Start-ups that invest heavily in R&D grow faster and are more likely to raise external capital

These are the conclusions of the ninth edition of the Rising Star Monitor, an annual study by the Vlerick Scale-Up Centre in collaboration with Deloitte Belgium. The 2024 study examines how and where young promising start-ups invest their limited resources and offers an insight into the spending and people strategies that underpin growth and innovation in a company's early years. The study was conducted by Professor Veroniek Collewaert and researcher Andrea Albuja and is based on a survey of 125 companies and 193 founders.

High growth ambitions despite economic climate

In line with previous editions of the Rising Star Monitor, 36% of young companies with growth potential actually have the ambition to grow quickly. What is striking this year is that those growth ambitions have never been so high: the most ambitious companies indicate that they want to grow within this and five years with 43 employees and 14 million euros in sales.

How do young companies allocate their resources to fuel growth?

Professor Veroniek Collewaert explains how the resource allocation strategy of young scale-ups differs from companies that want to grow less.

Focus on R&D in the early years is an engine for rapid business growth

How the limited resources are used from the start of the company is decisive for the further growth trajectory of the start-up. High-growth companies invest 23% of their workforce in R&D from the start, while lower-growth companies prioritise sales (26%). Moreover, this strategic focus is a constant: up to 3 years after its establishment, promising fast-growing companies continue to invest 21% in R&D, while slow-growing companies continue to focus on sales (23%). 

When young, promising companies invest more resources in R&D, they also increase their chances of attracting external financing. 31% of those who mainly focus on R&D bring external investors on board, compared to only 18% for companies that do so less.

"External investors attach great importance to a clear focus on R&D and innovation when considering injecting capital into a start-up," says Veroniek Collewaert, Professor of Entrepreneurship at Vlerick Business School. "As a result of that external funding, the company in question can also reach operational milestones – such as product definition, product development, and the creation of a beta version – more quickly within those first three years."

"The continued focus on R&D among young, fast-growing companies clearly shows that they are looking at innovation strategically and in the long term. Even if it comes at the expense of short-term financial milestones," adds Sam Sluismans, Programme Leader of Deloitte's Technology Fast 50. "The development of products and the launch of a first product on the market often takes more time. That reduces the chance of positive cash flow or profit in the first three years."

Striking patterns in total spending

• On average, young start-ups spend 215,000 euros in the year they are founded, rising to 500,000 euros when they have been in existence for three years.
• Three years after its inception, they invest 100% of their revenue from sales back into the functional operation of the company. Half of that sales revenue goes to 3 domains: R&D (22%), production (16%) and sales (12%).
• Companies that raised external funding spend significantly more: on average, they invest 200% of sales revenue back into the business (vs. 62% of sales revenue for companies without external funding). Moreover, they are much more likely to invest that money in R&D (64%).
• There are also industry differences: while biotech companies spend 31% on R&D, ICT companies spend 20% in areas that are directly in contact with the customer, and only 15% goes to R&D.

Founding team composition influences growth decisions

• When the team of founders consists mainly of people with a degree in science, more is invested in R&D (18% vs. 4%).
• Founders who are older, who have a degree in business administration or who already have experience as entrepreneurs focus their resources more on sales.
• The larger the founding team, the broader the resources are deployed simultaneously across various business domains. Together, they often have more resources and also a wider range of skills and knowledge.

Founding team remuneration

• Many founders do not receive any remuneration at the start, and the most common form is a base salary. Only 57% of founders in fast-growing companies pay themselves some form of salary. Three years after its founding, this increases to 76%. The amount of this salary also increases over time.
• Founders retain the majority of the equity. However, fast-growing companies tend to give away more equity to external shareholders over the years.