7 Reasons Scale-Ups Are Magnets for Savvy Investors, According to HubSpot‘s Founder

In the high-stakes world of startup investing, the prospect of picking a unicorn in its infancy is alluring. Every VC dreams of writing the first check to a future decacorn. But the reality is, betting on unproven seed-stage startups is a lot like playing the lottery. Your odds of hitting it big are vanishingly small.

That‘s why more and more seasoned investors are setting their sights on a different class of company: the scale-up. As HubSpot co-founder and longtime startup investor Dharmesh Shah explains, scale-ups represent a uniquely attractive investment opportunity. They combine genuine upside potential with proven traction and major risk reduction.

So what exactly separates scale-ups from their greener startup peers in the eyes of investors like Shah? Let‘s break down the key factors:

Scale-Ups Have Real Revenue and Customers

One of the biggest risks with seed-stage startups is that their product and business model are unproven. They might have a great concept and a sharp founding team, but it‘s all theoretical until they bring in paying customers.

Scale-ups, by contrast, have already proven their ability to generate real revenue by selling to real customers. While definitions vary, a company typically earns the "scale-up" label once it has hit the $10 million ARR mark and/or is growing revenues at 20% year-over-year or more.

Those numbers serve as powerful proof points for investors. "When a company has over $10 million in ARR, it shows they‘ve figured out product-market fit and how to acquire customers," says Shah. "That dramatically reduces the risk profile compared to a startup that‘s still searching for a viable model."

Scale-Ups Command Larger Rounds and Richer Valuations

The customer and revenue traction that scaleups demonstrate allows them to raise significantly larger rounds at higher valuations compared to early-stage startups.

Consider these data points:

  • Seed stage startups raise a median of $2.6 million at a median valuation of $10.5 million (per PitchBook)
  • Series A startups raise a median of $10 million at a $23 million pre-money valuation
  • Series B scale-ups raise a median of $32 million at a $90 million pre-money valuation
  • Series C scale-ups raise a median of $59 million at a $265 million valuation

For investors, this means writing larger checks into companies with significantly more upside potential. A seed investment might return 10X in a home run scenario, but a successful scale-up investment could return 50-100X. With power law returns in venture capital, that makes a huge difference.

Scale-Ups Have Battle-Tested Founders and Teams

Another major risk factor with startups is the unproven nature of the founding team. Even brilliant entrepreneurs with impressive pedigrees still have to prove they can execute on their vision and lead a company from zero to one. Many founder-market mismatches or team implosions doom startups before they even really get started.

With scale-ups, investors can bet on battle-tested founders and leadership teams. They‘ve shown they can get a product to market, recruit talent, acquire customers, build a brand, create repeatable processes, and navigate the countless other challenges of shepherding a fledgling company.

"Having that scar tissue and experience from the early stages is invaluable," says Shah. "As an investor, it gives you so much more confidence in the leadership‘s ability to scale the company and navigate the inevitable speed bumps."

Scale-Ups Can Deploy Capital More Efficiently

Startups typically need to raise capital before they have any real sense of how efficiently they can deploy it. Their product and go-to-market strategy are still taking shape, so it‘s difficult to gauge how effectively an influx of funding will translate into growth.

Scale-ups offer much more visibility into the return on investment of the capital they raise. With an established product, market presence, and key business functions like sales and marketing, they can more predictably put fresh funding to work in proven growth levers.

"The top scale-ups have strong unit economics and a handful of scalable growth channels that just need more fuel," says Shah. "As an investor, you can have confidence that your capital can be productively deployed from day one."

Scale-Ups Are Closer to Attractive Exit Opportunities

The ultimate goal of most startup investments is a profitable "exit" via an acquisition or IPO. But for early-stage startups, those eventualities are difficult to underwrite given the lack of predictability into their growth and market standing.

Scale-ups, however, are much closer to the milestones that make major exits possible. Their larger scale and growth trajectory make eventual exits more foreseeable. There are far more buyers for companies with $50-100M in revenue than those under $10M, and public markets have shown far more appetite for IPOs of later-stage, firmly established companies than early-stage growth stories.

While not every scale-up investment leads to a blockbuster exit, the odds are significantly better than with unproven startups. Mature private equity firms, growth funds, and strategic acquirers are constantly prowling for proven scale-ups to add to their portfolios.

Scale-Ups Reflect Powerful Market Trends

The rise of scale-ups as an investment category reflects broader shifts in the technology and venture capital markets. Over the past decade, companies have opted to stay private longer, and more value creation is happening pre-IPO. The number of private companies valued at $1 billion or more has exploded from a few dozen in 2013 to over 600 today.

This trend is driven by a few key factors:

  • Massive influxes of private capital from non-traditional investors like hedge funds, sovereign wealth funds, and family offices, which have longer time horizons than traditional VCs
  • The ability of companies to reach massive scale quickly by leveraging cloud infrastructure and tapping into global markets
  • The increased cost and complexity of going public, which has pushed IPO timelines out significantly

For investors, this means some of the most attractive returns are found not at the earliest stages, but in the critical scaling years between product-market fit and IPO. Companies like Airbnb, DoorDash, Snowflake, and yes, HubSpot, have minted fortunes for investors who got in at the right scale-up stage.

The Proof Is in the Returns

Ultimately, the power of scale-up investing comes down to one key factor: the incredible historical returns the category has delivered. According to Cambridge Associates, while early-stage VC funds have returned an average of 18% annually over the past 25 years, later-stage VC and growth equity funds (which typically invest in scale-ups) have returned over 25% per year over the same time period.

Put another way, if you had invested $100,000 into later stage companies in 1995, you‘d be sitting on over $15 million today, compared to "only" about $3 million if you had put that money into early-stage startups. The compounding power of those extra return percentage points is immense.

For investors like Dharmesh Shah, it‘s those kinds of return profiles that make scale-ups so attractive. By combining powerful growth prospects with demonstrated traction and an attractive risk/reward calculus, scale-ups represent a unique sweet spot.

"Don‘t get me wrong, I still get excited about promising startups at the earliest stages," says Shah. "But if I have to put significant capital to work and want the best odds of a strong return, I‘m betting on scale-ups all day long. The numbers speak for themselves."

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