By Dr Joachim Timlon, Assistant Professor in Strategy and International Business, University of Birmingham
Digital transformation has become a top priority for corporate boards, further accelerated by COVID-19 and strategies that have transformed British tech start-ups into Unicorns. To become a Unicorn a privately owned company needs to be valued at over $1billion. Cazoo, Motorway, Hopin, ASOS, Just Eat, Shazam, Funding Circle, IHS Markit and Blippar are some examples of British private companies that once were start-ups but have now reached the Unicorn status with a valuation of at least $1billion (around £730 million). How have British tech start-ups transformed into Unicorns? The secret to keeping the momentum going towards exponential growth and returns seems to reside in distinctive strategies.
To start, successful tech start-ups follow one of four distinct strategic trajectories to success: network, scale, product or deep tech. While these categories are not mutually exclusive, each of them provides a pathway to scale, and each comes with its own characteristics regarding revenue growth, employees, and other similar markers.
Network strategy seeks to use network effects that might be local or global. This refers to the concept that the value of a product, service or platform increases because the number of users increases, causing the network itself to grow. One example is social media platforms that primarily benefit from direct network effects because the value of the services provided grows exponentially, as a direct result of attracting more users so called direct network effects. Indirect network effects occurs when the value of the product or services increases due to complementary products or services that are added to the platform. Network effects can help scale a business by improving the value proposition, increasing the customer base, and market share, generating increased profits.
An effective network strategy depends on a number of factors, such as the number of active users, the network’s reliability or robustness to transfer big data, security so that the data reaches its destination without any third-party reading or altering or destroying the data and secure procedures to recover from data losses and breaches. This strategy requires the highest funding of all the strategies to subsidize early usage. Successful start-ups, therefore, focus on individual markets to become the dominant local platform, entering them sequentially, one-by-one, rather than all at once with a global approach as may be possible in a region with more uniform characteristics between cities. Typically, these are marketplace, mobility and social-media start-ups, such as Cazoo, the used car marketplace, which has become a most recent UK Unicorn in record-breaking time while adapting to any mobility ecosystem.
Scale strategy seeks to use the effects of economies of scale to dominate a market. Economies of scale refers to cost advantages due to a decrease in cost per unit of output obtained by increased scale of operation. Putting it simply – doing things more efficiently with increasing size. This strategy requires rapid sales growth early on, initial commercial success, and relies more on investments in sales, marketing and business development roles of employees than product development. Start-ups that pursue this play are frequently e-commerce, consumer, or media companies, such as ASOS, Just Eat and Shazam. To apply a scale strategy, the board needs to make solid trade-off decisions between exploiting economies of scale, cost efficiencies, and exploring product differentiation.
Product strategy seeks to use the effects of focus or concentrating on providing value to customers by developing an initial product for a select, well-defined use case. A use case is a software and system engineering term that describes how a user uses a system or platform to accomplish a particular goal, such as having a unique customer experience. To drive early usage this strategy relies on the collection of detailed customer feedback, which is essential for further product development and scaling up to a larger customer base. It requires getting the product (and market fit) right early on so their product and tech roles, such as engineering, product management and IT, are more important than commercial and operational roles. Start-ups with a product strategy are usually B2B software-as-a-service (SaaS) providers or FinTech’s, such as Funding Circle (one of the first alternative lending platforms in the UK, enabling individuals to lend to small businesses).
- Deep Tech
Deep tech strategy seeks to use the effects from exploratory research and development (R&D) in new digital technologies, such as Artificial Intelligence. It relies on top research talents from international universities, having the highest share of employees in R&D roles, receiving a higher amount of patents compared with the other strategies. It involves a longer time focus than the other strategies and equally requires investors that have a similar long-term vision and willingness to fund a long R&D phase. Blippar (an image-recognition platform and visual browser, which essentially enables its users to take a picture of anything, and then receive a vast collection of search results related to the photo) is one example.
This secret ingredient revealed as different kinds of digital strategies is useful to explain how British start-ups have transformed into Unicorns. Understanding the strategies, requirements and success for these unicorns can guide board decisions about strategies to be used and resource allocations to be made with important trade-offs between cost efficiencies and differentiation, as well as being right and being fast in transforming an aspiring start-up into a magnificent Unicorn.