What’s the difference between a startup, a scale-up, and a tech company?
By Julie Durban - 20 April 2021
Do all startups become scale-ups? How big does a company need to be to become a scale-up? Is a tech company necessarily a startup or a scale-up? The lexicon of innovation and the companies that embody it is complex and a misuse of language can easily happen. Here are some definitions to make it all clearer.
What makes a young company a startup?
The world of startups is surrounded by its fair share of misconceptions. When we think “startup”, we might picture a group of millennials chatting apps around a foosball table, in skinny jeans and white trainers. While this is far from the standard scenario, there is always a bit of truth in such stereotypes. Indeed, there is a “startup culture” and an environment specific to these growing companies. This often entails a flat organisation and more informal workplace guidelines.
Still, a newly founded company is not necessarily a startup. The term startup is reserved for companies that are innovative or that make use of new technologies. Unlike a typical SME, a startup has to invent its own processes and define its business model. It doesn’t stick to what already exists or how things are done traditionally. This is the challenge for a startup: to find its own business model, to succeed in stabilising it and to grow rapidly (often sacrificing short-term profitability).
Eric Ries, author of the best-selling book Lean Startup, defines a startup as:
“A structure designed to create a new product or service under conditions of extreme uncertainty. “
Most often, a startup seeks to position itself in an underserved market segment. It needs to strike the right balance between niche targets and the ability to deploy its offer on a large scale. Finally, being a startup is a temporary status. Young innovative companies are not destined to remain startups forever. They evolve into scale-ups after reaching a certain stage of maturity. That being said, there is no fixed age for ceasing to be a startup.
If it is only a question of maturity, what criteria do a startup need to meet to become a scale-up?
How does a company become a scale-up?
As the term implies, a scale-up is a startup that has grown, that has changed scale. To move to this next stage, the startup must have succeeded in stabilising its business model and industrialising its offer. It has therefore proven its viability.
To qualify as a scale-up, it must meet certain criteria that have become the norm. The first of these concerns annual growth. A scale-up must register a team growth of more than 20% per year, with at least 10 employees on permanent contracts. In terms of turnover, a scale-up is expected to generate between $1 million and $3 million. It must also have already raised at least $1 million. Once it has reached these milestones, it is no longer in the startup phase or in a situation of extreme uncertainty, as described by Eric Ries.
Simply put, a scale-up is nothing other than a successful startup. Since it will not remain a startup indefinitely, a young company’s prospects are limited. It will either:
- Go bankrupt
- Complete an exit and/or merge with a large group or a scale-up
- Become a scale-up
A scale-up generally aims to continue its development and expand its market, notably by having strong international ambitions. Shift Technology is one example of a French startup rated by Early Metrics (ranked in the top 2% of most promising startups) that has become a scale-up. In fact, it is already active in North America and South-East Asia.
The business unicorn, a category of its own?
As its name suggests, the unicorn is a rare, even legendary creature. In economics, the term refers to an unlisted company valued at over $1 billion. Aileen Lee coined the term in 2013. The venture capitalist was looking for a way to describe the 0.1% of companies with a valuation of over $1 billion that venture capital funds invest in. These companies are also characterised by their business model which favours rapid growth financed by fundraising over profitability.
It is impossible to miss these unicorns today. Their names are now familiar, and the use of their services is widespread: Netflix, Blablacar, Dataiku (rated by Early Metrics), Deliveroo, etc.
To sum up, a unicorn has to have been a scale-up, which itself had to be a startup initially. However, it is still difficult to get away from the name startup, a word still charged with connotations such as economic dynamism and entrepreneurial spirit.
Can tech companies be qualified as startups?
Despite their growth, we still tend to think of Twitter, Airbnb or Blablacar as startups. But have they retained any startup trait in their operations? These tech companies are only startups in spirit since they employ well over 10 employees and have evidently proven the viability of their business model.
Nevertheless, they maintain ambitious growth goals even if it means generating as much revenues as losses. They create jobs fast and maintain their image as pioneers. What remains is also their appetite for developing technologies or finding innovative use cases for them.
Claiming to be a tech company is obviously not exclusive to startups. Corporate groups also emphasise their tech or high-tech characteristics. However, even if there is no fixed definition, there are certain criteria that make it possible to recognise a tech company:
- A scientific core business (applications, exact sciences, etc.)
- A scalable model and/or offer
- Revenue generated from the sale of technology
- A proprietary and protected technology
Nowadays, we can say that all technology companies are startups at their creation. However, the reverse is not always true, not all startups are technology companies. While they are innovative, startups don’t always patent or develop their own technology. Their innovation can lie elsewhere, such as in their marketing approach or their development processes.
Now that you know the meaning of the terms startup, scale-up and technology company inside out, are you ready to find the next unicorn? If you need a helping hand, Early Metrics can support you in identifying top startups and understanding technology trends relevant to your strategy.