Definition of Startup: What isn't a startup?

Submitted by tomo on April 5, 2013 - 10:45am

What is a startup?

We're in the middle of a tech boom and it's become fashionable to either work for a startup or to be a startup. But what is a startup? How do you know that company offering you a job in exchange for a few years of your life is really what they say they are? How should you compare the hobby or side project you're working on with a "startup"? How is a startup different from a business? What kind of company would attract venture capital and what kind might get other kinds of funding, but not from VCs?

First of all, there's more than one definition of "startup". Paul Graham defines startup as "a company designed to grow fast". That definition says three things: a startup is a company, a startup has a plan, and a startup is about growth.

My definition has more words: "A high risk venture to flesh out and scale up an as yet unproven business model with an aim to reach a massive known market or an unknown or unknowable market."

Definition

A high risk [startups, unlike hobbies, are necessarily risky - nothing ventured, nothing gained]

... venture [usually a business, but this could apply to a team's activities within a larger organization - uncertainty is implied]

... to flesh out [as in an unproven business model, many blanks must be filled in by the entrepreneurs as a result of experimenting, trial and error, course correction]

... and scale up [scale is really key - without scale, you're just a local mom&pop, or all the hope and risk-taking investment dumped into you has no potential to garner large returns - more on scale below]

... an as yet unproven business model [a startup's business model doesn't yet exist as a known successful and proven model from the start, and when that model does become proven and successful then it's no longer a startup]

... with an aim [without or before an explicit and conscious effort to market and sell a product or service then it's just a research project]

... to reach a massive known market [this is where scale is required, where the risk has the potential to result in sufficient reward]

... or an unknown or unknowable market [early in the discovery stages, an entrepreneur may have a hunch that they're developing a product with a large potential market, but not feel out the depths of the market until later]

Google, Apple Computers, Intel, Ford Motor Company, Instagram, YouTube... in hindsight, these were once all startups. They all faced huge risks but eventually found themselves delivering products to massive markets and also successfully scaled up to serve those markets. And at the time, it wasn't clear at all how those business models would succeed or whether they would at all.

What isn't a startup?

But what about a research project at a certain university being taken on by a certain Larry Page? Surely, this research had the potential to become a massively-valued company used by much of the Earth's population. Was it a startup? Obviously not (not at that point in time, which brings up the thornier issue of at which exact point to call the genesis of conception of a startup). While the kernel of the idea was on a clear path to scaling the entire web, what was the risk? Whose lives would be affected if Larry had failed in his research? The time investment was no different from any other student.

What about the neighborhood sandwich (banh mi) cart? It's a risky business and who wouldn't like to sell increasingly more sandwiches month by month? The difference is that there are many sandwich carts everywhere trying numerous variations of the business model. But that business model is well understood. You could take your growing sandwich business to the bank and get a loan after quantifying a few common metrics of your particular variant. The banker would have absolutely no expectation of getting 1000% interest on their loan. Conversely, while not being a sure thing, the risk is more than manageable by competent parties. You're very likely to not lose lots of money, and you're extremely unlikely to huge amounts of money. [Franchise restaurants are more scalable. But they also fall within the bounds of relatively well-known rather than innovative business models.]

So what if you're bringing a new service to the market? You plan to offer a widget-configuring service around town, because widgets are the hot new thing right now. You see growth potential there. Except that you have no way to scale this business to other cities which are outside your driving range and all you're really doing is trading your time for money. When you're not working, you're not earning. And outside of cloning yourself you have no way to multiply 100-fold what you're doing.

What about a blog, like the blog you're reading now? Could you be reading a startup right now? No.

Hobbies are not startups. Hobbies can turn into anything but there's no intention of a hobby itself being a startup venture, otherwise you treat it as such and not a hobby. A hobby is never seen as a risk. Time spent on a hobby is the reward itself. With a normal business, you expect to get back what you put in plus some. With a startup, you hope to get back much more. With a hobby, you're not putting anything in and you expect to get just as much out.

Working at a startup will be exciting. It will necessarily move fast, and if you're doing anything financially promising at all, there will be the pressure from the threat of competition. You'll see lots of mistakes being made. It will be different. Traditional roles will be upturned as CEOs become janitors and developers do customer service. But it will be a chance for those young idealists to get their fingers in a number of fields they would have otherwise had to wait decades for. And best of all, you have the potential of becoming a billionaire. And that's what sets a startup apart from business as usual.

I have had some personal experience with startups.

Also, read about startups in Vietnam.

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