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1、Technology,Media&Telecommunications PracticeHard choices:How Europes fastest-growing start-ups become unicornsJust one in ten start-ups valued at$100 million grows to$1 billion within four years.Here are five trade-offs they made to get there.November 2022 Jasmin Merdan/Getty Imagesby Kim Baroudy,Gi

2、acomo Dolci,Sid Ramtri,and Harry Schiff Earning a$100 million valuation is an exceptional achievement.In all of Europe,only about 850 start-ups reached this milestone between 2010 and 2017.Yet these“centaurs”have little time to celebrate.The venture capital(VC)firms that invest in them expect their

3、value to reach$1 billion or moreand to do so quickly(Exhibit 1).Less than one in ten of them manage this feat in under four years.Why is it so hard for already successful start-ups to maintain their rapid pace of growth?Earlier this year,we surveyed and interviewed dozens of founders,top executives,

4、and board members of 100 scale-stage European start-ups to understand the strategic decisions and best practices that differentiated the fastest growers from their peers(see sidebar“About our research”).What quickly became clear was that scale-up leaders struggle with making trade-offs.When we asked

5、 founders and executives to name their biggest mistakes,39 percent(the largest group)described a failure to focus attention and resources in the right placesor a failure to focus at all.In recent years,excess liquidity has allowed scale-ups to put off making such trade-offs,but fundamental value cre

6、ation has always required tough decisions among competing priorities.This is a universal lesson that applies across business types,economic cycles,and capital environments.Through our research,we have identified principles to guide leaders of European scale-ups through some of the critical trade-off

7、s and decisions that mark this period in their development,even if it takes longer than four years to reach the elusive milestone.1.Strike the right balance between growth,efficiency,and moat buildingAlmost all scale-ups agree on three strategic imperatives:to succeed,they must drive growth,increase

8、 efficiency,and build a moat to protect their market position.Yet in our analysis,we found Exhibit 1Web Exhibit of Number of years from$100 million to$1 billion valuation,1%of companiesNote:Figures may not sum to 100%,because of rounding.1Question:In what year did the start-up frst achieve a valuati

9、on of$100 million?In what year did the start-ups valuation reach or exceed$1 billion?Source:Dealroom;PitchBook;McKinsey European Scale-up Growth Journeys Survey,MayJune 2022Most European scale-ups that made the leap from a$100 million to a$1 billion valuation have typically done so in fewer than fou

10、r years.42529132144101416221315111234567McKinseysurvey(n=24)PitchBook(n=110)71123456762Most European scale-ups that made the leap from a$100 million to a$1 billion valuation have typically done so in fewer than four years.2Hard choices:How Europes fastest-growing start-ups become unicorns1 The three

11、 strategic plays are discussed in more detail in our previous article“Winning formula:How Europes top tech start-ups get it right,”McKinsey,August 18,2021.Earlier analyses included a fourth category:the deep-tech play,pursued,for example,by firms that develop biotechnology,deep-learning models,and a

12、dvanced manufacturing solutions.These companies have value propositions and competitive advantages founded in unique intellectual property(IP)based on scientific or technological breakthroughs,and thus focus on developing this IP.We have excluded deep-tech plays from this analysis because at compara

13、ble valuations,its arguable as to whether deep-tech companies are actually in the“scale stage”of their development.that 40 percent of companies struggle to balance efficiency and growth.Deciding where to focus can be a function of two things.The first is a companys strategic play.In a previous artic

14、le,we described the overarching strategic plays pursued by scale-stage companies.1 Scale-ups in our research identified themselves with regard to these plays based on their core business drivers:Network plays(such as ridesharing services,social media,and communication platforms,and other advertising

15、-based businesses)benefit from network effects and can focus on growing users and usage,as this naturally enhances their value proposition.Former scale-ups that applied this approach include Airbnb and LinkedIn.Product plays(such as software companies)are often vulnerable to copying or commoditizati

16、on and thus focus on continuously enhancing or expanding their offering to maintain differentiation,increase customer-switching costs,or develop a one-stop-shop value proposition.Examples include Revolut and Stripe.Scale plays(such as e-commerce and delivery companies)have high fixed or marginal cos

17、ts and have to focus on generating revenue and improving operational efficiency.Examples include Picnic and Zalando.The second factor that can drive how a scale-up allocates effort and resources across growth,efficiency,and moat building is the macrofunding environment.This should be no surprise;sca

18、le-ups tend to be cash-flow-negative and are thus highly sensitive to changes in the availability of capital.When capital is abundant,as it was for much of the past ten years,scale-ups can lean more heavily into growth.In this environment,not being aggressive enough can be a fatal mistake.As one exe

19、cutive warns,“We made decisions that capped growth to reach profitability,but competitors growing faster than us attracted more money,better investors and,ultimately,better unit economics About our researchTo identify best practices for European scale-ups,we mined venture capital(VC)databases to ide

20、ntify 846 European start-ups estimated to have reached a$100 million valuation between 2010 and 2017.We surveyed founders,top executives,and board members from approximately one hundred of these companies and interviewed 50 founders(some who had also been surveyed and others who had not).We also int

21、erviewed select VCs.The companies represented a wide range of industries,from biotech and cybersecurity to consumer products and travel,with finance/insurance accounting for nearly a quarter of the total.Based on quantitative and qualitative data,we identified the strategic decisions and practices o

22、f the fastest-growing scale-ups.3Hard choices:How Europes fastest-growing start-ups become unicornstoo.”This perspective is supported by our research:profitability,efficiency,and cash flow were cited as top three priorities by just 12 percent of the scale-ups that made it to$1 billion in four years

23、in the period between 2010 and 2021.When capital tightensfor example,as it has in 2022scale-ups may want to focus more on efficiency.2.Pursue product expansion before geographic expansionGeographic expansion is the most common strategic priority among scale-ups:61 percent of the companies we surveye

24、d included this among their top three.However,more than half of these companies came to regret that prioritization.In fact,the fastest-growing scale-ups began geographic expansion more than two years later than their slower-growing peers,2 and 20 percent of our respondents cite overly rapid expansio

25、n as their single biggest mistake.“We were pushed to expand because we had raised all that money,and that was expected,”said an executive at a German scale-up.“But we werent ready,and we ended up leaving some of those markets a few years later.”In contrast,product expansion provides a clearer path t

26、o value creation,in part because it can drive all three strategic imperatives of scale-stage companies:Drive growth.New products can open new customer segments or increase spend from existing customers.Increase efficiency.New products that target existing customers drive revenue with low(or no)acqui

27、sition costs.Build a moat.Broadening product touchpoints with customers increases switching costs.The fastest-growing scale-ups in our sample were twice as likely to cite product improvement as a top three priority,compared with slower-growing peersand none expressed regret for that decision.The ben

28、efits of product extensions are especially relevant for scale-ups pursuing two strategic plays:For companies pursuing scale plays,new offerings that increase revenue per customer can help overcome high fixed costs or low margins.For example,a meal-kit deliverer added luxury meals to its offering,inc

29、reasing the average basket size while leveraging its existing distribution network.For companies pursuing product plays,product extensions can increase differentiation from The fastest-growing scale-ups began geographic expansion more than two years later than their slower-growing peers.2 Relative t

30、o the investment round that gave them their initial,estimated$100 million valuation.4Hard choices:How Europes fastest-growing start-ups become unicornscompetitors and broaden customer touchpoints,raising switching costs.For example,a data intelligence company added products and governance services t

31、o become a one-stop shop for customers data management needs.Network-play scale-ups stand out as exceptions to this principle of focusing on product extensions before geographic expansion.Because first-mover advantages are especially valuable to business models with network effects,network-play scal

32、e-ups often have more to gain from rapid expansion than companies pursuing other strategies.As such,a more aggressive approach to expansion may be worth the risk(Exhibit 2).3.When embarking on geographic expansion,prioritize accessibility over sizeAt some point,scale-ups do need to look beyond their

33、 borders to find growth.When they do,many are tempted to target the biggest market they can find,but this is often a mistake.Thats because expanding is hard,but it gets easier with practice.Beginning with an accessible,familiar market nearbyrather than the one with the largest revenue poolreduces th

34、e degree of difficulty and helps companies develop a playbook for achieving sustainable operations and positive unit economics in other markets.Trying to build this playbook while battling strong competitors,wooing customers whose tastes and habits are shaped by a different culture,and managing a te

35、am several hours and time zones away is rarely a recipe for success.As one founder told us,expanding to unfamiliar markets is“95 percent like starting a new company;there are almost no synergies”(see sidebar“US expansion:Go all in or dont go at all”).A successful online grocer provides a better exam

36、ple.It launched its first expansion into a neighboring country with a similar culture and no dominant competitors.The company refined its playbook and optimized operations before tackling larger and more competitive markets farther away.Variations on these approaches can be more or less appropriate,

37、depending on a scale-ups overarching strategic play:Scale-ups pursuing scale plays(such as delivery or e-commerce companies)may want Exhibit 2Web Exhibit of Share of scale-ups citing geographic expansion as a top 3 priority,1%of respondents(n=70)1Question:At the time of the SCALE ROUND in SCALE YEAR

38、,what were your top 3 strategic priorities?2Question:Refecting back,were those the right strategic priorities for the company to focus on at the time?Source:McKinsey European Scale-up Growth Journeys Survey,MayJune 2022Network-play scale-ups are more likely to prioritize geographical expansion,and l

39、ess likely to regret it,than other European scale-up types.ScalePrioritization was right decision2ProductNetwork505079253368Network-play scale-ups are more likely to prioritize geographical expansion,and less likely to regret it,than other European scale-up types.5Hard choices:How Europes fastest-gr

40、owing start-ups become unicornsto give even greater preference to cost and ease of entry when selecting initial expansion markets,given the high cost of setting up local infrastructure and logistics.Scale-ups pursuing product plays(such as software companies),by contrast,can be more bold in targetin

41、g larger markets,even if more distant,simply because the cost and complexity of launching a new market tend to be lower.In many cases,these businesses can launch with no physical presence at all.4.Acquire companies for their products,people,and intellectual propertynot their presence in other market

42、sBuying another company can be an effective mechanism for rapid growth,and scale-ups with tens of millions of dollars in VC capital areoften for the first time in their existencein a position to do so.However,many scale-ups get their first acquisitions wrong.One clear pattern from our data suggests

43、that the goal of acquisitions heavily influences their likely outcome:acquisitions undertaken for the purpose of launching in a new market are more than five times more likely to fail than those aimed at acquiring products,people,or intellectual property(Exhibit3).Absorbing a new company is difficul

44、t enough,but layering on differences in culture,distance from management,and technical integration of highly redundant product components increases the difficulty substantially.One executive put it this way:“Most of our acquisitions aimed at entering new markets failed.They were just too far away fr

45、om the team,there was too little management oversight,and we couldnt execute.”In contrast,bolt-on product acquisitions present fewer challenges94 percent of the companies that attempted these considered them successful.“When we bought for product,we were much more successful,”adds the same executive

46、.“We could co-locate people and integrate fast.When US expansion:Go all in or dont go at allA US expansion can be tempting for European scale-ups,for understandable reasons.Its a large,unified market with customers that often adopt new technologies quickly and investors with big checkbooks.But many

47、European scale-ups fail to commit fully enough to gain a foothold in what is not only a very large but a very competitive and culturally different market.European scale-ups planning a US launch would do well to gather three critical components beforehand:1.A significant American investor,or a custom

48、er that can act as a true partner,helping to navigate local dynamics or regulations.2.An expansion playbook that has been thoroughly battle-tested in other markets.3.A commitment from a top leader(such as a founder or CEO)to relocate to the United States for several years to oversee the business and

49、 signal commitment to customers,suppliers,and staff.6Hard choices:How Europes fastest-growing start-ups become unicornssomething goes wrong you know it,and you can react right away.The synergies that exist in your Excelyou can make sure they actually happen.”There is one principal exception to this

50、lesson.Scale-ups pursuing network plays often face a chicken-and-egg problem in each new market:How do you attract users from one side of a marketplace(such as buyers,riders)before securing a critical mass of users on the other side(such as sellers,drivers)and vice versa.For these companies,acquirin

51、g a company with an existing user base can provide a shortcut to achieving critical mass in new markets.A ridesharing player employed this strategy to quickly expand to cities across Europe.Notably,this approach tends to work best when the acquired company itself already has a critical mass before t

52、he deal.Buying a company that is still fighting its own chicken-and-egg battle offers little benefit,with all of the aforementioned risk.5.Dont shy away from making changes to the leadership teamThe scale stage is not like the seed stage,and the leadership team that was successful in the former may

53、not be in the latter(Exhibit 4).Nearly one in five scale-up leaders we surveyed claimed their biggest mistake was acting too slowly to replace people in the wrong roles.Companies should try to be honest about roles that are outgrowing their current occupants.This includes founders,who may need to ta

54、ke a hard look in the mirror.3 Those who successfully create a scale-up from nothing may not have the full skill set or mentality required to grow a scale-up into an enterprise.In some cases,a strong CFO or chief human resources officer(CHRO)can serve as a counterweight to founders and address weakn

55、esses or blind spots in the original leadership team.Exhibit 3Enter newgeographic market(n=11)275Acquireproduct,talent,IP(n=20)5Web Exhibit of Acquisitions reported as unsuccessful,by acquisition purpose,1%of respondents1Question:How many companies had the start-up acquired in the 4 years following

56、the SCALE ROUND in SCALE YEAR?What were the primary purposes of these acquisitions?Would you consider these acquisitions successful?Intellectual property.Source:McKinsey European Scale-up Growth Journeys Survey,MayJune 2022Acquisitions for territorial expansion are fve times more likely to fail than

57、 those for products,people,or intellectual property.Acquisitions for territorial expansion are five times more likely to fail than those for products,people,or intellectual property.3 For more on the transition thinking among founders,see the recent McKinsey podcast interview“Giving developers a lea

58、ding role in cybersecurity”with the cofounder(and former CEO)of Snyk.7Hard choices:How Europes fastest-growing start-ups become unicornsIn other cases,founders may realize that they dont actually enjoy the day-to-day work demanded by their evolving role and may prefer to step back from their executi

59、ve position while retaining their board and shareholder roles.One founder told us,“As a founder,I did not want to run the business at that size,it did not excite me.Im a zero-to-one guy.So,I left and just remained as a shareholder.”Start-ups that reach the$100 million valuation milestone have alread

60、y outperformed scores of their peers,but the growth imperative only gets harder.As a result,scale-ups are forced to make hard choices among competing priorities.Sometimes(as with a US expansion),the decision may be all or nothing.Other trade-offs(such as in allocating resources across initiatives th

61、at drive growth,increase efficiency,or reinforce moats)may require a more balanced approach.The common thread among all is that leaders should be ready to embrace the challenge full on,understand the ramifications of various options,and be bold in plotting a path forward.Exhibit 4Product0Grew from$1

62、00 million to$1 billion valuation within 4 years1020304050FinancialMarketingDid not reach$1 billion valuation within 4 yearsWeb Exhibit of Top 3 C-level roles replaced after the frst scale round,1%of scale-ups(n=52)1Start-ups 1st investment round with an estimated valuation of$100 million.Excludes d

63、eep-tech-play scale-ups.Source:McKinsey European Scale-up Growth Journeys Survey,MayJune 2022The fastest-growing European start-ups are more likely to replace people in key roles after their frst scale round.The fastest-growing European start-ups are more likely to replace people in key roles after

64、their first scale round.Designed by McKinsey Global PublishingCopyright 2022 McKinsey&Company.All rights reserved.Kim Baroudy is a senior partner in McKinseys Copenhagen office,Giacomo Dolci is a partner in the Milan office,Sid Ramtri is an associate partner in the So Paulo office,and Harry Schiff i

65、s a consultant in the Montreal office.The authors wish to thank Moniem Abdu,Rahul Berry,Rob Bland,Rogerio Campos,Kurt Chauviere,Miles Emami,Jay Jubas,Armaan Kamerkar,Maiia Khamzina,Lena Koolman,Alok Kshirsagar,Ludovic Langlois-Therien,Kate Lloyd George,Massimo Mazza,Vladimir Mozhaev,Guilherme Radomysler,and Yotam Segal for their contributions to this article.Scan Download PersonalizeFind more content like this on the McKinsey Insights App8Hard choices:How Europes fastest-growing start-ups become unicorns