How do Startups Grow?

While being a major pillar of national economies and societies worldwide, startups tend to struggle to survive and grow into serious ventures. An often-cited challenge is to scale up their organizational competencies at the right time. However, some do manage to cross the chasm and survive. The focus of this research is to shed light on the underlying mechanism of startups surviving and growing into serious ventures. Traditionally, growth has been measured using scale-based outcomes, such as the number of employees or the value of the firm’s assets. We argue for a qualitative view on startup growth and seek to examine the mode of how startups grow. We do so by tracking how startups acquire organizational competencies, proxied by the human capital they hire into the firms. This approach is novel and offers substantial benefits to address the question of startup survival and performance that previous literature fell short on. We investigate which types of competencies startups consider important to acquire (versus outsource), when and in which sequence they think it is important to acquire a given competence, and how these competencies are linked to startup survival and performance. At the heart of the empirical strategy is the construction of a unique hand-collected dataset that tracks the recruitment history of the sample startups and the hired employees’ backgrounds over time. These data are supplemented by information on venture financing, patent activity, product introductions, and other startup information such as age or size—many of which have to be hand-collected, too, given the lack of ready-to-use data for this type of firms. Using these data, we can (i) model the various growth patterns, proxied by the sequence of hired competencies, (ii) study within-competence depth and breadth, (iii) examine how these growth patterns are explained by founder and venture capital characteristics, and (iv) link these growth patterns to various performance outcomes: startup innovation output, sales, subsequent capital acquisitions, and survival. These performance measures cover the various metrics used to evaluate venture success, and at the same time allow us to study the trade-offs among managing for a given type of performance outcome. We believe that the research findings can provide important insights for investors who seek to value startup potential, as well as for entrepreneurs in optimizing their startup’s growth paths and scale-up choices.