At a recent industry event, I had an unexpectedly heated conversation with an investment banker about the meaning of the word startup in today's world. As we argued, it became clear that there is no longer (if there ever was) a standard definition to indicate what someone means when they use the word startup.
It's not as bad as Humpty Dumpty, who declared a word means whatever he decides it means, but in more cases than I expected companies that call themselves startups probably aren't, and some that are not considered startups probably are.
Based on some comments from some of my CTO colleagues and some other research, it is clear there are four dimensions of the word startup that most people are referring to. Companies are considered startups when they are:
- Searching for a product and a business model
- Using venture capital financing
- Focused on rapid, scalable growth
- Formally adopt or exhibit aspects of startup culture
As we will see, these categories help but leave a lot of gray areas.
Searching for a Product and a Business Model
Several of my CTO pals in effect agreed with the definition in Steve Blank's article "What is a Startup? First Principle
s," which put it this way: "a startup is an organization formed to search for a repeatable and scalable business model."
Daniel Seltzer, CTO of The Credit Junction, an NYC-based Fintech company, put it this way: "A startup is an unproven concept trying to become an operating entity."
This fits into a comment I heard venture investor Fred Wilson make when I was CTO of TheStreet.com. When asked if he invested in great companies, Wilson said no, rather he invested in great ideas and great people. By the time a company is great, the potential investment return is far lower.
Blank argues that a strong indicator of progress is that market acts in the way your business model predicts. "Your job as a founder is to quickly validate whether the model is correct by seeing if customers behave as your model predicts. Most of the time the darn customers don't behave as you predicted," Blank wrote. Startup executives then must "pivot," that is, change their business model until they get it right.
At some point you go through a transition as Blank shows in this diagram:
The question becomes then, once you have a business model are you still a startup?
One of my CTO's argued that once you are executing you are no longer a startup, "Once the product is fully developed, there are customers (paying or not) and there is business operations, sales, and marketing - I politely offer it's no longer a startup. There is a difference between being a new company and a startup."
Paul Graham points out in his analysis (which we will get to shortly) that you wouldn't consider a new barbershop a startup if it were run like all the other barbershops in town.
Using Venture Capital Financing
If a company takes venture financing, it is a startup, right? Well, for many years, that was probably true by the "search for the business model" standard. Companies that accepted Series A, B, C, sorts of rounds were in some ways searching for or perfecting a business model and there was lots of risk and uncertainty still on the table.
But nowadays, you have companies that are 8, 9, or more than 10 years old that are accepting VC rounds described as Series C, D, or E or whatever. Are these companies still startups? Most are certainly not still figuring out or perfecting their business models. They are executing.
The key question is why are such companies accepting venture rounds? Is it that the risk is still high even after many years of operation? For many of these companies, I suspect that the risk is low and they could raise money from more traditional sources such as bank loans or high-yield bonds. But in doing so, would the companies effectively announce that they were no longer a startup? That the potential for growth is over?
In addition, the amount of money they could get from the traditional sources would probably be a lot lower than they can get from a VC in exchange for equity.
To understand if such companies are still startups, we need to go to the next criteria.
Focus on Rapid, Scalable Growth
Paul Graham argues on his blog that "Startup = Growth.
" At Y-Combinator, the incubator Graham founded, the entrepreneurs are encouraged to focus on what will make the rate of growth as high as possible.
"We usually advise startups to pick a growth rate they think they can hit, and then just try to hit it every week. The key word here is â??just.' If they decide to grow at 7% a week and they hit that number, they're successful for that week. There's nothing more they need to do. But if they don't hit it, they've failed in the only thing that mattered and should be correspondingly alarmed," Graham writes in the blog.
"Focusing on hitting a growth rate reduces the otherwise bewilderingly multifarious problem of starting a startup to a single problem. You can use that target growth rate to make all your decisions for you; anything that gets you the growth you need is ipso facto right. Should you spend two days at a conference? Should you hire another programmer? Should you focus more on marketing? Should you spend time courting some big customer? Should you add x feature? Whatever gets you your target growth rate."
One of the CTOs suggested this framework:
- Potential startups - pre product market fit, you're not a startup, you just hope to grow up to become one someday!
- Startups with annual revenue growth of at least 50% (the sweet spot is 100%+ year on year growth). You're on the rocket ship ride.
- Former startup - With a modest 20% annual growth rate, institutional and/or public market investors and dependable, forecastable sales, you're counting the days until you vest and can change another piece of the world.
So by this standard, many of the companies that have figured out their business model and are growing at modest rates probably should not be considered startups if they reduced their expectations for growth.
But the reason that these longer-in-the-tooth companies are taking VC money is that they are not giving up on the goal of really scaling. They are building out the product and ramping the marketing to find that massive growth. So, it seems fair to say they are still startups because they hope for growth and can get financing.
Many companies try to be cultural startups. One of the CTOs described the romance of the startup this way: "Great coffee, no infrastructure, servers in a closet with a window air conditioner, folding tables from Costco. CTO does everything technical. By themselves. â??Technical' includes telephones, security systems, elevators, rat patrol, and plunger operator if the toilets back up."
This is pretty fun, I must say. I had the exquisite experience of doing a startup where I first worked in the basement of the chairman's townhouse. I was employee number two and participated in building the whole shooting match, with all of the joy and ugliness that goes with it.
The great thing about this experience is that you develop some useful traits like taking action in the face of utter panic. You learn to bring order to chaos and move things along in a positive direction in the face of uncertainty. These are the skills that documentary filmmakers or stage managers or event producers acquire. As Stanley Motss, the Hollywood producer portrayed by Dustin Hoffman, says in the movie "Wag the Dog," "Find a problem. Solve it. That's producing."
Many companies want this excitement and romance for themselves. But claiming it is not the same as having it. As one of the CTOs said, "CEOs of larger corporations sometimes try to claim â??we're a big startup' to declare the intent of being scrappy. They aren't fooling anyone."
The other part of the startup culture is a focus on creating technology. Graham argues that technology expertise is an excellent foundation for a startup.
"What's different about successful founders is that they can see different problems. It's a particularly good combination both to be good at technology and to face problems that can be solved by it, because technology changes so rapidly that formerly bad ideas often become good without anyone noticing," Graham writes in his blog.
"Rapid change in one area uncovers big, soluble problems in other areas. Sometimes the changes are advances, and what they change is solubility. That was the kind of change that yielded Apple; advances in chip technology finally let Steve Wozniak design a computer he could afford. But in Google's case, the most important change was the growth of the Web. What changed there was not solubility but bigness.
"The other connection between startups and technology is that startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology. When a startup both begins with an idea exposed by technological change and makes a product consisting of technology in the narrower sense (what used to be called "high technology"), it's easy to conflate the two. But the two connections are distinct, and, in principle, one could start a startup that was neither driven by technological change, nor whose product consisted of technology except in the broader sense."
One of the CTOs involved in educating entrepreneurs pointed out that this correlation has become much weaker as time has passed. Some people think that you must be a techie or have a deep understanding of technology to found a startup. As Graham points out, it certainly doesn't hurt, but it is not required.
Startups that aren't Startups, and Companies that Are
It doesn't seem that any of these frameworks explain large exceptions. Amazon, Google, Facebook, for example, found business models, went public, but then kept creating new ones and pivoting like crazy. Companies like Twitter went public while pivoting. Inside these companies, there are divisions that are seeking massive growth and acting just like startups. Are they startups now? When did they stop being startups? Is every new service on AWS or Google Cloud Platform a startup? Microsoft is focused on getting huge growth from Azure? Is this part of Microsoft a startup?
There are also companies like Instant Pot that have focused on product development, skipped the traditional marketing process, and have achieved massive growth using Amazon's platform. Are such companies startups? Do they count as startups only if the growth rate is high enough?
Many companies use the term selectively. When speaking to customers who are seeking to understand the long-term prospects of the company, executives say they are no longer a startup, but a mature company. But when they are looking for funding, the company becomes a growth-obsessed startup again.
This examination has made it clear to me that when someone uses the word "startup" you need to ask a few more questions to find out what they really mean.
The article was originally published here