Apart from some exceptions, the results for corporate-startup collaboration have been generally disappointing.

But Joe Haslam believes there is hope - and his optimism comes from experience. Not only is he a professor at IE Business School in Madrid, where he teaches founders and MBA students how to scale their startups, he has co-founded and grown a number of companies including Marrakech.com, which raised over $75m in Venture Capital, and Hot Hotels, the first startup founded in Spain to be accelerated by the Techstars program in the USA.

According to Haslam we’ve paid more than enough attention to startups and enterprises, and nowhere near enough to the scaleup phase: how a startup grows into an established, sustainable company.

So what is a scaleup exactly, and what distinguishes it from a startup? And how can corporations identify and work with scaleups in a way that benefits both? At Innov8rs Tel Aviv, Haslam walked us through it.

Startup vs Scaleup

Steve Blank defined a startup as “an organization formed to search for a repeatable and scalable business model.” A startup is not just a smaller version of a big company. It is an organization set up to run experiments.

“When someone sends me a business plan that looks like it’s for a big company, I send it back to them and ask them to give me a list of the experiments they are running, “says Haslam. “What's your insight, your hypothesis? That's really all I care about.”

So when does a startup become a scaleup? It has nothing to do with how long you’ve existed as a company, or how many products you have, or even your profitability.

You become a scaleup when you achieve heavy engagement - in other words, product-market fit - and you stop doing what's not working in order to double-down on what is.

“People ask me to come in for a two-day workshop and at the beginning of the first day I realize they have all these products they don't need,” says Haslam. “I say ok: you need to snip this product and emphasize the stuff that's working. That leads to product-market dominance, and that leads to being an enterprise.”

Haslam outlined five ways a scaleup is different to a startup:

  • Startups are about putting out fires - in other words, survival. Scaleups are about lighting fires - looking for and taking opportunities.
  • Startups experiment to find out where they’re strong. Scaleups try to find out where they’re weak.
  • Startups need generalists - people who can do a bit of everything. Scaleups need specialists - people who know more about their particular area than most people in the world.
  • Startups experiment. Scaleups simplify.
  • Startups can make you famous. Scaleups can make you rich.

Growth doesn’t make you a scaleup

Uber. AliBaba. Airbnb. These companies are often brought up as examples of why corporations need to get with the innovation program. But are they the disruptive forces we’ve made them out to be? According to Haslam, the evidence says no.

“Anything that grows really fast can collapse just as fast. And when we actually look at the reality, all that's happened with these companies is that they've grown really fast.”

Uber is considered the most valuable venture-backed technology company in the world; it became the world’s largest taxi company in just nine years, without owning any vehicles. But according to data compiled by Bloomberg, Uber has ‘Peter Pan’ syndrome: though it has reached a stage most startups never realize, it has yet to turn a profit. The company has long been subsidizing rides; in some markets, customers paid just 41% of the true cost of their trip. Deep discounts like this can create an artificial signal about the actual size of a market; in fact, when Uber alerted passengers that fares had doubled, usage dropped by 40%.

If customers are only using your service because it’s priced cheap, and that pricing is not profitable or sustainable, can you really claim success?

“Growth can actually be a destructive thing,” Haslam points out.

“Edward Abbey said: growth for the sake of growth is the ideology of the cancer cell. Innovation is moving quickly - but if it's not sustainable, then it's not a good thing.”

That said, Uber has caused disruption in the taxi industry. But what about Airbnb? Several years ago, everyone thought Airbnb was going to turn the hotel industry on its head, if not make it obsolete. But hotels have continued to thrive, with 2017 seeing both hotel occupancy and stock prices climbing.

Small, and want to grow? Big, and want to hold on? Get the basics right.

Most companies aren’t disrupted simply because a faster moving, faster growing startup appears on the scene and they’ve failed to keep pace and innovate. In Haslam’s experience it's bad management that kills companies, not disruptive startups.

“Most companies are disrupted because they don’t see the blindingly obvious. They fail at the general, basic management stuff.

They don't know how many people work for them, or how many products they have, but yet they want to talk about innovation. Before you start talking about incubators and startups, you have to get your basic stuff right.”

Startups who fail to scaleup fail for similar reasons: good old-fashioned management skills. Haslam says “Everyone thinks they're a good manager, but I despair at the number of people who just don’t learn the basics: how to interview properly, how to manage people, how to give feedback. It's seen as a nerdy thing to be good at management.”

But if you want to scale up, you need the nerds. “MBAs generally don't found startups, but they do generally scale them. If you look at the key moments in a lot of growth companies, generally it was a boring nerdy MBA who started to ask the basic questions. What are our R&D costs? When do we get paid? What are our capital ratios? Maybe they weren't the person who had the initial inspiration, but they were certainly in there when the company scaled successfully.”

How to succeed at corporate-scaleup collaborations

Focus on sustainability, not innovation

Haslam often sees companies, large and small, focus on innovation over sustainability - and to him, that’s completely backwards. “Sustainability, trying to work out how to make something sustainable, is much more interesting than innovation because you're not trying to sell dollars for 80 cents, which is what innovation is for some companies. Actually applying the principles of sustainability gets you the innovation everyone's talking about.”

As an example, Haslam cites Madrid-based sustainable clothing company Ecoalf. Founded in 2012, their goal was to create a new generation of recycled products with the same quality and design of the best non-recycled products. Along the way, they basically transformed into an R&D operation, figuring out how to make thread and fabric out of used tires, plastic bottles, old fishing nets, discarded cotton and wool, and post-consumer coffee grounds. In addition to their flagship concept store in Madrid, Ecoalf has recently opened another location in Berlin, launched both their Ecoalf Foundation and Upcycling The Oceans project, and has entered into partnerships with companies like Apple, Swatch, GOOP, Barney’s New York, and Coca-Cola.

Go in at the right time (it’s later than you think)

Haslam cautions against letting fear drive partnership or acquisition decisions. Though many think you need to get in with a startup within their first five years, in reality you need to give them plenty of room to grow - even when that growth seems potentially threatening.

“Companies make their real money in their later phases, could take ten years. Peter Thiel argues that the real value of Paypal is yet to be realized! Let these startups grow and, if they manage to get a product-market fit and hire experts, then it’s time to pay attention to them.

Let them do stuff that may threaten you so you can identify their value - there’s plenty of time to acquire them and realize that value.”

In fact, Haslam argues that startups shouldn’t be seen as a threat at all. “Some of the incubators I've seen were so far away from anything that was commercially viable. The most interesting companies have people with deep sector knowledge - they spend time working in an area and acquire deep knowledge that very few people have. Do most of these startups have that? Absolutely not.

That’s why the future is about scaleups. It's about people who can get to a certain stage on their own. Let these startups go, let them prove themselves. Then you can start having the conversations.”

Embrace the era of the big...

Haslam points out that we’ve moved into a new era of exponential technology - self-driving cars, mixed reality, synthetic biology - that heavily favors the big over the small. And these technologies are not ‘startuppable’ in the same way previous innovations have been.

“This is not like Instagram, where you can have five people in a garage making filters and be worth a billion dollars. These technologies are big company things.

They require closer integration with corporates who understand regulation, who have specialists, who can put products using these technologies into their supply chain. We are starting an age where the big is favored over the small.”

...and ignore the startup hype

The shine of the startup is beginning to fade. Why? In part, because starting is so easy.

Haslam recounts how expensive it was to start his first company, Marrakesh, in 1999. As a provider of on-demand spend management solutions for retail and government they had to physically buy servers and build their own data center, and hire marketing planners and buyers. Now, you've got Amazon web servers, and can target people on Facebook. But while this drop in cost is good, it has been accompanied by a corresponding drop in quality.

“I thought, going back ten years, that more startups would mean more scaleups. What we're learning is that more startups just means more startups. It doesn't mean they're going to be better.

In general, saying ‘I have a startup’ is about as interesting as saying ‘I've joined a gym’. Talk to me when you scale.”