A small group of SMEs that “scale up” account for the majority of new jobs in the economy. These firms can play a key role in the recovery. However, scaling up brings new challenges. New evidence shows that while the majority of scalers are able to maintain the new scale, some fall victims of their own success. What does this mean for SME and scaling-up policies?
A tale of two firms
Finnish firms NewLiner and Visma experienced spectacular growth between 2012 and 2015. NewLiner – a construction company specialising in the renovation of piping systems –grew from 56 to 93 employees. Visma, an information technology (IT) company that provides smart cloud services, grew from 25 employees to 113 over the period. NewLiner and Visma are two examples of “scalers”, i.e., small- or medium-sized enterprises (SMEs) that grow employment or turnover by one third or more within three years.
However, thereafter, the fortunes of Visma and NewLiner diverged. Visma continued to grow, creating another 78 jobs. NewLiner, by contrast, contracted sharply, cutting its employment by two-thirds. Many of the new workers that had joined the company only a few months before had to look for another job – again.
NewLiner and Visma were both part of the roughly 2 000 Finnish scalers, which account for only 13% of all SMEs, but contribute 72% of the new jobs SMEs added to the Finnish economy. But NewLiner’s reversal of fortunes hints at a cautionary tale. Are the celebrated “scalers” actually able to adapt to their new scale and sustain it, or do they risk falling victim to their own success?
A larger size brings many new challenges. Founders or owners may find it difficult to step back and delegate responsibilities. They may need to comply with new regulations and deal with fiercer competition. They may struggle to find enough workers with the skills that they need. Fast growth may be built on unsustainable investments that jeopardise a firm’s financial balance. These are just some examples of the growing pains that could have been behind NewLiner’s struggles.
The majority of scalers maintain their new scale or grow further
The good news is that the majority of scalers are able to adapt to the challenges their new size brings. They manage to consolidate or even continue to expand their business, just as Visma did. Evidence from Finland, Italy, Portugal, and Spain shows that almost two-thirds of scalers continue to grow or at least maintain their new scale in the three years after their first growth phase. 12% of scalers in Spain and 25% in Portugal even manage to scale up twice, which means that their employment grows by more than 75% within a period of six years. In total, scalers that continue to grow add more jobs than are lost in scalers that fall victim to their initial success. Policies that back scaling, therefore, continue to “pay off” beyond the scale-up phase.
Scalers in the information and communication technologies (ICT) sector are most likely to scale up twice
SMEs in the ICT sector, like Visma, are particularly likely to continue their fast growth over a 6-year period. One-third of scalers in the ICT sector (34% in Finland, 39% in Portugal, 25% in Italy, and 18% in Spain) scale up twice in a row. Construction firms, like NewLiner, are generally the least likely to scale up again, and the most likely to downscale. This more volatile trajectory may in part depend on the work that depends on large contracts and the cyclicality of real estate investments. Nevertheless, even in construction half of scalers maintain their new employment level or continue to grow.
How can policy alleviate scalers’ growing pains?
The evidence shows that the quick rise and fall of NewLiner is the exception rather than the rule. The majority of scale-ups create jobs that are sustainable over the longer term. Policies are needed to support more firms to do so, such as the “Help to grow” programme in the UK and the “Nordic Scalers 2.0” in the Nordic region. These programmes provide managerial training and advisory services that not only help firms scale up but to thrive at the new scale. In doing so, they can help lay the foundations for a job-rich recovery that lasts.