What exactly is a Startup?
Hypothetically, one of the most used term among investors and entrepreneurs and arguably the most abused is the word “Startup” (well, somewhere after “Entrepreneur” and a “Business Plan”).
Before we go any further, I want you to answer these two questions (you could drop your answers in the comment section),
- How would you define a startup?
- How does your business embody or distance itself from those characteristics? (if you have a business or are thinking of starting one)
Now, let’s try defining what a Startup is.
Have you ever wondered where the term came from, or where it was used first? I know I have.
Within 1994 and 2004, a lot of Information Technology based companies successfully went public triggering an eagerness for investing in any “dot-com” company. This led to a rapid growth in the value of the Nasdaq composite stock market index (a stock market index which included many internet-based companies) which peaked on March 10, 2000, before crashing. The crash lasted from March 11, 2000, to October 9, 2004 [see dot-com bubble]. This period, referred to as the dot-com bubble popularized the use of the term “Startup” [tekedia]. While, according to startup-book.com, it is stated that the word “Startup” in the business sense was first cited in 1976 on a Forbes article titled “The… unfashionable business of investing in startups in the electronic data processing field”. At this point, it is important to note use of the term “Startup” with relation to ICT.
Since 1976, there has been several definitions of what a Startup is. In fact, the article “But really – how do you define a Startup?” by Sam Dewey summarized that “being a Startup is as much as the mentality than anything”. While true that the definition of a startup is wrapped around a mental attitude of this group of people (by that I mean those within the Startup ecosystem), it sounds a lot like “A startup is defined as the definition given it”
To get a clear understanding of what a startup is especially now, I would be highlighting three main dimensions used in defining startups.
- Business model,
- Growth potential, and
“A Startup is an organization formed to search for a repeatable and scalable business model” this is the definition of a startup according to Steve blank. At first glance, this looks like a basic definition, but let’s break it down a bit.
When talking about a business model, we refer to how a company creates, delivers and capture value. A startup founder, starts out with a vision of a product with a set of features, then comes up with hypothesis about all the pieces in the business model (see business model) like; who are the customers/users, the distribution channel, how to price and position the product, how do we create end-user demand, how do we finance the company, how do we sustain talent, etc.
This is a common phase among Startups, therefore a founder is tasked with quickly validating these hypotheses and making adjustments until he finds a “repeatable and scalable model”.
“A Startup is a company designed to grow fast,” says Paul Graham in his article Startup = Growth. Growth is an important factor for any startup, as Paul Graham later stated, “Startups are so hard that you can’t be pointed off to the side and hope to succeed…. The good news is, if you get growth, everything tends to fall in place. Which means you can use growth like a compass to make almost every decision”.
Startups are born in very harsh situations, with a lot of uncertainties, a founder can’t afford being slow in such environments. You have to think quick and think growth.
Unlike other businesses, a startup is characterized by its ability to “(a) make something lots of people want (or need). (b) Reach and serve all those people”. To accomplish (b) a founder must always think growth.
Not all new businesses are startups. Where a business lacks growth potential (like a barbershop) it can’t be considered a Startup. Arguably we can also say that if a “Startup” lacks a growth mindset, it can’t also be called one.
With such growth expectancy from Startups and the high rate of uncertainty, Startups find themselves needing lots of financing, but unable to get such from traditional sources (e.g. banks).
A bank would find it easier to weigh the risks of a barbershop needing financing because its business model has been tested and has proven repeatable (I mean look around, they are in every corner, we don’t need a guru to tell the need), this is same with any business whose product and business model has been tested in the market.
But startups play in a different space, they not only come up with new concepts, but they are also testing various models to find market fit. They need investors willing to share the risk and profits.
As such Startups seek either Venture Capital financing or Angel investments. The question most times is, at what point does a startup stop accepting such investments? Is it at the point where they find a repeatable, scale-able, and tested business model?
I am not in this saying that all startups require investors (well…). But this is a very common characteristic.
It is also important to note that innovation remains the primary identifier for startups. Carrying out a CTRL C and CTRL V operation on an existing startup does not make you one. What startups strive to do each day is innovatively provide solutions to community challenges that have global impact.
Putting it all together,
While this is no one-sentence definition of what a Startup is (which by the way is close to impossible to generate one) it is only right that we have a proper understanding of what a Startup is, so we are not caught in space with no sense of direction. For example, why should a typical bookshop owner chase after VC financing when all he/she wants to do is buy more books for the shelve? Or a founder copying a model of an existing Startup and then calling himself one?
In the next five years, the definition of what a Startup means would surely change (The word may altogether become obsolete). But until then Startups should be properly identified and given the right kind of support.