Scale-ups: what they are and why they are important for the country's economic recovery

Scale-ups are innovative companies that have already developed their own product and business model, operate in the marketplace and have certain successful characteristics that allow them to aspire to international growth. In a sense, scale-ups are mature start-ups that are ready to grow.

According to Deloitte, scale-ups can be defined as companies that reach a turnover of at least 10 million dollars in the first five years of life.

Other aspects that characterise scale-ups are:

1. Winning vision: articulated mission to solve a large and urgent need through an ambitious, future-oriented and innovative business concept.

2. Favourable market: the size, growth and margins of the industry certainly provide a favourable position to scale.

3. Enthusiastic consumer base: people who buy the product quickly because it is significantly better and/or satisfies an urgent need.

4. Uniqueness: whether it is the mastery of a specific skill, a privileged relationship, etc. Something that makes a product or service distinguishable from the competition.

5. Scalable model: increasing returns, viral sales dynamics or improvement through the use of economies of scale.

According to the study Scale up: the experience game by THNK and Deloitte Fast Ventures (2014), which analysed the success factors of 400 start-ups in 24 countries and identified those success factors that generate unicorns, only one start-up out of 200 becomes a scaleup after about 5 years.

The Italian scale-up context

The Italian start-up ecosystem is still undersized compared to other international contexts and the number of scale-ups that manage to emerge is relatively low. This is not due to a lack of quality start-ups, which often go abroad in search of sufficient venture capital investment.

One of the reasons why scale-ups struggle to get off the ground in Italy is that the venture capital market is still quite young in our country.  Therefore, it has yet to convince a growing amount of venture capitalists. In addition, the lack of 'exit' or stock market listing has not facilitated the raising of new funds.

In general, Italy is a nation traditionally accustomed to safe investment. We have a great creative capacity, but unfortunately, we are lagging behind in terms of culture. This is demonstrated by the fact that the real estate market remains the preferred investment field for Italian investors.

According to the above-mentioned report, in Italy, out of about 1 billion dollars, 85% was raised by venture capital and private investments, the remaining 15% by means of IPOs of 9 companies that have been listed on the stock exchange. 78% of the investment rounds were led by local investors, 9% by European investors and 8% by US investors. But the financial rounds led by Italian investors are smaller in size.

The role of crowdfunding in financing scale-ups

Crowdfunding platforms can play a fundamental role in the development of Italian scale-ups. Equity crowdfunding is gaining more and more authority and receives the trust of investors, including institutional investors who are showing a growing interest in the sector.

In Italy, crowdfunding is complementary to venture capital. At European level, the market for B rounds of European-based companies is very good, with a large availability of capital, volumes increasing by 5% year on year. However, 60% of venture capital rounds are made in the UK, Germany and France.[1]

Investments in scale-ups usually offer a higher level of security than investments in start-ups. Scale-ups are entrepreneurial entities that have reached a certain maturity to be able to close important funding rounds, expand beyond their home country and become established companies.

According to a report published in 2018 by the Digital360 Research Centre, Italy is in 20th place among the EU countries for the effectiveness of the entire ecosystem in supporting start-ups and scale-ups. Our country is below the European average, far from comparable economies such as the United Kingdom (2nd place), Germany (5th place) and France (11th place), surpassed by some smaller countries that in recent years have been able to create very positive structural conditions for the entrepreneurial ecosystem (such as Estonia, Latvia and Slovenia) and by some countries that have focused on an aggressive use of tax breaks (such as Ireland, Luxembourg and Cyprus).

However, the future is promising and bodes well. Italy, in fact, is showing an important recovery thanks to a number of factors, including the growth of investment operations in scaleups, as well as the doubling of equity financing of startups and the increase in unicorns (companies reaching a value of USD 1 billion).

The exits front is also interesting. The number of divestments is still quite low, but there is finally some interest from international industrial players in our entrepreneurial reality.

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