What Is A Startup?
Skepticism finds no substance when we say that startups are the ones stealing the limelight in the twenty-first century. We are surrounded by startups and if you follow the news, you must have formed an image of a startup as a group of guys who started an incredibly innovative business in their garage with some groundbreaking business strategy. But this is just a cinematic view of startups. A real startup is totally different from the one you have in your mind.
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What Is A Startup?
A startup is a business structure powered by disruptive innovation, created to solve a problem by delivering a new product or service under conditions of extreme uncertainty.
Many entrepreneurs and renowned business magnates define startup as a culture and a mentality of building a business upon an innovative idea to solve critical pain points.
Paul Graham, the founder of Y Combinator, has further simplified the definition of the startup and associated it with growth. According to him-
A startup is a company designed to grow fast. 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.
Therefore, the key points to note while categorizing a business as a startup are:
That difference is why there’s a distinct word, “startup,” for companies designed to grow fast. If all companies were essentially similar, but some through luck or the efforts of their founders ended up growing very fast, we wouldn’t need a separate word. We could just talk about super-successful companies and less successful ones. But in fact startups do have a different sort of DNA from other businesses. Google is not just a barbershop whose founders were unusually lucky and hard-working. Google was different from the beginning. – Paul Graham
One thing that differentiates startups from other businesses is the relationship between their product and its demand. Startups have products which target a largely untapped market. Startup entrepreneurs know the perfect strategy to create a product what the market wants and to reach and serve all of them. This triggers the fast growth.
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.
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