The Case for Software Scaleups Versus Startups

The Case for Software Scaleups Versus Startups

New research shows that a segment of high-growth software companies known as scaleups are catalyzing economic growth and fueling innovation and job creation, despite the economic fallout from the COVID-19 pandemic.

The report, The Scaleup Revolution: A Force Multiplier of Economic Growth, conducted by research firm Wakefield Research on behalf of Insight Partners, a software venture capital and private equity investor, surveyed 300 C-Suite leaders in the software industry to understand the distinct characteristics that reveal why software scaleups are critical to the health of the global economy.

Scaleups, defined as high-growth companies with revenue growth of above 20 percent per year in each of the past three years, employ at least 10 individuals and have increased employment by 20 percent or more over the same three years. While startups, defined as having less than $10 million in revenue, are still finding their feet, scaleups have a tested business model and a validated product in the market. Insight Partners invests in scaleups software innovators and leaders providing Series A through to late-stage capital and supporting their growth with Onsite, the firm's scaleups engine of operating experts.

Resilience during recession

Scaleup leaders are focused on accelerated growth plans after they graduate from the startup phase – which only one out of 200 achieves. Despite widespread economic downturn, the report found four in five scaling-focused software companies forecast that their investment in scaling activity will increase through 2021, with an additional 29 percent of companies set to maintain current levels of investment. More than half (56%) anticipate the scaling of their company to be completed within three to five years. About a quarter (26%) expect completion within one to two years – signaling no sign of slowdown for scaleups as they continue to catalyze the economy.

Historically, once companies reach the scaleup stage, they remain resilient. Between 2009 and 2012, scaleups made up just 2 percent of all U.S. companies, yet they were responsible for 35 percent of new job gains among companies that added headcount in that period. In the current economic environment, the vast majority of scaleups (81%) expect to either maintain or increase their current number of employees over the next year, revealing a similar positive trend of job creation regardless of the economic climate.

"Scaleups are a less appreciated driver of innovation and growth in the economy. Our report reveals the extent to which these companies have been able to capture value and create high-paying jobs in the pandemic and beyond," said Deven Parekh, managing director, Insight Partners. "For decades, software scaleups have been a category of particularly robust growth – the technology industry has numerous business model and product attributes that can help with rapid scaling, providing potential advantages over other industries. Scaleups are proven, flexible, and resilient job creators, even in the most challenging times."

Software scaleups power the future economy

Despite making up only five percent of all companies in the country, software and IT services companies constitute 20 percent of U.S. scaleups, underpinning how the sector is leading and thriving within this critical growth phase. The software sector is uniquely poised for success as companies typically possess a well-defined vision, competitive edge, scalable business model, and demand-side market factors that support the new virtual normal. The industry drives job growth beyond the sector, with nearly one in ten U.S. jobs – 14 million – resulting from the software economy (according to a private company analysis between 2011 and 2017).

Amid the pandemic, software scaleups doubled down and quickly pivoted to both retain and grow customer bases. Most (55%) introduced concessions for existing customers, and nearly half (48%) made premium products free for new users. Due to the increased demand for software across sectors, most software scaleups (58%) expect annual growth rates to increase over the next three years.

"The unique characteristics of software companies that allow them to scale and grow quicker also help explain the shift toward growth investing: economies of scale, data science, recurring revenue models, and virality," said Ryan Hinkle, managing director, Insight Partners. "This allows for almost uncapped growth potential among software companies and invites investment capital. Simultaneously, increased investment in software companies further propels their growth, leading to a self-reinforcing cycle of unconstrained growth potential."

A paradigm shift toward investors who provide more than capital

Companies and founders realize scaling up is the most difficult part of a business journey, as they must meet growing demand, enable sustained growth, and limit chaos. Scaleups require specific expertise to support them through key challenge areas, including talent management, product development, and go-to-market capability. Nearly all (94%) scaleup leaders recognize the importance of venture capital and private equity experience to address these operational challenges and to help them obtain rapid scaling goals.

In response, investors have shifted to a new paradigm combining the risk-taking and innovation of venture capital with the operational know-how of private equity to provide support beyond financial backing and to become true partners in helping companies achieve their vision. Scaleups seek out investors with strategic resources, operating expertise, and expansive networks that are key to becoming an overall better business.

"When we invest in emerging scaleups with a Series A investment, they are just starting to build out their operations, and their needs are very different from a later stage scaleup who is preparing to go public," said Hilary Gosher, managing director and head of Insight Onsite. "Insight's scaleup engine, Onsite, is a trusted source of data, playbooks, and hands-on support available from the industry's best operators. Founders and CEOs have access to resources and expertise to scale successfully. We have learned that while every company's journey is unique, there are common challenges that almost every software scaleup navigates as they grow. We connect the dots and connect the leaders to an unparalleled global network of engaged scaleup innovators."

Notably, nearly all (90%) executives are concerned about maintaining their company culture as they scale, particularly as leaders become removed from the day-to-day operations and as the company moves away from the boot-strap culture innate to many startups. Investors often provide scaleups with talent management expertise to recruit top-tier candidates who fit the culture and who have the skills and industry experience crucial to building long-term value as a company grows.

"Scaleups, especially software scaleups with capital and resource support, have limitless opportunities and are catalyzing financial growth by invigorating the economy with innovation, jobs, and services that support distributed working and living," said Parekh. "Despite economic downturn, albeit buttressed to some extent by strong digital transformation tailwinds, scaleup leaders are laser-focused on rapid scaling. To benefit from their potential as an economic powerhouse, investors must continue to invest in and support scaleups."

Article published by icrunchdata
Image credit by Getty Images, DigitalVision Vectors, sesame
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