or venture capital fund takes place when the scale-up is 2 to 3 years old, while financing from banks and corporate/strategic investors enters the scale-up’s financing mix when it is 4 to 5 years old. This is in line with the financial growth cycle, in which different sources of capital are optimal at different points in the cycle12. The first use of subsidies is scattered throughout the scale-up’s growth cycle, which could be explained by the existence of different types of subsidies. E.g. R&D subsidies might be more relevant early in the growth cycle of the scale-up, while export subsidies might be more relevant later, when international expansion starts. The average amount raised from the different external financing sources is highest for corporate/strategic investors (4,200,000 EUR), followed by venture capital funds (3,200,000 EUR), business angels (1,800,000 EUR), banks (600,000 EUR), other external financing sources (500,000 EUR), subsidies (300,000 EUR), and incubators/accelerators (21,000 EUR). Corporate/strategic investors, however, are mainly attracted to innovative scale-ups for ‘technology-window’ and ‘competency-enhancing’ purposes, which might come at the expense of the growth of the investee company.13 A well-developed business angel and venture capital market is hence important to foster scale-ups, as these investors provide significant

12 Berger, A.N., & Udell, G.F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22(6-8), 613-673. 13 Bertoni, F., Colombo, M.G., & Grilli, L. (2013). Venture capital investor type and the growth mode of new technology-based firms. Small Business Economics, 40(3), 527-552.

39%

27%19% 17% 15% 14% 8% 1%

EUR - EUR 500,000 EUR 1,000,000 EUR 1,500,000 EUR 2,000,000 EUR 2,500,000 EUR 3,000,000 EUR 3,500,000 EUR 4,000,000 EUR 4,500,000

0%5%

10%15%20%25%30%35%40%45%

Bank debt

Subsidies

Other e

xtern

al financin

g…

Venture

capita

l

Corpora

te/s

trate

gic in

vesto

r

Business an

gel

Accelera

tor/i

ncubator

Crowdfu

nding

Use of external financing sources

Frequency of use Average amount raised


18

amounts of funding and have strong incentives to support the growth of their investee companies.14

Lessons from the funding challenge

The analysis of the funding sources of European scale-ups reveals three important phenomena. First, a significant share of scale-ups are not able or not willing to raise external financing. This restrains their growth prospect to what they can finance with internally generated cash flows. Scale-ups are hence advised to consider external financing sources and/or improve their attractiveness to external finance providers. Second, when large amounts of money are needed, venture capital and corporate/strategic investors are key, followed by business angels. Other financing sources, while available to a larger proportion of scale-ups, do typically provide smaller amounts of money. A well-functioning venture capital market is hence key to foster ambitious scale-ups. Third, more than a third of the scale-ups that already raised external equity consider funding to be their biggest challenge. This finding provides evidence for the existence of a scale-up gap15 in Europe, in which scale-ups that raised early rounds of external equity have difficulties raising larger follow-on rounds.

THIRD CHALLENGE: MARKET ACCESS

MARKETING Defining a marketing strategy entails two consecutive steps: first determining a target market and then developing a marketing mix to meet the needs of that market.

Scale-ups are able to thrive in competitive markets

Almost half (48%) of the scale-ups faced multiple incumbents in their domestic target market when starting their business. This suggests that many scale-ups do not shy away from established markets. Only 22% of scale-ups were the first to enter their target market with their specific product or service. ICT scale-ups and scale-ups with more novel products or services in particular seem to face less competition.

14 Colombo, M.G., Mustar, P., Gervasoni, A., Luukkonen, T., Tykvova, T., Marti Pellon, J., Mickiewicz, T., Manigart, S., & Clarysse, B. (2011). Venture Capital: Policy Lessons from the VICO Project. Available at https://www.vlerick.com/~/media/Corporate/Pdf-knowledge/Venture%20Capital_VICO/Venture%20Capital_VICO.pdf. 15 Duruflé, G., Hellmann, T., & Wilson, K. (2018). From Start-Up to Scale-Up: Examining Public Policies for the Financing of High-Growth Ventures. In C. Mayer, S. Micossi, M. Onado, M. Pagano, & A. Polo (Eds.), Finance and Investment: The European Case, (pp. 179-219). Oxford: Oxford University Press.


19

Customer service excellence as a driver of high growth

The most important key advantage or unique selling proposition (USP) of scale-ups’ current product or service offering is customer service (35% of scale-ups), followed by engineering (22%), and the scale-up’s brand (19%).

ICT scale-ups demonstrate more ambitious marketing practices

40% of the scale-ups state that they have formalized their vision and direction of their product offering over time through the creation of a product roadmap. Product roadmaps are more prevalent in ICT scale-ups, in scale-ups with stronger growth aspirations and in scale-ups with external equity investors (69% versus 28%). In contrast, only 22% of scale-ups in the Business products and services industry have a product roadmap.

1%

1%

2%

4%

5%

16%

22%

48%

0% 10% 20% 30% 40% 50% 60%

Multiple non-highly-funded startups

1 highly-funded startup

1 non-highly-funded startup

Multiple highly-funded startups

1 incumbent

Fragmented

None

Multiple incumbents

What did the competition in your home country look like when founding the company?

7%

16%

17%

17%

19%

22%

35%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Manufacturing

IP

Partnerships

Network effects

Brand

Engineering

Customer service

Which aspects did you consider to be a key advantage (OR: your USP) compared to your competition?

(multiple answers possible)


20

The development of products is overseen by a product manager in 17% of the scale-ups. Product managers are more prevalent in scale-ups with a product roadmap, in scale-ups with stronger growth aspirations, in scale-ups with external equity investors (38% versus 8%), in scale-ups with a larger headcount, and in ICT scale-ups.

28%


69%


Have a product roadmap

Do not have a product roadmap

8%


38%


Product manager is a separatefunction in the organisation

Product manager is not aseparate function in theorganisation


21

We further captured information on scale-ups’ digital marketing efforts. More specifically, we asked them how often they perform a user experience/user interface (UX/UI) audit. Three in four scale-ups perform a UX/UI audit on an annual basis or less frequently. ICT scale-ups perform UX/UI audits more frequently than scale-ups in other industries. Almost half (46%) of scale-ups adjust their pricing model on an annual basis, while the remainder is evenly split between a higher and lower frequency. The frequency of adjustment is associated with the scale-up’s industry: scale-ups in the ICT (Business products and services) industry adjust their pricing model more (less) frequently compared to scale-ups in other industries.

SALES An effective sales strategy is essential to build a growing company. When crafting a sales strategy, companies should decide what sales methods to use, ensure the availability of the required resources, create a sales plan and manage sales performance. Below, we provide insights into the implementation of sales strategies by European scale-ups.

Low frequency of cold calling

The most widely used lead generation methods are referrals from existing clients (71%), warm leads (e.g. website traffic, conferences) (45%), online engagement with prospects (44%), cold calling (34%), and re-engagement of old clients (34%). ICT scale-ups use all of the aforementioned lead generation methods more frequently than scale-ups in any other industry. Traditional media are not relevant in the lead generation strategy of European scale-ups. The biggest differences are found for online engagement with prospects (65% for ICT scale-ups vs 36% for scale-ups in other industries) and warm leads (61% for ICT scale-ups vs 39% for scale-ups in other industries).

6%

34%

34%

44%

45%

71%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Traditional media (e.g. radio, newspaper)

Re-engagement of old clients

Cold calling

Online engagement with prospects

Warm leads (e.g. website traffic, conferences)

Referrals from existing clients

How do you generate leads? (multiple answers possible)


22

Two in three scale-ups have a sales team

An important element of the sales strategy is deciding on whether the scale-up will recruit a dedicated sales team. Only two in three scale-ups have a dedicated sales team, comprised of, on average, 4 FTEs, which accounts for 47% of the total workforce. The size of the sales team is positively correlated with the size of the company, while its share in the total workforce is negatively correlated with the latter. A regression analysis suggests that, on average, a sales team of 2 FTEs is required to generate 1 million EUR of annual sales. In order to then increase annual sales with another 1 million EUR, one additional sales person is needed on average. The sales cycle takes between 1 and 6 months in half (49%) of the scale-ups, while the remainder is evenly split between a shorter and longer sales cycle. Customers are very loyal. For 45% of scale-ups, the yearly churn rate, or the percentage of customers that were lost during 2018, is less than 1%, while another 36% lost less than 10% of customers.

Stronger sales incentives in ICT scale-ups

Sales rewards can accelerate performance of the sales team and help to attract and retain the best sales people. Nevertheless, sales people solely receive base pay in 30% of the scale-ups. Good sales performance by sales people in these scale-ups is translated into higher salaries. Variable pay only or a combination of variable and base pay to reward sales results is used in 40% and 23% of scale-ups, respectively. The use of variable pay is positively (negatively) associated with scale-ups in the ICT (Business products and services and Consumer goods and services) industry. The most frequently used form of variable pay is a cash bonus (93%), followed by company shares (13%) and pension plan deposits (13%). The use of company shares as a sales reward is not popular, but nevertheless more prevalent in scale-ups with external equity investors or with stronger growth aspirations.

6%

23%

30%

40%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Other

Combination of base pay and variable pay

Base pay only

Variable pay only

How do you reward sales results?


23

One in five scale-ups has acquired at least one other company

Next to selling products or services directly, scale-ups can boost their growth by partnering with other companies or, alternatively, by outright buying them. Joint ventures and/or strategic alliances with other companies are used by one in three scale-ups. ICT scale-ups are more than twice as likely to engage in joint ventures and/or strategic alliances compared to scale-ups in other industries. Acquisitions are the second most frequently used mode of non-organic growth (18% of scale-ups), significantly higher than the 3% found by the Rising Star Monitor16 in a sample of Belgian young, high-potential ventures. This suggests that acquisitions are more prevalent when companies enter their high growth phase. Licensing out (10% of scale-ups) and franchising (7% of scale-ups) are less frequently used. Interestingly, licensing out is only used by ICT scale-ups, scale-ups in the Consumer goods and services industry, and in scale-ups with external equity.

About four in ten scale-ups generate sales abroad

In a fragmented European market, international sales are important to fuel growth in scale-ups. Nevertheless and surprisingly, less than half (43%) of the scale-ups had international sales at the end of 2018. This is comparable with international activities of French scale-ups (40%), but significantly lower than those in UK scale-ups (54%). If selling internationally, the average scale-up is very international: it generates 40% of its total sales in 13 foreign markets. Internationalization patterns differ by industry, growth aspirations, the size of the domestic market, and the presence of external equity investors. First, a higher share of scale-ups in the ICT (71%) or Biotech and healthcare (75%) industries has international sales. For internationally active ICT scale-ups, international sales account for a larger share of

16 Collewaert, V., Manigart, S., & Subotic, M. (2018). Rising Star Monitor: The many faces of growth. Available at https://www2.deloitte.com/content/dam/Deloitte/be/Documents/technology/DeloitteTechnologyFast50/RSM%202018%20report%20final.pdf.

7%

10%

18%

33%

0% 5% 10% 15% 20% 25% 30% 35%

Franchising

Licensing out

Acquisitions

Joint ventures/strategic alliances

Use of non-organic modes of growth


24

their total sales compared to other internationally active scale-ups (48% vs 36%). Second, stronger growth aspirations in scale-ups are both associated with a higher likelihood of internationalization and, conditional on internationalization, a larger share of international sales. Based on a median split, scale-ups with strong growth aspirations internationalize more often (69% vs 27%) and, conditional on internationalization, generate more sales abroad (46% vs 31%). Third, scale-ups based in countries with larger domestic markets – using the country’s gross domestic product in 2018 as a proxy for the size of the domestic market – have a lower likelihood of internationalization and, conditional on internationalization, a lower share of international sales. Only 33% of the scale-ups based in the three largest economies in our sample (France, Germany, United Kingdom) have international sales, compared with 52% of scale-ups in the other countries. Conditional on internationalization, international sales are 27% (46%) of total sales for the big country (small country) group. Fourth, the presence of external equity investors is associated with a higher incidence of internationalization (62% vs 33%) and, conditional on internationalization, a larger share of international sales (52% vs 34%).

33%

Scale-ups without external equity 62

%


Have international sales

Do not have international sales

52%

34%

0% 10% 20% 30% 40% 50% 60%

Average share of international sales

% of sales generated abroad



25

Lack of international ambitions is holding back growth

Even more worrying is that only 10% of scale-ups that do not internationalize have an international roadmap, compared to 56% of the scale-ups that already generate international sales. The likelihood that pure domestic scale-ups will internationalize in the near future is hence very slim. The factors that lead scale-ups to draw up an international roadmap are closely linked with those affecting scale-ups’ current internationalization patterns. More specifically, scale-ups in the ICT industry, scale-ups with stronger growth aspirations, scale-ups with external equity investors, and scale-ups located in countries with smaller domestic markets are more likely to have an international roadmap. Interestingly, even within the categories of ICT scale-ups and scale-ups with strong growth aspirations, a product roadmap is more prevalent for those scale-ups with external equity investors. Finally, having an international roadmap is associated with higher current sales levels (5 million EUR vs 1.9 million EUR) and a higher number of sales people (4.2 FTEs vs 2.2 FTEs).

Direct exporting as the preferred go-to-market strategy for international markets

Direct exporting is the most frequently used international go-to-market strategy, as indicated by 69% of the scale-ups, followed by joint ventures/strategic alliances (54%), licensing out (19%), acquisitions (15%), and franchising (15%).

17%


58%


Have an international roadmapfor the next 3 years

Do not have an internationalroadmap for the next 3 years


26

Lessons from the market access challenge

External equity investors serve as a catalyst to scale-up internationalization17, and their investee companies are therefore more likely to face the difficulties inherent to conquering new markets. This explains why external equity-funded scale-ups highlight access to (international) markets as their most important challenge. Less ambitious scale-ups may enhance their sales growth by developing a dedicated sales team with appropriate financial incentives, by developing a clear market access strategy, by considering non-organic growth modes such as acquisitions, joint ventures or alliances, and foremost by being more internationally oriented. International markets may be entered through direct exports, but other internationalization modes may be relevant as well. These are all too often ignored.

FOURTH CHALLENGE: EXECUTIVE LEADERSHIP

Original founders are more frequently replaced in ICT and Biotech and healthcare scale-ups

In line with previous research on entrepreneurial teams, the average scale-up is founded by two founders. On average, the size of the entrepreneurial team later increases to three. This increase is stronger for ICT scale-ups and scale-ups that have attracted external equity. In 35% of the scale-ups, at least one executive has left the entrepreneurial team by the time of the survey. Executive attrition is more prevalent in scale-ups in the ICT or Biotech and healthcare industry and in scale-ups that have attracted external equity (50% versus 29%). In contrast, executive attrition is less common in scale-ups in the Consumer goods and services industry.

17 Fernhaber, S.A., & McDougall-Covin, P.P. (2009). Venture Capitalists as Catalysts to New Venture Internationalization: The Impact of Their Knowledge and Reputation Resources. Entrepreneurship Theory and Practice, 33(1), 277-295.

8%

15%

15%

19%

54%

69%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Other

Franchising

Acquisitions

Licensing out

Joint ventures/strategic alliances

Direct exporting (i.e. selling directly into the marketyou have chosen using in the first instance your…

What is your go-to-market strategy for (additional) international markets? (multiple answers possible)


27

Three in four entrepreneurial teams can rely on industry-specific work experience

In 48% of scale-ups, at least one member of the entrepreneurial team had founded at least one other venture before joining the current venture. This share is higher for scale-ups with external equity investors (60% vs 43%). For 76% of the scale-ups, at least one member of the entrepreneurial team had worked in the same industry as the current venture before joining the current venture. This share is higher (lower) for scale-ups in the ICT (Consumer goods and services) industry. Entrepreneurial team members pay themselves a low salary Next to deciding how and how much employees will be compensated, the entrepreneurial team should think about its own compensation.18 The average base pay of a member of the entrepreneurial team was 67,000 EUR in 2018. This is only slightly higher than the 55,000 EUR per team member in the much younger Belgian ventures studied in the Rising Star Monitor. Base pay is lower in scale-ups in the Consumer goods and services industry. Interestingly, there is no association between base pay and the age or size of the scale-up, or the presence of external equity investors.

18 The compensation package of a member of the entrepreneurial team typically consists of two components: a base pay and (the prospect of owning) a share of the company’s total outstanding equity. Nonetheless, little is known about the size of the compensation package of members of the entrepreneurial team in European scale-ups. We therefore asked respondents to disclose their base pay and equity stakes. Despite the promise of full anonymity and confidentially, significantly fewer respondents were willing to answer the questions on compensation; response rates for this set of questions range between 54% and 64%. Even though we did not find evidence for nonresponse bias, we deem it wise to not draw too strong conclusions from these findings.

29%


50%


At least one executive has left theentrepreneurial team

No executives have left theentrepreneurial team


28

As base pay is low, most of the financial reward for the members of the entrepreneurial team is expected to come from increasing the value of their share in the long term. As such, it is important that they retain a significant stake in their scale-up. At the end of 2018, the entrepreneurial team retained on average 70% of the company’s total outstanding equity. In 43% of scale-ups, the entrepreneurial team even retained full ownership. Entrepreneurial teams in scale-ups that attracted external equity retain on average 53% of equity, compared to 79% in those that did not.

One in three scale-ups is advised by at least one independent director An important area in which scale-ups should professionalize is their governance. The most important governance body is the board of directors. Next to its monitoring role, a board of directors can play a valuable role by providing scale-ups with key experience, strategic reflections, a sounding board and access to individual non-executive directors’ personal networks. Overall, 51% of the scale-ups have a board of directors. Since corporate governance codes are set by the Member States of the European Union, legal requirements regarding the establishment of a board of directors can explain the variation in board presence across countries. All Swedish and UK scale-ups have a board of directors, compared to only 13% of German scale-ups.19 Nevertheless, boards are more prevalent in ICT scale-ups, in larger scale-ups, and in scale-ups with external equity investors. Indeed, the establishment of a board of directors typically coincides with the entry of a first equity investor when not legally required. Next to the representatives of these investors, independent non-executive directors can be appointed to the board. Independent directors, defined as directors who do not have a material relationship with the company, can act as mediators during disagreements between

19 In the one-tier governance model, the board of directors comprises both executive and non-executive directors. In the two-tier governance model, executive and non-executive directors are separated into two boards: a management board and a supervisory board. For comparison purposes, we decide to not focus on the role of executive directors in this report, and therefore refer to the supervisory board as the board of (non-executive) directors.

53%

79%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

% of company's total outstanding equity retained by the entrepreneurial team



29

different shareholders and may bring industry experience. Of the scale-ups that have a board of directors, 57% have appointed at least one independent director.20 The presence of independent directors is associated with ICT scale-ups, larger scale-ups, external equity investors (76% versus 47%) and stronger growth aspirations. For boards with independent directors, the average number of independent directors equals three.

Audit, exit and remuneration committees are extremely rare

Only 11% of scale-ups with a board of directors have an audit or remuneration committee within the board, and 4% have an exit committee. The presence of an exit committee is positively correlated with the scale-up’s sales level, which suggests that scale-ups only value exit committees when they have gained enough market traction to be attractive to potential buyers. The presence of a remuneration committee is positively correlated with the scale-up’s age: 17% of the scale-ups that are older than the median age (8.2 years) have a remuneration committee, compared to only 4% of the scale-ups younger than the median age. This suggests that remuneration issues become more of a concern when scale-ups grow older.

Lessons from the executive leadership challenge

The addition and replacement of entrepreneurial team members and the advice provided by independent board directors has a beneficial impact on a scale-up’s sustained growth through an increase in human capital21. Again, scale-ups backed by external equity investors demonstrate superior practices in this area.

20 As such, 29% of all scale-ups in our sample have at least one independent director. This share is slightly higher than that for Australian scale-ups (26%) as found by KPMG. 21 Demir, R., Wennberg, K., McKelvie, A. (2017). The Strategic Management of High-Growth Firms: A Review and Theoretical Conceptualization. Long Range Planning, 50(4), 431-456.

47%


76%


Have at least one independentdirector

Have no independent directors


30

FIFTH CHALLENGE: INFRASTRUCTURE A company’s infrastructure refers to the basic facilities, structures and services upon which the rest of the company is built. Historically, infrastructure has been synonymous with the company’s fixed assets, i.e. the building, equipment, machinery and tools. The advent of information technology has led ICT infrastructure to become an essential component of a company’s infrastructure. Below, we therefore examine how European scale-ups organize their ICT infrastructure.

Seven in ten scale-ups use a dashboard/software package for cost monitoring

69% of the scale-ups use a dashboard/software package for cost monitoring. Scale-ups with external equity investors (92% for scale-ups with external equity vs 60% for scale-ups without external equity) and ICT scale-ups (87% for the ICT industry vs 63% for other industries) are more likely to use a dashboard/software package. For scale-ups that do use a dashboard/software package, the combination of Excel and Microsoft Power BI is the preferred option in 54% of cases, while the remaining scale-ups mostly rely on solutions sold by smaller domestic providers.

60%


92%


Use a dashboard/softwarepackage for cost monitoring

Do not use a dashboard/softwarepackage for cost monitoring


31

Four in ten scale-ups use an ERP system

Even fewer scale-ups (42%) use an ERP system. The large majority of scale-ups with an ERP system (79%) source this from smaller domestic providers rather than from big software companies such as Oracle, Sage, Microsoft, SAP, Syspro, or Odoo.

Lessons from the infrastructure challenge

Even though infrastructure is seldom perceived as the biggest challenge for European scale-ups, this report highlights the huge potential for scale-ups – particularly those without external equity – that lies in adopting a dashboard/software package for cost monitoring and an ERP system that is adapted to their size. This would allow them to better deal with the increased complexity in their financial and operational processes.

HARVESTING/EXIT

One in three scale-ups has considered a possible harvesting or exit strategy

The final step in the entrepreneurial process is that of harvesting value by exiting the company. In other words, a harvesting or exit event allows the owners of the company to cash out of their positions in the company, and use the proceeds to explore new opportunities. Therefore, it is important for entrepreneurial teams to identify a harvesting or exit strategy for the company. However, the entrepreneurial team of only 31% of the scale-ups has explicitly considered a possible harvesting or exit strategy. Factors that are positively associated with the consideration of harvesting or exit strategies are the scale-up’s industry, growth aspirations and ownership structure. First, harvesting or exit strategies are more likely to be considered in scale-ups in ‘hot’ industries, such as ICT, compared to other industries (48% vs 26%). Second, entrepreneurial teams with stronger growth aspirations are more prone to consider a harvesting or exit strategy (58% vs 14% based on a median split): strong growth aspirations and exit orientation go hand-in-hand. This finding provides evidence for the existence of a group of entrepreneurs who desire growth and money, next to a group of entrepreneurs who are more motivated by lifestyle.22 Third, the financial objectives of investors are reflected in the fact that scale-ups that attracted external equity are significantly more likely to consider a harvesting or exit strategy compared to those that did not (58% vs 20%).

22 Cassar, G. (2007). Money, money, money? A longitudinal investigation of entrepreneur career reasons, growth preferences and achieved growth. Entrepreneurship & Regional Development, 19(1), 89-107.


32

A sale to another firm is the most likely harvesting/exit route

Overall, a sale to another firm is regarded as the most likely exit route (highly or somewhat likely according to 75% of scale-ups), followed by a merger, sale to a financial investor, sale to an individual(s), IPO, and liquidation/discontinuance of the venture.

20%


58%


Have considered a possibleharvesting or exit strategy for thefirm

Have not considered a possibleharvesting or exit strategy for thefirm

3%

16%

9%

16%

16%

34%

6%

13%

22%

22%

31%

41%

6%

16%

6%

16%

19%

3%

13%

9%

25%

25%

13%

16%

72%

47%

38%

22%

22%

6%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Liquidation/discontinuance of the venture

IPO

Sale to an individual(s)

Sale to a financial investor

Merger

Sale to another firm

Likelihood of harvesting/exit strategies

Highly likely Somewhat likely Neither likely nor unlikely Somewhat unlikely Highly unlikely


33

CONCLUSION Our research has found scale-ups in multiple industries, with different growth aspirations, entrepreneurial teams, investors and management practices. Combining strong growth aspirations with professional management practices will be key in order to sustain growth. Our results suggest that European scale-ups have multiple areas for further professionalization. Especially external equity investors push scale-ups to implement best practices. However, most of these investors are only willing to invest in companies that have the potential to generate significant financial returns. These companies are typically led by entrepreneurial teams with entrepreneurial experience and strong growth aspirations, and are active in a limited number of industries. Policy makers are hence advised to contribute to the development of an entrepreneurial ecosystem that supports scale-ups through the availability of critical resources such as financing, high quality employees, and entrepreneurial knowledge.23 One set of measures should be focused on increasing the availability and improving the cross-border flow of venture capital. As found in this report, many European scale-ups face a scale-up financing gap, which forces them to seek later-stage venture capital in the US. In many cases, these scale-ups may move a significant part of their operations across the Atlantic Ocean, effectively withdrawing from the European entrepreneurial ecosystem. Increasing the availability of venture capital through government initiatives that leverage private sources of capital is hence highly warranted. Finally, scale-ups would benefit from higher cross-border venture capital activity in Europe, as cross-border investors can assist them in entering the investor’s home market, enabling further growth.24

23 Spigel, B., & Harrison, R. (2018). Toward a process theory of entrepreneurial ecosystems. Strategic Entrepreneurship Journal, 12(1), 151-168. 24 Devigne, D., Vanacker, T., Manigart, S., & Paeleman, I. (2013). The role of domestic and cross-border venture capital investors in the growth of portfolio companies. Small Business Economics, 40(3), 553-573.


i

APPENDIX

Method

Since there exists no readily available database on European scale-ups, we compiled a list of scale-ups ourselves. More specifically, scale-ups in eight European countries – Denmark, Finland, France, Germany, Luxembourg, the Netherlands, Sweden, and the United Kingdom – were identified. In order to be classified as a scale-up, companies had to comply with at least one of two definitions. The first definition is based on the OECD definition of high-growth companies. According to the OECD, companies with average annualized growth greater than 20% per annum, over a three year period should be considered as high-growth companies. While the OECD definition measures growth by the number of employees or by sales, we expand the definition by also measuring growth in the cost of employees. We further allow the three year period of high growth to fall anywhere between 2012 and 2017, i.e. the most recent year for which company information is publicly available. Finally, we excluded companies operating in the financial/insurance or real estate industry. The second definition considers the amount of funding raised by companies and classifies companies that raised at least 1 million USD in funding since foundation and had at least one funding event since 2013 as scale-ups. Funding sources include business angels, venture capital funds and crowdfunding campaigns. For both definitions, only companies founded no earlier than 2007 and no later than 2013 were considered. While the first definition allows to identify scale-ups that did not resort to external financing, the second definition allows to identify scale-ups that are not obliged to report company information. Applying both definitions to the data retrieved from three commercial databases25 results in the identification of 80,451 scale-ups. While nearly half of the identified scale-ups are based in France, this does not imply that this country is the birthplace of the largest number of scale-ups. Instead, this is the result of the difference in reporting requirements across Europe, leaving proportionately more scale-ups undetected in countries with less stringent reporting requirements, such as Germany and the United Kingdom. Since these reporting requirements do not differ across industries within the same country, the analysis carried out in Part A of this report does not require the availability of the full population of scale-ups. For the analysis in Part B, equal weight for countries may in fact be preferable to population weights. For our sample of surveyed scale-ups, the weights are closer to the former than to the latter.

25 The three databases are Orbis Europe, Zephyr (both provided by Bureau van Dijk), and Crunchbase.


ii

Denmark2%

Finland8%

France49%

Germany3%

Luxembourg0%

Netherlands1%

Sweden33%

United Kingdom4%

Country distribution of identified scale-ups

Denmark10%

Finland16%

France35%

Germany8%

Luxembourg0%

Netherlands11%

Sweden14%

United Kingdom6%

Country distribution of surveyed scale-ups

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