Founders often see themselves as the biggest obstacle to scaling their tech business. They shouldn’t, says Tony Zappalà, partner at Highland Europe.
When Henry Ford said “Failure is simply the opportunity to begin again, this time more intelligently”, it was as if he was talking with early stage tech companies in mind. Unlike many other fields, in the startup world founding your second, third or even fourth company is viewed as a badge of honour – and rightly so. If each time you learn from your experience, even if the company in question tanked, you are set fair to get it right next time around. Failure is merely a staging-post along the way.
However, successfully navigating the rapids of startup survival is by no means the most fraught and difficult part of a founder’s journey. As growth stage investors, we know all too well that the moment where turbulence truly begins to strike is when a startup scales. In order to find out more about this critical phase of a company’s lifecycle, we’ve just looked in depth at many of the big issues scaling tech companies face, by asking a diverse mix of founders from the UK, Europe and beyond what they see as their key challenges.
Significantly, we discovered that half (49%) of the founders questioned for the survey thought that their own ability to manage a fast-changing business was the biggest risk they faced. Almost as many (47%) were concerned about their ability to change strategy quickly where needed. Meanwhile, a whopping 74 per cent said they found adapting and evolving their role as the business scales “challenging”.
In many ways these numbers shouldn’t surprise us. Scaling a business, at times, resembles a high stakes game of snakes and ladders, where the ladders are slippery and the snakes seemingly ubiquitous. CEOs and the executive team often encounter problems at every turn, in every field from operations to company culture, and hiring to customer acquisition. No wonder then that as they transition from startup founder to CEO of a growing business many entrepreneurs begin to question themselves and their own abilities.
(For the most part) they really shouldn’t. Scaling a business is a leap into the unknown – uncertainty comes with the territory. Whether that uncertainty comes from external factors (geo-political shocks such as Brexit, or specific industry-changing events) or internal ones (‘Should we double-down on this market or quit while we’re ahead?’), founders of startups are almost always far better-placed than incumbent businesses to respond with a fresh approach. After all, where there is confusion, there is often opportunity too.
Larger businesses and corporates are, as a rule, unwilling to risk rapid adjustments largely because the costs of taking risks that don’t pay off or indeed backfire are too high, meaning that it’s easier to postpone or cancel big decisions. Startups have no such shackles. Nimbler, and with less to lose, they can react to shifts far more rapidly and instinctively. That, of course, makes it a great time to innovate.
However, they should innovate while remaining true to their company’s brand – pure opportunism rarely pays off. A luxury brand suddenly experimenting with ultra-low end products, for example, may well put off existing customers, without attracting new ones.
Similarly, fewer than two thirds (62 per cent) of those we spoke to carry out regular growth-planning or strategic planning exercises. In my opinion, it’s a mistake for founders not to devote a reasonable amount of time to planning, including master scenario planning. If there are major (foreseeable) events which could have a significant impact on the business, it’s always worth taking time to work through the different scenarios and figure out in advance what the right response for the company should be. Ideally, founders should act on the things which are beneficial in multiple scenarios, but have a plan for when things take an unexpected turn.
Sticking to principles such as these will help entrepreneurs on their personal transition from founder to CEO of a scaling company. Nevertheless, our research revealed that founder confidence turns out to be even more of an issue than access to finance (something that is frequently cited as a problem for European early-stage companies) – and intriguingly we found that startups in the UK were 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 reaching a valuation of at least $1bn – that figure falls to 47 per cent for UK businesses, compared with 69 per cent for European businesses and 73 per cent 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. So why might they show lower levels of confidence than their European counterparts about their own company’s chances of making it?
As the research didn’t delve into the reasons, we can only speculate. But it may be down to a number of factors including British self-effacement, the size of the companies that were questioned (the British scale-ups were more numerous but smaller) and the wider economic backdrop cannot be overlooked: the swirling unpredictability surrounding Brexit may rattle the cages of even the most experienced of entrepreneurs.
Yet while uncertainty is something that all founders must learn to live with, risk can always be mitigated – ideally with trusted advisors supporting a founder or CEO in their shift from startup boss to leader of a scaling business. As investors in high growth companies, we know that this will help some to go on to build great and lasting companies. Statistically, of course, many won’t. But those founders should relish the opportunity to turn the page and start over again, only this time more intelligently.