Chapter 2

Start-up profiles: The Big Five

Is there another way to look at start-up growth?

VC-backed start-ups operate in a number of diverse sectors, across various geographic locations, and of course, they were a target of VC investments at different stages of their business development. All of this makes the analysis of VC-influenced growth a daunting task. Therefore, we need to step up our game and introduce a more sophisticated statistical approach.

The Data

How do we classify start-ups by growth pattern?

Multidimensional cluster analysis is a convenient analytical tool that groups start-ups according to common performance characteristics. For example, according to number of employees, turnover, total assets, intangible assets and operating costs. One way to define start-up performance based on these measures is the four-year compound annual growth rate (CAGR), starting from investment year. We could classify 93% of firms, that is, those still active in the fourth year after the VC investment. The rest, 7% of all start-ups, had defaulted by this point.

The cluster analysis suggests that there are five different kinds of European start-ups, some more prevalent than others. Named after their growth pattern, we find laggards, commoners, all-rounders, visionaries and superstars. Can you guess which one will get you the most bang for your buck? To find out, let’s have a look at each profile and their characteristics in the rest of the chapter.

Before we delve into the nitty-gritty of each profile, let’s line them up and compare their progress four years after the VC investment. Each profile is characterised by a different pattern of growth across our five key financial metrics. We find that, for example, laggards didn’t really advance much, in fact their business contracted. By contrast, the rest of the profiles’ growth rates are scattered throughout the positive domain, though with large variations. Just by comparing commoners and superstars, we clearly see why the latter have earned their name.


















What happens to start-ups after two years of growth?

Looking at start-up growth two years instead of four years after the VC investment does not result in major differences across start-up profiles. Most companies stick to the same group anyway. The commoners is the most stable profile, with almost 82% of firms remaining after four years as well. They are also the group most start-ups gravitate towards, particularly from the laggards profile – 53%. Laggards are also the companies with the highest probability of defaulting - 39%. However, relatively few start-ups (from any given profile) default before their fourth post-investment year.

…or after six years of growth?

We see more defaults between four and six years of growth than between two and four years. Why? Well, it’s a question of fund life. In line with other studies, we find that most VC investors stick to their invested companies for at least four years – resulting in only 7% of defaulted start-ups at year four. After that, under-performing investments tend to be written off, resulting in 10% default rate by year six. Naturally, laggard companies are still the most likely to default, with more than 20% of firms sharing this fate. Conversely, superstars are the least likely to go bust.

The commoners emerge as the most stable profile after six years as well, with 87% of companies maintaining their status. If there were only two groups, under-achievers (laggards and commoners) and high-achievers (all-rounders, visionaries and superstars), it would be more likely for an achieving start-up to switch to a non-achieving profile than vice-versa. At the same time, “big jumps” are very rare, i.e. almost no under-achieving start-up moves to a very successful profile or the opposite. Superstar firms turn out to be the most resilient, as they are the most likely to remain within a high-achieving group.

Profile distribution after two, four and six years following the VC investment

But what really was the role of VC?

The five profiles do a fine job at summarising the different types of VC-backed start-ups in the European ecosystem, as measured by the growth they experience after investment. But where is the “VC factor“? In other words, would start-ups not backed by VC firms (VCs) experience similar trajectories of growth? And if so, are there differences in the actual growth rates? To answer these questions and uncover the true “VC factor“, it’s time to bring into our analysis a new class of start-ups: those not backed by VC.

A recap of the five start-up profiles and their average growth rates