What is a startup?
On startup hype and the distinction between a startup and a small business
“I am sick and tired of the word startup. It seems like everyone and their mother has a startup today, I might even start calling the Vietnamese grocery store next doors a food startup.”
Above is part of a response to a recent article of mine that discussed the ambitions of entrepreneurs in Europe and the fact that too many of them focused on local businesses. It is an example of several comments that addressed a growing phenomenon in our region, let’s call it a startup hype.
Definition of a startup
I don’t know whether or not we are experiencing a startup hype. I wouldn’t even know how to define it, measure it or prove its presence or absence and I am not sure if it is worth anyone’s time to do so. But if I was to side with the claim that our region is experiencing a startup hype, I would argue that there is a paradox: we are experiencing a startup hype despite the fact that there are very few actual startups. And part of the reason for such paradox would be the ambiguity surrounding the definition of what a startup is.
Trying to define a startup is a risky affair that I am not going to undertake. Instead, I am going to steal a definition from Paul Graham’s widely circulated article on growth. It makes excellent points on many topics which are worth separate posts, including why it is beneficial for profitable companies to take outside investment or why so many people hate the word startup for wrong reasons.
Paul Graham defines startup as a “company designed to grow fast”. Not just a company that grows fast, since most startups fail (his article explains why), but a company that makes an explicit commitment to grow fast. Such commitment already makes a huge difference as it accents a mindset rather than a factual description — which is exactly what we believe in at Credo Ventures as well.
Of course, the natural question is to ask how fast is fast. Paul Graham’s Y Combinator companies that he considers good grow between 5-7% a week, the exceptional ones at 10%. Ideally in revenue, although Paul Graham explains why the next best metric is active users. A typical company at Y Combinator makes about a $1,000 per week at the beginning of the program.
The natural follow on question is to ask for what period of time. The length of the exponential growth naturally defines how successful the startup will be. Paul Graham makes an example of a company, which grows from $1,000 by 5% for 4 years (and thus makes $25 MM a month in revenue). A great article by Jules Maltz shows what kind of growth do successful companies experience in more mature stages, four years before their IPO.
So how many startups does our region really have?
The point of this post is not to argue whether 2%, 5% or 10% is the right weekly growth. Nor it is to argue that startups should grow by such rate for 2 years, 4 or 8. The point is that if we look at the number of companies in our region that are at least attempting to generate such growth numbers or even thinking of reaching something like $25 MM in monthly revenue (real company net revenue, not value of processed transactions) in four years or even eight, we could cross out vast majority of companies that call themselves startups. I would call them small to medium sized businesses. The end of the startup hype.
Surely a lot of our entrepreneurs will say that such growth is impossible to achieve in a single European country. And yes, the second point of this post is to say that it is very hard. Actually one could make the case it is harder here than in the United States, China or India. But not impossible. I have seen at Benson Oak how our portfolio company AVG grew from low single digits MM in revenues in 2003 to USD 180 MM in 2009. From Brno. Czech Republic, it was later stage than Y Combinator’s companies with $1,000 of monthly revenue, therefore I suppose a revenue CAGR nearing 100% is still pretty good given the company stage. And the 2009 revenue had doubled by 2012 with current valuation of USD 1.2 Bln.
The case for building startups being harder for us in Europe is based on our small domestic markets: companies in China or India can be startups even with a ‘local’ business idea, because their definition of local is in hundreds of millions of potential users. I bow in front of those entrepreneurs who can achieve startup-like growth for a prolonged period of time by having a single-country focus in Europe. They are truly masters of business execution. But based on Paul Graham’s logic I would argue that if we want to run a startup in our region, and achieve startup-like growth, we would have an easier time starting with the premise that we want to build a global company and thus start businesses that stand the test of global competition.
Some globally celebrated entrepreneurs like Richard Branson made their first successes with local businesses such as “CD shops” or virtual mobile operator. But Branson executed them well in a market much bigger than our region. He might have even experienced the kind of growth Paul Graham expects to see in a startup. And those ‘local’ businesses made him a fortune big enough to finance his own space program. I have serious doubts that a local business in Europe will give us a chance to finance our own space program (most likely not even a chance to go through someone else’s program). Maybe I am wrong. But for all those who want to leave their own mark in the universe, I think you have better odds with sticking to a global startup. And for those who don’t, that’s fine, there is nothing wrong with a small to medium sized business. Heck, even big sized business. Just don’t call your company a startup, you will help avoid the startup hype.
