What Makes a Newly Established Company a Startup?

Today, large or small, many new companies have been established every day. Craftsmen open their own shops or large corporations create new companies to expand their business line. We do not call any of them a startup, with some exceptions. So what distinguishes startups from these new companies?

First, focusing on technology, getting investment, or being established to be sold when the time comes, criteria come to mind. However, the only important indicator that makes a newly established company startup is to GROW rapidly, continuously, and steadily. The high level of technology and investment processes are designed to feed this growth aim. In other words, technology focus and investment processes are observed in almost all startups, since technology can reach the global market more easily and quickly, and since the cash that comes with investment creates an opportunity to take quick action so it allows maintaining even, increasing the growth rate. In addition, the “scalability potential”, which is perhaps the most point of attention of venture capitalists, is designed to evaluate how easily this startup will grow. That’s why startups are built to grow fast, and they always put sustaining growth as their primary goal at every critical decision-making moment.

So what does it take to grow?: According to Paul Graham, there are two main factors for growth. First, many people need the product/service and the target market needs to be large, secondly, this solution needs to be accessible to all the people who need it. The difficulty of establishing a startup is every player aims to meet the demands and needs of large markets, so it is necessary to design an innovative and disruptive solution. The biggest example was the spread of the computer. As Guy Kawasaki mentioned in his “Art of Innovation” speech, when he was a guest at TEDxBerkeley, in 1943 IBM Chairman Thomas Watson said that: “I think there is a world market for maybe five computers.” To think the unthinkable, to imagine the unimagined is saying “No, everyone will have their own computer.” like Apple, while such thoughts are active in the market.

Why is growth significant?: The natural benefits of growth also apply to startups. It brings many important favorable conditions as reducing costs, strengthening market dominance, increasing bargaining power, and increasing efficiency. The reason why it is dominant in terms of startups is this: Ventures start with intensive R&D studies and are established to produce a meaningful output and value from scratch. Since they have extremely limited resources, especially in terms of human and monetary, they have very little time to create the minimum viable product. After MVP, the company needs to find early adaptors and starts to target product-market fit so time is the most significant factor in the limitations list of startups. In order to reveal attractive and appealing value in a short time, a stable high growth rate is a prerequisite and big risks are taken regularly to achieve this rapid growth. For example, a company that earns $1000 per month and grows 1% per week will only make $7900 per month after 4 years. However, if we increase the growth rate to 5%, this startup will be making $25.5 million per month at the end of 4 years. That’s why taking big steps with constant high risk makes such an important difference.

However, it is very important to make growth healthy and in control. Sometimes startups overrate growth while under-emphasizing profitability. That’s why I believe it is necessary to pay attention to the “Rule of 40” metric designed specifically for SaaS startups. Although it is designed for SaaS startups, regularly checking this indicator, which shows the balance of turnover growth rate and profitability rate, will control growth and ensure that it is in a healthy and compact state. Non-SaaS startups can also compare this rate with the data of other startups in their industry, and have the opportunity to observe their level of growth/profitability tread-off in order to avoid exaggeration of growth. By examining this indicator, startups can achieve sustainable and profitable growth which is one of the ultimate aims of businesses.