WTF is a startup anyway?

A no frills, no BS definition.

Let’s face it, we’ve all heard the word “startup” company being thrown around. Spotify, Airbnb, and Uber are all known as “startups” (which is actually incorrect), but what does this all mean?

And when your friend’s boyfriend’s older brother/sister says they’re starting a “startup” how is that any different from any other early-business? Can your aunt’s fruit and grocery store be a startup if it has an online shop?

This blog will dive into an easy-to-follow, no frills definition for the uninitiated.

The No-Frills Definition

In layman terms, a startup is…

“an early-stage company that aims to dominate a market by rapidly scaling a new business model through the use of new technology.”

That’s it! But that’s still a fairly condensed definition so let’s break down some of the concepts we used here:

• “Early-stage company”: a company that has only just been established (anything below 2 years old)
• “Dominate”: All startups aim to dominate a particular market — they don’t need to be the only players, just the largest.
• “Scale”: Scaling a business model simply means growing the business — most often its expanding the number of “users” or customers. The end goal of a startup scaling is to capture as much of the market as possible in the shortest period of time, and profiting from this dominant position.
• “Rapidly”: Speed is needed to capture a market. As such startups need immense early-stage capital to set up. This leads to startups being lean (low cost) in some areas whilst pouring money into “marketing” and customer acquisition.
• “Business Model”: This is a plan for the operation of a business, identifying sources of revenue, the intended customer base, products, and financing. Startups aim to create a business model that is repeatable and can be replicated in as many markets as possible. They are “new” and “replicated” quickly and easily by using technology to tap into geographical areas, or gain customer insights to improve the product.
• “New technology”: It’s loosely any technology that is emerging and fairly cutting-edge. However a lot of startups have simply introduced existing tech (e.g. online platforms) to outdated markets.

In essence, a startup company is like a “traditional business” (like a supermarket) on steroids.

“Traditional business” vs. “Startup”

So what’s the difference? Let’s use an example of the traditional taxi industry and Uber.

Taxi Company: In all cities around the world, only a limited number of taxi licenses are issued by a government authority and they’re super expensive. Traditionally cab companies (e.g. “Silver Service”) make money by purchasing these cab licences then leasing their taxi cabs (with the licenses) to drivers. The way they grow the business is by increasing the number of drivers in their company to get more income. But you’re limited from growing quickly because of factors like licensing costs, and competing with other cab companies.

How is Uber different?

Uber: At the end of the day, the “customer need” between cabs and Uber is the same: customers want to get from A to B. Convenience, price, and cleanliness also factor in. But Uber uses technology to scale and change its (basic) business model in the following ways:

• No Licences or Cars: Uber’s platform doesn’t require the company to classify drivers as taxi cabs and therefore doesn’t need licenses to operate, a huge cost saving. It also doesn’t pay for car servicing.
• “Gig Economy”: The platform is entirely mobile-based and taps into the gig economy — drivers can drive when they want and how they want. Staffing becomes a lot easier because any Joe Blow with a car can do it.
• Pricing: Uber can change its pricing capitalising on “surge pricing” at peak times, or setting a significantly lower price when competing with cab fares. They can also change the cut they get from each fare, unlike cabs who collect a consistent rent. In this way, Uber can change the price so they ensure that they are always making the most amount of money in the existing market conditions.
• No Regulations: Uber is not limited by fluxes in local regulation regarding the number of cab licences. As such it can indirectly control how many drivers are operating at a time so as not to flood the market (by shifting cab rates).
• Borderless: Given that the service operates through an app it is virtually borderless, and can operate in any city without a need to consult local regulators prior to entry.
• Tech: GPS, optimisation algorithms (for ride matching) keep the journey with Uber smooth and hassle-free.

Disclaimer: This analysis is based on Uber’s Uber X base product. Uber now has many product lines from car renting for drivers (Uber Marketplace), to food delivery, that all have their own business models.

As you can see, Uber is classified as a “startup” for a multitude of reasons. In terms of scale and speed, the business model can be replicated easily and quickly in different geographical markets as all that is required is data connection, mobile phones, and some drivers (with their cars). Technology certainly helps as well — where cab drivers were once limited by location and their communication method to customers, users of Uber can book, rate, track, and pay entirely online allowing for scale but also a better customer experience. Finally, Uber no doubt aims to dominate the market, and has tried to push out cab companies and other rideshare companies in many countries and regions.

Startup to scale-up

At a certain point, a “startup” spreads its wings and becomes a “scale-up”. Whilst there are many definitions for a “scale-up” one definition suggests that startups evolve when they find “product market fit”, which is to say that they have created a product (e.g. the Uber app) that customers want and are willing to pay for.

At this point, they no longer need to make massive revisions of the product (they can make adjustments) and will be focused more on bringing that product and company to larger markets (scaling).

As such, given that Airbnb, Uber, and Spotify, have all found their product (many years ago) and now focus purely on growing their business operations and market, they are no doubt scale-ups.

This piece was written by Textbook Ventures — we organise startup events, write newsletters and cater exciting activities for student entrepreneurs across NSW (sign up to our weekly newsletter and check out our Facebook to stay in the loop!)