Decoding Scaleup Success: Networks, ESOPs, and Advisors Make the Difference

Startup Genome and the Global Entrepreneurship Network recently released a new report offering a fresh perspective on what it takes for a startup to scale. The report draws on an eleven-year study involving 100,000 startups to provide a nuanced look at the factors contributing to startup scalability, offering actionable insights that underscore the importance of networks for entrepreneur support organizations, entrepreneurs, and policymakers. 

The report reevaluates the conventional definition of ‘scaleup,’ arguing it falls short when discussing tech startups. It proposes a more straightforward and objective metric: a valuation of $50 million or more, suggesting that such VC investment can be a reliable indicator of a startup’s readiness to scale. 

The study initially surveyed more than 100,000 founders of young startups (less than four years old) representing more than 40 different origin countries. The research followed a subset of 10,500 startups who volunteered for extended tracking, using data from Crunchbase, Dealroom, Pitchbook, and other regional databases to determine which startups achieved scaleup status (according to their updated definition). They then counted the number of startups meeting their scaleup criteria, finding that 4.6% of startups in their dataset achieved this benchmark.  

Based on this data, the report identifies three key factors that distinguish scaleups from other startups: offering stock options to all employees, founders with at least five connections to global entrepreneur ecosystems, and having a team of three or more advisors with equity stakes. 

Employee Stock Options Plan (ESOP)
Offering ESOPs to all employees, not just senior-level staff, significantly boosts a startup’s chances at scaling. According to the report, startups providing ESOPs to all team members are at least twice as likely to scale compared to those that do not. In many cases, ESOPs act as a strategic tool for attracting and retaining top talent and fostering greater team motivation and commitment within a startup. 

Global connectedness

Startup Genome defines global connectedness as “the degree of international connections between ecosystem holders.” Measuring the global connectedness of founders served as a proxy for access to global startup knowledge and markets. The report notes that startups scoring higher in global connectedness are at least three times more likely to scale than those with lower scores. 

Advisory teams
The last key factor contributing to startup success revolves around the size and makeup of a startup’s advisory team. Startups with three or more advisors with equity are 15 times more likely to scale than those with fewer advisors. Notably, the report shares that such advisory teams are uncommon, representing only 20% of startups in their datasets compared to 45% with no advisors globally. 

In addition to the three core factors listed above, the report highlights other variables that can contribute to startup success:

• Serial entrepreneurs: Founders with prior experience in hypergrowth startups have an 85% higher scaleup rate. These founders are particularly impactful in places with a limited history of producing successful startups, where they can serve as catalysts for knowledge sharing, benefiting the local entrepreneurial ecosystem. 
• Sources of financial support: Founders with financial backing from friends were more likely to scale up than those relying on personal savings or support from family. This correlation underscores the importance of networks and connections, as friends often provide founders with introductions, advice, and encouragement in addition to financial support.
• Motivation: Founders who indicated their primary motivation was to get rich saw the highest scaleup rates at 5.7%, outpacing other motivations, including changing the world (4.4%), setting up a quick flip (3.7%), making a great product (3.6%), and making a good living (1.7%). 

For a deeper dive into these findings, the complete Scaleup Report by Startup Genome and the Global Entrepreneurship Network is available here.

This article was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.