The term “startup” has been bandied around with increasing frequency over the past few years to describe scrappy young ventures, hip San Francisco apps and huge tech companies. But what is a startup, really?
“A startup is a company working to solve a problem where the solution is not obvious and success is not guaranteed,” says Neil Blumenthal, cofounder and co-CEO of Warby Parker.
When I hear the word “startup,” my mind immediately begins playing a reel of a bunch of twenty-something year old web developers, huddled together in a retro office somewhere in the SF Bay Area. Drinking beer at midday, laughing about the epic, cool culture they’ve got going, and chatting about the fact that they spent the weekend hanging out with their venture capitalist besties.
So, when I hear people use the word “startup” in association with a small businesses—say a restaurant, cafe, hair salon or dental practice—my mind balks.
And I’m not entirely wrong.
Key difference #1—How these entities think about growth
Startups are different from traditional businesses primarily because they are designed to grow fast. By design, this means that they have something they can sell to a very large market. For most businesses, this is not the case.
Generally speaking, to operate a business, you don’t need a big market. You just need a market and you need to be able to reach and serve all of those within your market.
Key difference #2—The relationship with funding
Apart from having different ways of thinking about “growth,” startups seek financial investment differently than most small business operations. Startups tend to rely on capital that comes via angel investors or venture capital firms, while small business operations may rely on loans and grants.
Difference #3—Planning for the “end,” or the exit strategy
“Startups looking for angel investors or venture capital (VC) absolutely need an exit strategy because investors require it. The exit is what gives them a return.” – Tim Berry
Another thing you’ll want to keep in mind is your vision for your business. If you’re pitching for VC funding without an exit strategy, you’re unlikely to get it.
A startup is a registered business entity. Any unregistered entity is just a work in progress or just an idea. A startup has an organizational structure no matter how horizontal it may be, has employees on payrolls, and have shares divided among shareholders.
A new business is considered a startup if, through its product or service, it uncovers a new source of utility for its customers. Nevertheless, disruptive innovation isn’t limited to product or service offered. Many startups don’t innovate in the product dimension at all, but they
- Provide an existing product through different innovative channels (e.g. e-commerce)
- Devise a similar business model with added value
- Become an aggregator of existing products and services
- Target new markets with existing products or services
Innovation is a risky process. There are many internal and external factors which affect the fate of the startup. Since most startups don’t build their business model on an existing market demand, their survival, in the long run, is uncertain.
The context on which the innovation happens is what separates a startup from a small business. The problem can be existing or can be induced. Remember how the demand for packaged drinking water was created by convincing people about the dangers of drinking regular tap water?
What A Startup Isn’t?
The best way to determine if a company is a startup is to compare it with those which aren’t. That being said, we’ve come up with a pragmatic approach to categorize a business as ‘not a startup‘. The categories include:
Startups are known to have unconventional and unripe business models. The demand for their product is still at a nascent stage, making their business model a work in progress where there is still a scope for many new revenue streams.
There are many new companies which start-up with a copied business models or as a franchise. These companies aren’t categorized as startups.
The product or service the startup deals in is still in the introduction or nascent stage of its lifecycle. Many new companies procure or deal with some existing products in the market. These companies aren’t considered startups unless they innovate in other channels of the business.
A startup usually doesn’t have more than 100 employees. But this aspect can’t be used solely to categorize a business as a startup.
This is one of the most debated characteristics of a startup. According to the Indian government if a company is in business for more than 5 years, it isn’t a startup anymore.
A startup isn’t a startup anymore if it has reached a point where its turnover is more than $50 million.
FUNDING & CO-FUNDING
FasterCapital is a virtual incubator based on the co-funder, co-founder concept, where we invest in the startups and provide them the technical development from A to Z
If your company is considered a startup, and you are looking for funding, Co-funding, Incubation & Acceleration. Get at me Ocey Phillips