Importance of well-functioning scaleup ecosystem | Future Winners | Deloitte Netherlands

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The importance of well-functioning scaleup ecosystems

A study, initiated by Deloitte and conducted by Erasmus Centre for Entrepreneurship

Many start-ups struggle to survive and grow into scaleups, about 90% of young firms die within 5 years after conception. Scaleups are in need of a well-functioning scaleup ecosystem to help them overcome the difficulties (‘Valleys of Death’) faced when scaling up an organisation and maintaining high levels of growth. Therefore, Deloitte and Erasmus Centre for Entrepreneurship (ECE) conducted research on scaleup ecosystems, with a zoom-in on the Mobility Ecosystem.

Scaleups and their importance

A scaleup is a company that has passed the stage of a startup and is growing at
high rates. Scaleups are important for socio-economic progress. They are key
drivers of job creation and industry productivity growth. Moreover, scaleups
play a crucial role in the innovative transformation of industries and sectors.
Due to their fast-growth, they can make a large and increasing impact on the
development, application and diffusion of innovations, new business models, and new concepts and practices within and across industries and markets. 

Scaleup Ecosystems and The Future of Mobility

Ecosystems and their importance

The idea of an ecosystem is that entrepreneurship and company growth is a
collective achievement of a set of interdependent actors and factors. Ideally,
companies and actors benefit from and contribute to the ecosystem by exchanging and sharing various kinds of resources, and human-, intellectual-, and relational-capital. This system is characterised by and dependent on access to: market, related and supporting industries, talent and knowledge and capital as depicted in Figure 1. 

 

About 90 percent of young firms die within 5 years
after conception

Summary Scaleup Ecosystems and The Future of Mobility

‘First Valley of Death’: the challenge of scaling the business model

A well-functioning scaleup ecosystem is necessary to help overcome the
difficulties (‘Valleys of Death’) faced when scaling up an organisation and
maintaining high levels of growth. Many startups struggle to survive and grow
into scaleups. About 90 percent of young firms die within 5 years after
conception. This is often referred to as the ‘First Valley of Death’. Three
major reasons identified by founders that were forced to seize their startups
are: a lack of market need; a lack of funding; and a lack of a solid founding
team. Those reasons highlight the importance of two particular building blocks
of a scaleup ecosystem: access to market and access to capital. 

‘Second Valley of Death’: the challenge of scaling the organisation

Only a small portion (about 5%) of startups will eventually turn into a scaleup.
Yet, about two-third of those companies lose their fast-growth (they stop
growing or even shrink or die) before their eighth year. We refer to this as
the ‘Second Valley of Death’. Whereas the first valley is mostly about scaling
the business model, the second valley is much more about scaling the
organisation. While access to market and access to capital remain important,
the second valley particularly highlights the importance of the other building
blocks of the ecosystem: notably access to talent and knowledge, and access to
related and supporting industries.

Unpacking the building blocks of (Future of Mobility) Scaleup Ecosystems

In order to understand how an ecosystem contributes to the growth and prosperity of scaleups, we unpack each of the five building blocks of the scaleup ecosystem.

 

1. Access to market

Well-functioning scaleup ecosystems offer sufficient access to high-growth markets and a high-growth customer base. This entails similar customer behaviours and needs across related and international markets (reaping economies of scale) as well as related customer needs within and across markets (reaping economies of scope and cross-selling). A high prevalence of scaleups in the market is also conducive for growth, especially through reinforcing effects such as forming a high-growth customer base for scaleups to tap into. Similarly, the presence of competing actors are an important component in scaleup ecosystems. By indicating market readiness, competition helps to drive further innovation and growth.

 

2. Access to related & supporting industries

Successful scaleup ecosystems foster dynamic interactions, collaborations and exchanges resulting in an active portfolio of partnerships, alliances and M&As. Through spillover- and network effects, (high-tech) scaleups can leverage the benefits of location when they are in close proximity to related industries, especially when they are located within a high-tech district. For instance, Brainport Eindhoven facilitates strong relationships between key ecosystem actors in the region. Moreover, the availability of professional and advisory services is useful for the development and professionalisation of elements of the organisation in the scaling up process (e.g. finance, HR, strategy, product development, legal, sales/ marketing) and for international credibility.  

 

3. Access to talent & knowledge

Sufficient capability and leadership development in the scaleup ecosystem is crucial to foster larger and functionally balanced founding teams with growth ambitions and complementary skills. The availability of external senior executives is useful to help scaleups form an optimal top-management team with substantial prior industry and entrepreneurial experience. Access to a diverse and international workforce comprised of highly educated scientists/engineers as well as sufficient personnel that do not require a high level of education is necessary for scaleups to carry out various functions when growing rapidly. Opportunities to offer flexible employment conditions, such as remote working options, to a diverse workforce in the scaleup ecosystem is also conducive to the growth process.

 

4. Access to capital

A diverse international funding landscape including patient investors with 'deep pockets' is required in order for scaleups to gain access to growth financing. To navigate this complex landscape, a 'funding escalator' (a well-developed system to help scaleups transition between different types of funding) and sufficient expertise is necessary to address various investors’ needs. Exit opportunities at every stage of scaleup growth are beneficial – opportunities for M&As at earlier stages can fast-track growth processes, for instance, while an active stock exchange can facilitate IPOs at later growth stages.

 

5. Institutional & cultural context

Supportive formal (government and educational) institutions, with high quality (ICT) infrastructure and low trading barriers for example, form an important backdrop of successful scaleup ecosystems. With sufficient support to help scaleups comply to a multi-country institutional environment, international scaleup growth can be fostered. An entrepreneurial spirit and 'local buzz' facilitating positive spillover effects via strong (regional) networks and 'dealmakers' reinforce the interactions, collaborations and exchanges taking place within a scaleup ecosystem. An ambitious and growth-oriented culture fostered by an entrepreneurial spirit as well as societal norms that tolerate risk, mistakes and failure, and favours innovation, creativity and experimentation encourage scaleups to continue their growth trajectories.

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