Defining a Tech Company: 5 key differences between a Startup and a Scaleup
— a newly established business
plural noun: startups
"problems facing startups and small firms in rural areas"
— a business that is in the process of expanding
plural noun: scaleups
"we need to ensure that UK tech startups and scaleups can access the global talent pool"
There’s a common misunderstanding when it comes to defining early-stage tech businesses. While the term startup is ubiquitous — even outside of tech circles — its more mature sibling, scaleup often flies under the radar. Why is this? Well, it could be because tech companies, even wildly successful ones, want to retain their identity as a “tech startup”; it’s cool to be a startup and people like the idea of working for one.
It might also have something to do with the blurred lines that mark where a startup has evolved (technically, at least) into a scaleup; there is no official “graduation” moment. Besides, once a startup always a startup… right?
Interestingly, though, VCs tend to prefer scaleups to startups as they’re a lower-risk investment. Therefore, it’s easier to get funding if you’re a company in scaleup mode.
Either way, whether you’re a budding entrepreneur looking to validate a new idea or a successful founder seeking a further round of funding, it’s essential to know what makes a startup a startup and a scaleup a scaleup.
Here are 5 key differences between the two:
1. Product/Market Fit
The primary difference between a startup and a scaleup is the stage they’re at on their respective trajectories. While scaleups have mastered product/market fit, startups are still on that journey — experimenting with features, customer segmentation and acquisition costs. Scaleups, on the other hand, have already validated assumptions about their market. Essentially, this means that a scaleup knows that if they invest £x into the business, they will receive £y in return.
The product/market factor is huge because it gives scaleup companies the green light to scale their operation dramatically with an almost guaranteed return on investment (ROI). (Hence, ‘scaleup’!) Meanwhile, due to the uncertainty around their market value, startups still need to invest their time and resources into figuring out what actually works.
Unsurprisingly, startups and scaleups are at very different stages when it comes to funding and investment. Tech startups typically have either no funding (the project is self-funded by the founder(s) or “bootstrapped”), a Seed Round or, occasionally, a Series A (a company's first significant round of venture capital financing).
Because funding is such an integral part of the tech startup/scaleup ecosystem, it’s fair to use it as a yardstick for determining the correct definition of a company. Generally speaking, if a tech company can provide investors with more validation than a market opportunity, an MVP and a dependable team, then it can rightfully be called a scaleup.
Another major difference between a startup and a scaleup is how risk-averse they are. So, while scaleups benefit from having product/market fit nailed, it also means they can’t take too many chances with new ideas; stakeholders and customers will expect them to keep providing “more where that came from”.
Startups, on the other hand, can afford to be far more agile. Without a validated product or substantial customer base, the ability to pivot or react to market changes is there for the taking.
4. Team Roles and Hierarchy
It’s not uncommon for those involved in startups to wear many hats. Sure, each employee will have a specific skill set, but they will likely be expected to take on various challenges as and when they arise. It might be a cliché, but many startup founders have to have to take on multiple roles for their fledgling company, from HR to PR and everything in between.
Once a startup evolves into a scaleup, however, roles and responsibilities start to become more clearly defined. For example, where just one person might have been solely responsible for sales and marketing, a scaleup might have the resources to employ separate teams of sales and marketing experts.
5. Systems and Process
As we’ve already established, startup environments are typically ‘all hands to the pump’ and this extends beyond job roles to the overall process of the company. Whether it’s responding to a lead enquiry or drafting a social media post, this process might look slightly different every time.
The freedom that startup team members have to experiment with these processes will change as the company evolves into a scaleup; they will need to be documented into a system that can be replicated by colleagues and new starters. Ultimately, a successful scaleup is run like a tight ship and organised systems are an integral part of that.
Are you the founder of a fledging startup? Or part of a scaleup in need of a technical partner? At Gravitywell, we work with Startups and Scaleups to help them achieve their goals. To learn more about our process or to chat about your project, get in touch.