It is exceptional for startups to reach a 100-million-valuation. In Europe, only around 850 startups achieved this in 2010-2017. These startups have little time to celebrate, as the investing VC firms expect them to reach billion-valuations quickly.
The current macroeconomic environment affects the European startup landscape – and is even more relevant in the emerging ecosystem in the Nordics
Over the past five years, Europe has produced unicorns at a faster rate than ever before. However, the current macroeconomic environment has affected the European startup landscape. From incumbent institutions to seed-stage startups, there is increasing uncertainty on how to navigate the hazy waters. This, together with political uncertainty, creates a complex situation.
“While fundraising has taken a backseat, it is not far off from historical averages that predated the extreme bull market that has been dominating globally for the past few years. Simultaneously, dry powder is at an all-time-high, giving investors the opportunity to invest big, while current market conditions keep them thoughtful”, says Kari Kulojärvi, Managing Partner, McKinsey & Company, Finland, and the Baltics.
While the IPO market remains at calm, in reality, startups have not used IPOs as majority exit paths in recent years, with the ability to stay private for longer and strategic acquisitions slowing the need for the public markets. In parallel, new opportunities open up for the talented; founders have to make a real decision on the cultural and financial ramifications of hybrid work; the collective venture community is headed to a new reality, which promotes sustainable growth over the topline extremity of the latest bull market.
“This new reality matters even more to the Nordic ecosystem, which continues to hold enormous promise. As a new generation of early-stage entrepreneurs launch ventures in fields ranging from SaaS to sustainable transport, having enough ambition is what separates those who flourish from those who struggle. Startups should have their head in the clouds, feet on the ground and eyes on the target”, says Kulojärvi.
Best-practices for startups to grow to unicorns
- Balance three strategic imperatives growth, efficiency, and competitive advantage. 40 percent of companies struggle to balance efficiency and growth. Deciding where to focus can be a function of two things.
- Identify strategic approach for scaling. This can be either network play, like social media, product play, or a scale play, like e-commerce.
- Focus on the macro-funding environment. This guides how they allocate effort and resources across growth, efficiency, and competitive advantage. When capital is abundant, scaleups can lean more heavily into growth, while when capital is tight, they may want to focus more on efficiency.
- Product expansion before geographic expansion. Even though geographic expansion is the most common strategic priority for startups, more than half regret it. “We were pushed to expand because we had raised all that money, and that was expected,” said an executive at a European scaleup. “But we weren’t ready, and we ended up leaving some of those markets a few years later.”
“The fastest-growing scaleups begin geographic expansion over two years later than their slower-growing peers. 20 percent mentioned that rapid expansion was their biggest mistake. Product expansion instead provides a clear path to value creation, in part because it can drive all three strategic imperatives of scale-stage companies”, says Kulojärvi.
- Prioritize accessibility over size. The geographic expansion should begin with an accessible and familiar market nearby – many are tempted to target the biggest market they can find, but this is often a mistake. Scaling startups may prioritize costs and ease of market entry, while companies focusing on product development may be bolder in targeting larger, more distant markets, as costs and complexity of launching a new market tends to be lower. Many that expand to the US, fail due to market differences*.
“Starting with an accessible, familiar market nearby reduces the degree of difficulty. As one founder told us, expanding to unfamiliar markets is “95 percent like starting a new company, since there are almost no synergies”, says Kulojärvi.
- Acquire companies for their products, people, and IP – not their presence in other markets. Buying another company can be an effective mechanism for rapid growth, and scaleups with tens of millions of dollars in VC capital are – often for the first time in their existence – in a position to do so. However, many scaleups get their first acquisitions wrong.
“Acquisitions for territorial expansion are over five times more likely to fail than acquisitions for Product, People or IP”, says Kulojärvi.
- Don’t be afraid to make changes to the leadership. Nearly one in five claimed their biggest mistake was acting too slowly to replace people in the wrong roles. Build a team that is capable of growing the company to the next stage – it may not include the same people, in the same roles, that got the company to its current stage.
“The scale stage is not like the seed stage, and the leadership team that was successful in the former may not be in the latter. Those that successfully create a scaleup from nothing may not have the full skillset or mentality required to grow a scaleup into an enterprise”, says Kulojärvi.
Leaders must be bold and act
Startups that reach the 100-million-valuation have already outperformed their peers, but the growth only gets harder.
“The common thread among all startups is that leaders must be ready to embrace the challenge, understand the tradeoffs of different options and be brave enough when planning the path forward. Europe has a lot of potential startups that can make a meaningful difference – we need to do our best to help them to be successful. If Europe is to take the lead, we need to continuously challenge ourselves to up our game within Europe, yet extending to a global scale”, ends Kulojärvi.
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