These days the term startup is bandied around so loosely, it has almost started to grate on my ears. Anyone and everyone you know has a business of their own or heads a ‘start-up’. Some really enterprising folks (pun intended), claim to have started up even when they clearly haven’t. As a start-up co-founder, you tend to notice these things involuntarily. And when the said co-founder is me, there is also a lot of thinking involved about what the term denotes.
From my personal reveries comes this post about the true meaning and definition of a start-up. Hopefully, this will help folks out there understand how and when to use the term correctly. Perhaps even put those grating noises to rest. Geronimo, and let’s jump right into it….
First, Let’s Meet Misters Merriam and Webster…
According to this very famous dictionary, the term startup refers to “the act or an instance of setting in operation or motion” or “a fledgeling business enterprise”.
So, you can – semantically speaking – start-up a startup. The key word to focus on, however, is ‘fledgling’. And just like fledgelings grow up to become beautiful birds, the idea is always to make your company grow and become bigger.
At some point in time, your company will no longer fit the basic definition of a startup. Also, if you are going into business as a franchise or a dealership owner, you are not really a startup. You are part of a registered and structured entity that has left its fledgeling days way behind. And this leads me to ask…
How Old Is Your Startup?
Homejoy founder Adora Cheung says that “Start-ups are a state of mind”. If you are working in a decade-old company that still lets you come to office in last night’s clothes and play foosball during lunch, are you working for a start-up? Or, just a company that gives zero dimes about hygiene and productivity?
In the startup world, age is really not a constraint anymore. Facebook is happily entering its pre teen years. LinkedIn is 13 years old. Google will be 19 this year, but for all dreamy-eyed entrepreneurs out there it still remains the epitome of start-up culture.
So, what gives a Startup?
Truth is, there is no finish line that an entrepreneur crosses over to stop being a startup. But if you take being a start-up to mean lack of structure, then you are wrong. Start-ups, too, need processes and hierarchies, and the right talent at the right time. In my opinion, a start-up business should not be more than 3 years old. I would calculate this age from the date of the first revenue. Of the other famous companies from the last ten years you will see that only one of them has been profitable:
AirBnB’s growth is an ideal reflection of start-ups of any scale. In most scenarios, initial investment from co-founder(s) is enough to keep the start-up going for about 2 years. After this, if the cash flow has not kept up with running costs, the business will start to go under.
AirBnB faced a similar problem. They had made some headway in the first two years post launch, but it took Y Combinator’s investment to keep them from running aground in year 3. Thankfully for them, just 18 months later they were able to prove their business model in their beachhead market. The obligatory Series A funding followed. They have been growing ever since and reported profits for the first time in 2016.
It takes time for every company to start making profits. It shouldn’t take you forever to have a proven business model. I think 3 years is enough time for a business to set up the basics. And if you haven’t done the bare minimum in these three years, then you will have to make the decision to either shut down or reach a stable business model after which you can continue further iterations.
Almost Forgot! Is your Startup Different Than the Others?
If we’re talking profits and 3-year plans, we must also talk of the things that set your startup apart from the others. Fashion is forever, I know, but the nth company that comes out with a website to sell clothes online cannot be hailed as a start-up anymore. For that matter, a payment gateway or online ‘wallet’, too, is not an innovative concept in today’s times. For a start-up to be a start-up, the SOPs (Standard Operating Procedures) should be completely different from existing businesses or should be an improvement of an existing business model. In the latter case, this would be the USP that will attract clients to your business.
As Neil Blumenthal, co-founder and co-CEO of Warby Parker says, “A startup is a company working to solve a problem where the solution is not obvious and success is not guaranteed”. Most of us take start-ups to mean a tech-oriented business but it necessarily does not translate that way. DropKaffe, CureFit, NutsOverSalads – these are all examples of non-tech start-ups in the country doing something different.
To be different, you also have to be unobvious. You are not a start-up if everyone in your TG knows about you! One might even say that the existence of a large population similar to the client base which is not aware of one’s business, is a prerequisite to being a high-flying, fast-growing start-up.
Did I Say Fast-Growing = Startup?
Yes! And I’m backed by Y Combinator’s Paul Graham who wrote in his post that a start-up is a company “designed to grow fast”. For Y Combinator companies, he recommends a growth rate of 5-7% per week, and calls a 10% week-on-week growth “exceptional”. This sounds like a great benchmark for a lean startup, but in reality, a 10% growth is not feasible. A company making $100 per week, would make $15 billion dollars a year in revenue at this rate; and we all know that it just does not happen.
Ideally, a startup’s revenue should grow exponentially every year. It should at least double year on year, and as this TechCrunch research shows the smaller the company the faster its growth can be. A 20-30% growth rate (year on year) is what helped companies like Splunk, LinkedIn and Marketo go public. Interestingly, these companies are also the ones that have the most successful IPOs today. Predictably, they also have solid revenue streams, high-gross margins and low customer churn rate. This does not mean that a company should stop growing post the IPO stage. LinkedIn has grown at an astounding rate of 86% CAGR post going public in May 2011. This has increased its valuation as well.
So, What Do We Know and What Have We Learnt?
Steve Jobs, The Immortal, once said “Being the richest man in the cemetery doesn’t matter to me. Going to bed at night saying we’ve done something wonderful, that’s what matters to me.” All said and done, the start-up culture has flourished not because of the ping-pong tables and the stocked pantries, but because these Petri dishes of innovation do ‘wonderful’ really well. The fact that our government launched its own start-up club last year is a testimony to the power this sector exudes.
Being a startup founder/member/groupie is cool as Antarctica, but it comes with its own set of responsibilities; chief among them being the proponents of change. The definitions and parameters change from person to person, but this truth does not. And as long as we don’t forget that, it doesn’t matter how old the company is or how many billions we hopefully make. The change, we bring, is reward enough.
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