What are the key success factors for startups wanting to scale to unicorn status? New research provides roadmap

For startup stakeholders, from founders to policymakers and investors, the billion-dollar question to reaching unicorn status has always been: what characteristics, behaviours and decisions of early-stage startups increase the chance of successful scaling?

Though only a fraction of startups successfully navigate the challenging pathway to scale to a valuation of $50 million or more, understanding the factors of a successful scale-up can guide resource allocation, policy-making and strategic collaborations.

Startup Genome’s Scaleup Report, a culmination of 11 years of primary research with close to 100,000 startup founders, provides data-driven answers to this critical question.

From 2015 to 2019, 30,000 startup founders answered our surveys, 20,000 entrusted us with confidential information such as their revenue, and 7,000 of those startups (under four years old) gave us their domain name, allowing us to identify several hundreds that scaled to a valuation of more than $50 million – and 18 unicorns – within four to eight years.

We have identified success factors that provide entrepreneurs, investors, and ecosystem builders a roadmap. Among these, we have found that the following actions under the control of startup founders, namely ‘global connectedness’, offering stock options to all employees, and offering equity to at least three senior advisers, are the most crucial to scaling success.

Startup Genome first presented the concept of global connectedness in 2017, defining it as the degree of international connections between ecosystem stakeholders.

We observed that startups in Silicon Valley and other globally-connected ecosystems seemed to have greater ease in creating globally leading innovation, accessing global markets, and seizing global category leadership, at least in part due to their global connections.

In simple terms, higher global connectedness provides a startup with scale-up potential – the potential to knowingly develop a globally leading business model – whether inherited by being based in a top ecosystem or developed by a single founder through networking.

If a startup puts this potential to work by going global at an early stage, it can — on average — achieve greater success and scale faster and possibly seize global category leadership.

Startups that develop a high level of global connectedness have a 3.25x higher chance of scaling up than those with a low level.

Ecosystems where founders are more connected to founders in top ecosystems see their startups “go global” at a much higher rate. Early-stage startups that “go global” are on a revenue growth curve that is 2.1x faster than those that do not. The Global Connectedness Index is based on the number of founder-to-founder international connections to top ecosystems.

Founders who give employee stock options (ESOPs) to all their employees – not only senior but also mid-level and low-level employees – dramatically increase their chance of scaling.

Offering stock options increases employee motivation, retention, and team spirit and commitment. They are also an essential incentive in attracting skilled talent to startups that cannot match the higher salaries of the corporate world.

Our research found that access to senior developer and growth-hacking talent goes dramatically down in countries where stock options are taxed at vesting rather than allowing employees to elect to be taxed on the (zero) option value at issuance and later be taxed at the liquidity event, as in the US.

In practice, taxing options at vesting prevents startups from issuing stock options to employees because employees cannot afford the tax liability rapidly building up each year as the startup’s valuation increases — long before employees can sell these options to pay their large tax bill.

Consequently, such tax policies deprive startups from a key motivation and retention tool.

For startup founders, having access to talent means not only hiring employees to join the team. It also means securing the regular advice of successful founders and senior executives, which can be done by issuing stock options to them, typically vesting over a period of 24 to 36 months.

Having equity that vests over time commits the adviser to invest in learning about and advising startup leaders regularly and for a sustained period.

It also means that the stakeholders will provide “tough love” when needed – giving the founder a difficult message because they are genuinely interested in the startup’s success rather than just valuing keeping a “good” relationship with the founder.

Securing the advice of more successful founders and senior executives greatly increases a startup’s chance of successfully scaling, in fact doubling it when going from no advisers to one or two, and increasing again by more than 50% by securing three or four advisers.

Founders looking to improve their chances of scaling should ensure that they offer stock options to all employees, build close relationships with at least five founders in top ecosystems, and secure the advice of at least three advisers by giving them an equity upside.