Scaleups. How to Measure Scaleup Performance
How to Measure Scaleup Performance
by Alberto Onetti
In a previous article we defined scaleups as “a development-stage business, specifically related to high-technology markets, that is looking to grow in terms of market access, revenues, and number of employees.”
That said, which criteria (appropriate scaleup metrics) can we use to identify a scaleup (and differentiate it from a “mere” startup company)? Or, in other words, when does a startup turn into a scaleup?
Although the answer looks plain (revenue and number of employees are the appropriate metrics to track progress of any business, startup companies included), the question is not trivial at all. Because in the startup world, revenue and employees are numbers almost impossible to get, at least on a timely basis.
As recently pointed out by Eric Paley (managing partner at Founder Collective) on TechCrunch: “Evaluating startup performance is a messy business. Late stage companies are rightfully secretive. Acquisitions are messy financial affairs often engineered to obfuscate the true value of a transaction.”
That’s why – in the end- we need to go for proxies.
As Startup Europe Partnership we measure scaleups by the amount of investments raised.
This criterion is not perfect for various reasons:
- We have seen bootstrapped companies (no funding) grow at impressive proportions rate and get ready for scale
- We have seen startups raise enormous seed investment while still in the “search phase” – still startups – especially in today’s environment where, in Silicon Valley, valuations are at a notable high.
- Then there’s the dynamics of traction– some scaleups don’t have revenue because that’s not their focus (a lá social networks); rather their focus is number of users/engagement/etc. Yet for others, especially B2B, it’s more about their revenue model and how much they are pulling consistently.
- There have also been interesting spinoffs from established companies, a significant number of which have proceeded to become successful ventures.
An alternative methodology is the one used by The Wall Street Journal and Dow Jones Venture Source that are tracking venture-backed private companies by valuation (aka The Billion Dollar Startup Club or Unicorn Club).
Eric Paley alternatively uses market capitalization and states that “The IPO market was the most transparent proxy we could find, and while imperfect, it is instructive. With notable exceptions, most of the biggest outcomes in venture capital are a result of IPOs.”
We still believe that capital raised is the second best option available. Raising money is not an indicator of a healthy growing business. But, at least, it is an indicator of economic development. As a company raises money, it typically uses it to increase the headcount (i.e. producing employment) and procure products/services from suppliers (i.e. fostering the growth of the ecosystem it is located). Then it produces economic growth, at least for a certain period of time. After that, it needs to turn into profitable or raise more money. But this is another story.