Revealed: Founders pose the biggest risk to businesses scaling successfully

  • Half of founders think their own ability to manage a fast-growing business is the biggest risk they face

  • Almost as many are worried about their ability to change strategy quickly where needed

  • Getting the right organisational structure and building capacity are much bigger obstacles to growth than access to capital for scaling businesses

  • British startups are significantly less confident than those in Europe and the rest of the world

  • Two-thirds of founders say their business has ‘unicorn potential’ and four fifths optimistic about the growth prospects of digital tech businesses in general.

  • Download full results here: https://we.tl/sgdr1T2nIc 

Highland Europe, the venture capital firm that invests in growth businesses, wanted to produce an accurate picture of the challenges facing businesses that are seeking to grow in Europe in 2017. This exclusive research was conducted in April and is based on the opinions of 173 European company leaders, two-thirds of whom were founders.

The research found that company founders see themselves and their ability to evolve and adapt from being a founder to being a chief executive as the biggest risk to their businesses, as they begin to scale. Almost half (49%) the businesses asked said that the ability of the founder to effectively manage the business, was a key risk for startups that are starting to scale. Some 47% of businesses said the ability to execute quickly on changes in strategy was also a risk.

Startups in the UK are also consistently less confident than similar companies in Europe and the rest of the world. While almost two-thirds of all business leaders think their company has unicorn potential - the possibility of achieving revenues of at least $1 billion -  that figure falls to 47% for UK businesses, compared with 69% for European businesses and 73% for companies outside Europe. Yet British businesses are no less confident than their international peers about the prospects for tech businesses in general in the UK.

Highland questioned a mix of businesses that are starting to scale or pre-scale, as well as growth stage companies that have already successfully scaled in multiple markets.

The challenges to scaling businesses

The research found that the challenges start to flood in once businesses begin to scale. For both businesses that are preparing to scale and businesses in the process of scaling the biggest challenges are:

  1. Building sales and customer acquisition (61%)
  2. Finding senior talent and professional management  (58%)
  3. Establishing the right organisational structure (54%)
  4. Access to capital (44%)
  5. Establishing processes to standardise areas (44%)

For businesses that have scaled, the research found that the biggest issues when scaling were less around sales and more about bringing in experienced talent and transforming the organisational structure so that the right teams, processes and people are in place:

  1. Finding senior talent and professional management (64%)
  2. Establishing the right organisational structure (49%)
  3. Building sales and customer acquisition (47%)

The research also highlights that it is vital for founders to evolve and embrace change as their business grows and the structures and relationships within it evolve. Founders of businesses that have already scaled said their biggest challenges were to adapt their role (74%), stay focused on the big picture and not get bogged down in operational detail (63%) and delegating effectively (60%).

Growth perspectives and risks

Almost all those surveyed (93%) said it is vital that their business grows but only two fifths (40%) have identified an optimal rate of growth for their company, while fewer than two thirds (62%) carry out regular growth-planning or strategic planning exercises.

Asked how they measure growth, 43% of entrepreneurs surveyed said they use revenue as their main metric, while 36% of scaling businesses say that they measure growth in customers. Only 12% look at growth in profits and just 8% look at growth in market share.

These pre-scale and scaling businesses also identified the chief risks they face as they expand. Foremost among these are the ability of founders themselves to stay in control and to ensure the business remains nimble:

  1. The ability of founders to effectively manage the business - 49% say this is at risk as the organisation scales
  2. Ability to execute quickly on changes in strategy (47%)
  3. Company culture and values (38%)
  4. Quality of products and services (30%)

An overwhelmingly optimistic outlook

European founders are extremely upbeat about prospects for their business and for digital businesses in general:

  • 80% of founders were optimistic that their digital business can grow in the country in which they are based
  • 67% think that their business has unicorn potential

Tony Zappala, partner at Highland Europe, said: “Scaling a business successfully is an incredibly difficult thing to do. There are challenges at every turn and the ones that can really trip up a founder are not always the ones you’d expect. With this research, we see that entrepreneurs and leaders of growing businesses are naturally optimistic, with two-thirds certain that their business has unicorn potential. However they are also aware of the pitfalls - from not being able to maintain their clear vision to being unable to access finance.”

“Interestingly, as a business grows, its major concerns over building sales and customers become slightly less critical. In fact, this research suggests that pre-scaling businesses may overstate the challenge of sales and customer acquisition. As growth continues, increasingly management issues surface, including the ability to hire senior talent and managers.”

Gordon Willoughby, chief executive of WeTransfer, the leading file-sharing service, said: "At WeTransfer our maturity and rapid growth mean we are squarely in the ‘scale-up’ phase where building both organisational infrastructure and organisational capability are the main challenges. Having supportive investors who can contribute to solving these issues through their prior experience or network of business contacts has been incredibly helpful for us.”

Lea Lange, Co-Founder and Managing Director of JUNIQE, the European market leader for curated and affordable wall art, home accessories, fashion and stationery, said: “At JUNIQE, we believe in sustainable growth. This means that our focus extends far beyond monthly sales targets. All elements of our daily work are geared towards long-term profitability. In many markets our journey has only just begun and we still see tremendous potential for further growth. It has taken a substantial amount of hard work and dedication to get to where we are today. And we are as excited as ever for the challenges that lie ahead.”

 

Notes:

Researchers commissioned by Highland Europe talked to 173 tech founders across Europe’s tech sector, of whom 31% were from the UK, 13% were in Germany and 20% in the Netherlands, 28% came from elsewhere in Europe and 8% from the rest of the world.

Almost one in three of the businesses had annual turnover in excess of £10m, while 7% had turnover of between £2.5 and £10 million, 8% had turnover of £1 to £2.5m, 29% had turnover of £999,000 or lower and a fifth were pre-revenue.

Tony Zappala