What Is A Startup? The Ultimate Definition.
We are in the midst of a silent revolution — a triumph of the creative and entrepreneurial spirit of humankind throughout the world. I believe its impact on the 21st Century will equal or exceed that of the Industrial Revolution on the 19th and 20th.
— Jeffry Timmons, The Entrepreneurial Mind, 1989
We are truly living in the Entrepreneurial Enlightenment — a society and an economy of entrepreneurs!
The risk of failure is smaller than the benefits of truly going after your passion.
Apple, Google, Facebook, Uber and many others — and many more to come — have brought great attention to startups and entrepreneurship. Thousands of startups are started around the globe every day.
Attracting the media’s attention, the term ‘Startup’ has become a buzzword in recent years. This is really just the tip of the iceberg. In the United States, it is expected that more than 40% of the workforce will be freelancers by 2020.
That’s for sure: It has been a decade of rapid change — forecasted to accelerate in the years ahead.
Welcome to the Global Entrepreneurial Enlightenment!
80/20 Summary
Startup mystery (or better said: Startup hysteria?)
The term ‘startup’ is poorly understood and greatly misused by a lot of people. Not surprisingly, there isn’t a common definition everyone agrees on. This creates myths and false illusions — especially created by outsiders who foolishly write and talk about this phenomena.
It feels like every entrepreneur starting a business nowadays calls his business a startup — either an agency, a freelance activity or a bakery with an online e-commerce store.
They might aim at using the startup-like mindset for their business to accelerate it — the StartupGeist — but they are not a startup by definition.
Let’s go through what Dave McClure, Eric Ries, Steve Blank and Paul Graham mean when they speak about startups to light up the shadows of the startup mystery.
What is a startup?
One of the best definitions for beginners about startups comes from Dave McClure, founder of the global accelerator 500 Startups.
A ‘startup’ is a company that is confused about (1) what its product is, (2) who its customers are, and (3) how to make money.
In other words, startups are designed to learn what problem or need (product) is solved for whom (customer) and how much customers are willing to pay for this (business model).
One of the more sophisticated definitions comes from Eric Ries, author of The Lean Startup:
A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.
Similar to McClure, Ries omits anything about the startups size, sector or industry in which it operates. Ries focuses on figuring out the right thing to build (as quickly as possible) for coping with extreme uncertainty. The nature of startups is to deal with uncertain situations that cannot be foreseen. Risk must not be large necessarily — it’s simply not yet known.
One of the most cited definitions comes from Steve Blank, the startup godfather of the global startup movement:
A startup is a temporary organization used to search for a repeatable and scalable business model.
He points to an important paradigm shift in understanding startups. Most people think of startups as smaller versions of large companies. He thinks that’s wrong. Startups are designed to search for a business model, but not execute one.
Established companies execute proven stuff. It’s certain. It’s predictable. Stuff that universities teach their students: accounting, finance, marketing, sales.
Startups, however, are highly uncertain and — if successful — grow really, really fast.
Paul Graham defines startups as high-growth engines.
Startups are designed to grow fast.
He goes on:
Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.
David Cummings, a successful serial B2B SaaS startup founder, also sees a startup as “a scalable growth-focused company”. Cummings and Graham don’t distinguish between search and execution but focus instead on the intended growth character of a startup.
To conclude, there are two camps defining the term ‘startup’.
One camp thinks that startups are temporary organizations that will need to prove to be a business by finding a repeatable business model under conditions of extreme uncertainty.
The other camp thinks that startups are designed to become high growth-oriented companies. This is ingrained in the startups DNA and mindset of its founders from day one.
Both camps think that startups face significant amounts of change and uncertainty on a weekly basis and are not smaller versions of large companies. Hence, startups are truly special and unique.
Do we really need this new concept #startup?
Can’t this just be called high-growth intended company?
Good questions!
People argue that a startup is a mindset and ingrained in a company’s culture. It shouldn’t be defined by growth metrics. A startup can remain a startup at all ages and sizes.
Most startup experts don’t think so. The intention to grow is the main reason why we use the distinct word ‘startup’ for super fast growing businesses.
Let’s explore why!
Because most startups fail (also read: the necessary evil of the innovation game), the immense attention the very few successful ones get seems unfair to many ‘ordinary’ entrepreneurs of the small and medium-sized businesses.
According to Graham, the mistake most people do lies in looking at median numbers in a domain of extreme uncertainty and therefore variation. The span from positive to negative is unbelievably big. The most successful startups, like Facebook, Uber or Whatsapp make such big returns and quickly reach valuations of companies, like Toyota, Siemens or Total within a few years of existence.
P.S. Read about three remarkable examples of hyper-growth startup valuations in my article ‘Startup Fundraising: The Crazy Startup Madness’.
Okay! Okay! I Get it — but how fast do startups GROW?
Paul Graham suggests to determine the growth rates of the most successful startups, rather than answering what growth rate is required to make a startup successful.There are two reasons.
Firstly, startup growth is a pole — not a threshold. Paul Graham says:
“Starting one is at first no more than a declaration of one’s ambition. You’re committing not just to starting a company, but to starting a fast growing one, and you’re thus committing to search for one of the rare ideas of that type. But, at first, you have no more than a commitment.”
Secondly, growth rates change over time. That’s why you can’t define threshold properly — only give benchmarks.
According to Graham, startups normally have 3 phases of growth:
- Phase 1: Initial slow or no growth while startup tries to figure out what it’s doing.
- Phase 2: Rapid growth.
- Phase 3: Slow growth because startup turns into big companies and their market’s saturate.
Paul Graham shares benchmarks about startups going through Y Combinator (YC) — a 3-month program that provides seed funding for startups. Seed funding is the earliest stage of startup funding — besides your own savings, family & friends, or initial revenues. It is supposed to pay expenses for the startup founders while they get started.
Keep in mind that these benchmarks are Silicon-Valley based. They might differ for your startup hub. The following benchmarks refer to weekly growths that startups aim at during YC:
- Exceptional rate: 10% or above
- Great rate: 5–7%
- Bad rate: less than 2%
A bad growth rate is often a sign that startups haven’t yet figured out what they’re doing.
Y Combinator recommends to preferably measure growth with revenue — or alternatively with active users. Active users is a “reasonable proxy for revenue growth, because whenever a startup starts trying to make money, their revenues will probably be a constant multiple of active users.”
Stop! Right expectations please…
Paul makes it clear that it is extremely hard to find something that grows consistently at several percent per week. It’s an exception — not the norm.
If you are the lucky one who found something that grows week by week by several percent, you found something of extreme value.
Let’s look at the numbers to see why.
A company that grows at 1% a week will grow 1.7 times a year, whereas a company that grows at 5% a week will grow 12.6 times. A company making $1000 a month (a typical number early in YC) and growing at 1% a week will 4 years later be making $7900 a month, which is less than a good programmer makes in salary in Silicon Valley. A startup that grows at 5% a week will in 4 years be making $25 million a month.
These numbers clearly show why compounding interest is so powerful. That’s why startups’ impact on societies and economies can’t be overstated.
In the next article — the Startup Economy — you will read about what macro trends and which innovations enable the rise of startups.
It’s clear that we are not dealing with a passing trend.
Startups are here to stay, are here to outcompete traditional businesses, are here to change the world — how we live, how we do business, how we do everything.
Welcome to the Startup Economy!
AND always remember: Not every company is a startup. If successful — startups grow rapidly.
Share your ❤ below — and respond with your thoughts.
I am looking forward to hearing from you.
I am Danny and started StartupGeist to help students and recent graduates build a business — and have a good life. Why? To be free, financially independent and healthy. How? Build a growth mindset and deliberately practice skills that turn your ideas into something bigger.
Originally published at startupgeist.com on January 15, 2016.
