SCALE-UPS IN THE NETHERLANDS
Moving from start-up to scale-up
Entrepreneurship seems to be in its heyday in the Netherlands. There are more entrepreneurs and start-ups than ever before. Simultaneously, the Dutch government has developed many new initiatives to foster and grow the entrepreneurial climate in recent years, ranging from policies and regulations surrounding alternative forms of financing to the launch of StartupDelta to put our country on the map as one of the world’s most attractive ecosystems for innovative start-ups.
As a result of all these efforts in addition to the increasing popularity of entrepreneurship in general, much attention has been paid to creating an ecosystem to foster the birth of new, innovative start-ups. Creating this breeding ground for start-ups has been absolutely vital for allowing the Dutch ecosystem to flourish as it has, and will remain crucial for its continued growth. Now that this foundation has been laid, however, it is also time to turn our attention to the next phase: scaling-up.
The importance of scale-ups in the Netherlands
Research by the Erasmus Centre for Entrepreneurship (ECE) and the Rotterdam School of Management (RSM) shows that scale-ups are a crucial part of the Dutch economy in terms of job creation. Between 2011 and 2014, Dutch scale-ups created more than 70,000 full-time positions; a remarkable contribution since these scale-ups make up a mere 0.5% of the Dutch private sector (Jansen & de Vos, 2015).
The annual Scale-up Dashboard by ECE and RSM defines a scale-up company according to the criteria established by the Organisation for Economic Co-operation and Development (OECD). A company is a scale-up or fast-growing company when it generates a yearly growth in turnover and/or employees of 20% over a period of three years. To be eligible for the scale-up designation, a company is required to employ a minimum of 10 people or have a turnover of at least five million euros at the start of the three year time period.
In accordance with this definition, firms can be divided into three categories:
- Fast-growing SMEs or Scale-ups (more than 20% growth per year)
- Growing SMEs (10-20% growth per year)
- Stable/shrinking SMEs (less than 10% growth per year)
In the Netherlands, 21% of scale-ups are active in the wholesale and retail sector. Other sectors with a significant number of scale-ups include the professional service industry, the IT sector and traditional industry. Overall, most scale-ups are relatively young and have fewer than 50 employees, with only 2% boasting more than 100 employees. Most scale-ups are based in Amsterdam, Rotterdam, Utrecht and Eindhoven (Jansen & de Vos, 2015).
The decline of Dutch scale-ups and SME growth
Despite their importance to the competitiveness of the Dutch economy, the number of scale-ups in the Netherlands fell by more than 50% during the period 2008–2014. Given the aforementioned contribution that scale-ups make to the competitiveness of the Dutch economy, this decline in companies being classified as scale-ups from 11% to a mere 5.4% is serious cause for concern and warrants additional research (until recently, scale-ups have been mostly neglected from a research perspective) in order to gain a better understanding of the barriers to continued growth. Even more so since we have not just witnessed a decrease in the number of scale-ups, but also a 21% increase in the total number of Dutch firms that can be classified as ‘stable/shrinking’. Over the past six years, this latter group has grown to include a whopping 70% of all Dutch SMEs (Jansen & de Vos, 2015).
A growth in SMEs – and scale-ups in particular – is vital for employment and job growth in the Netherlands, as SMEs create 58% of the total turnover of Dutch businesses and are responsible for 70% of Dutch employment. As previously observed, of the total population of SMEs, young SMEs and scale-ups have made a disproportionate contribution to net job creation in the past ten years, with almost 90% of the new jobs being created by this group of companies.1
It comes as no surprise that the economic downturn that started in 2008 has had an effect on the growth of Dutch SMEs. However, these macroeconomic conditions alone are not enough to explain the overall trend in the Netherlands. Previous research shows that the Netherlands performs significantly worse than other European countries when it comes to scale-ups. For example, small companies in the Netherlands grow 40% slower on average than their counterparts in countries such as Germany and Belgium (Snel & Timmermans, 2012). Another study by the OECD (2014) attributes a relatively high percentage of the employment rate in the Netherlands to companies that never grow beyond one employee. Compared to the UK, our country has double the number of freelancers.
Furthermore, recent research by the European Commission (2015) shows a less positive trend in gross value added and employment than in surrounding countries. While surrounding countries saw a growth in added value of SMEs, the Netherlands experienced a decline in added value in the same time period. Similarly, from 2008 to 2014 the creation of jobs in SMEs was -0.9% on average in European countries, while the Netherlands scored -2.4%. This number becomes worse when compared to the net job creation by SMEs in neighbouring countries such as Germany (+20.2%), Belgium (+11.1%) and the UK (+5.1%) (Muller, Gagliardi, Caliandro, Unlu Bohn & Klitou, 2014).
Barriers to scaling up for Dutch firms
Various studies show that, more often than not, barriers to rapid growth lie with the entrepreneurs themselves. Generally speaking, Dutch entrepreneurs appear to lack the ambition for growth that would mark them for scale-up potential. Comparing Dutch entrepreneurs to others within Europe, 26.1% of European start-ups expect to have at least five more employees within five years. In the Netherlands, this percentage is only 19.5% and has been dropping over the past few years. This might be attributable in part to the rise of freelancers, as similar research shows that 75% of freelancers expect never to hire a single employee. Only a small group of individuals expects to expand and lead a company with employees in the future (Hoevenagel, de Vries & Vroonhof, 2015).
In addition, more than 60% of Dutch entrepreneurs indicate that their main activity is focused on lowering costs, consolidating, and improving productivity. While this focus helped many to survive the financial crisis, rapid growth requires the development of new business models, new markets and going beyond the incremental innovation of existing products and services. The Entrepreneurship Index, however, suggests that since Dutch entrepreneurs do not focus on these activities, they are not prioritising growth and investment.2
Extending the observations regarding the lack of growth ambition, the degree of internationalisation amongst Dutch SMEs is lower than the European average (European Commission, 2015). A study by ScaleUp Company (formerly known as NLgroeit) shows that Dutch SMEs are more dependent on their domestic market, which showed a greater decline than the export market for Dutch businesses during the financial crisis. Dutch firms struggle to enter new markets and expand their value creation.
Aside from there being little growth ambition, there is also a lack of skills to initiate and facilitate that growth. Many entrepreneurs struggle with the transition from start-up to scale-up, where the challenge is to design, improve and expand an organisation beyond the initial product or service. This shift is demanding for many entrepreneurs as it requires new management skills, leadership qualities, the ability to rapidly attract the right talent, and knowledge that many do not possess (Jansen & Roelofsen, 2016).
Finally, when Dutch entrepreneurs do have the ambitions and skills to grow, there appears to still be a barrier to growth in terms of access to capital. The study by ScaleUp Company shows that SME entrepreneurs experience difficulties accessing extra funding for both equity and debt (McKinsey & Company, 2014). Despite various efforts and improvements in access to capital, it remains difficult to access the funding required to scale up in the Netherlands, compared to the average European country. The overall willingness of Dutch banks to provide fast-growing companies with loans is lower than in neighbouring countries, due to the relatively high costs of these loans. While alternative funding is on the rise, the options for scale-ups remain limited (Jansen & Roelofsen, 2016).
The future of Dutch scale-ups
Despite the overall decrease in the number of Dutch scale-ups, there is also room for some good news. While in the past years we have seen the number of Dutch scale-ups decrease by 50% – a stronger decline than in most neighbouring European countries – the Netherlands still has the highest number of scale-ups in Europe. The ScaleUp Dashboard shows that in 2014, 5.4% of all Dutch companies with more than ten employees were scale-ups, a total number of 2800 firms. This percentage is higher than that of countries like the UK, Germany or France, which have been labeled the scale-up nations for the past few years. Presently in the UK, for example, 4.6% of companies are scale-ups and in France and Germany these percentages are even lower (Jansen & de Vos, 2015).
If we want to maintain the position of leading ‘scale-up nation’, there’s much work still to be done. The decline of scale-ups in recent years and the lack of SME growth more generally warrant concern and increased attention as fast-growing firms are vital to the competitiveness of the Dutch economy and job creation. We can continue to build our scale-up nation by providing insights based upon real-time information on scale-ups, constructing knowledge and expertise about long-term investments in scale-ups, increasing the integration of entrepreneurship in educational programmes, developing leadership qualities within scale-ups and encouraging collaboration between scale-ups and established organisations (Jansen & de Vos, 2015).
Every year, the Erasmus Centre for Entrepreneurship (ECE) and the Rotterdam School of Management (RSM) publish the Scale-up Dashboard to provide additional insights into the world of Dutch and European scale-ups so that we can stimulate and facilitate their growth and that of the Dutch economy as a whole. The 2015 edition of the Scale-up Dashboard will be published on November 17 2016. For the latest insights, go to http://ece.nl/what-we-do/scale-up-research/.
1 Staat van het MKB, www.staatvanhetmkb.nl.
2 Erasmus Centre for Entrepreneurship, Erasmus Ondernemerschapsindex 2014.
European Commission (2015) SBA-Factsheet 2015. Retrieved from European Commission website: http://ec.europa.eu/DocsRoom/documents/16344/attachments/25/translations/nl/renditions/native
Criscuolo, C., P. N. Gal and C. Menon (2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers, No. 14, OECD Publishing. http://dx.doi.org/10.1787/5jz417hj6hg6-en
Hoevenagel, R., de Vries, N. & Vroonhof, P. (2015) Zzp-panel: resultaten eerste meting 2014. Retrieved from Panteia website: http://ondernemerschap.panteia.nl/main/download/id/a201435
Jansen, J. & de Vos, L. (2015) ScaleUp Dashboard 2015. Retrieved from Rotterdam School of Management website: http://www.rsm.nl/fileadmin/Images_NEW/Scale-up_Dashboard_2015.pdf
Jansen, J. & Roelofsen, O. (2016) De haperende groeimotor van het Nederlands kleinbedrijf. Retrieved from NL groeit website: https://www.nlgroeit.nl/sites/default/files/pdf/nlgroeit_whitepaper.pdf
McKinsey & Company (2014) Het kleinbedrijf Grote motor van Nederland. Retrieved from Rijksoverheid website: https://www.rijksoverheid.nl/binaries/rijksoverheid/documenten/rapporten/2014/06/20/het-kleinbedrijf-grote-motor-van-nederland/het-kleinbedrijf-grote-motor-nederland.pdf
Muller, P.,Gagliardi, D., Caliandro, C., Unlu Bohn, N. & Klitou, D. (2014) SME Performance Review 2013/2014. Retrieved from European Commission website: http://ec.europa.eu/DocsRoom/documents/16121/attachments/1/translations/en/renditions/pdf
Snel, D. & Timmermans, N. (2012) Meer snelgroeiende bedrijven en meer krimpende bedrijven in Nederland. Retrieved from IMK Intermediair website: https://www.imk.nl/uploads/wp-content/helpdesk-wp-content/uploads/2012/11/Panteia-Meer-snelgroeiende-bedrijven-en-meer-krimpende-bedrijven-in-Nederland.pdf
Prof. Dr. Justin J.P. Jansen is professor of Corporate Entrepreneurship at Rotterdam School of Management and scientific director of the Erasmus Centre for Entrepreneurship in the Netherlands. He is intrigued by the notion that most organizations tend to focus on existing businesses and clients, unable to break away from existing routines and processes in order to explore new territories. Based on the impact of his research, he has recently been named as one of the most influential scientific minds worldwide by Thomson Reuters. Professor Jansen has been named as one of the top-100 leading professors in the field of entrepreneurship.