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At Tech in Asia we often come across well-funded companies that have been in existence for a number of years, but began as a startup. Personally, I used to think the term “startup” simply referred to an immature technology business, or a small company starting out on their journey to success.
But flying in the face of this logic are world-renowned entities like Xiaomi, Didi Kuaidi, and US companies Airbnb and Uber. They’ve all been referred to as startups, but at some point they clearly managed to graduate to fully-fledged giants. Surely there must be some way we can distinguish between fledgling upstarts and the more established companies that continue to dominate headlines.
To answer this, we have to first consider in some detail precisely what a startup is.
What’s the difference between a startup and a regular company?
Often when you look at the origin stories for today’s mega companies, they all had humble beginnings. Though the tech press likes to pretend the startup community invented bootstrapping, getting a venture off the ground with your own savings is common for small businesses. So then, if both start out small, have a focus on making money and growing the rate at which they make money, wherein lies the difference?
The difference lies in their mentality from the outset, says world-renowned serial entrepreneur and University Lecturer Steve Blank. Small businesses typically focus on making a profit as soon as practical, with their usual goal being a sustainable business designed to provide a livelihood and career for a business owner. A startup on the other hand, is a more risky experiment, set up to explore a new business model or aspect of a market with potential for much greater growth.
The key distinction is this: where a small business might happen to pursue significant growth due to organic expansion, a startup is designed, at outset, to be scalable. Startups look to create new markets or disrupt existing ones, and in pursuing either pathway, hope to see large growth.
Another critical difference includes the growth strategies that a small business or startup might pursue. Where a small company might focus on increasing revenue with a near-term view to enhancing profitability, startups have a couple of alternative pathways to determine growth.
One such path is pure user acquisition, where companies bullishly invest in acquiring users with a view to generate revenue later – usually through advertising. Examples include YouTube and Facebook. Another example includes focusing on increasing revenue without much attention devoted to profitability (Amazon).
Okay, so when should startups shed the label then?
Just as there are no real hard and fast rules in the startup game, there is no one answer to determine when exactly a startup graduates. Below we have provided instead a list of generally accepted guidelines that you can use to a determine a startup’s business position.
Clearly definable moments
If you’re pulling in around US$20 million in revenue, you’re unlikely to still be in the ‘testing-the-waters’ phase of your business and are well on your way to a sustainable business plan.
Another clear sign would be the physical size of a startup in terms of employees, a solid 80-100 employees should take you out of startup territory.
A final clear signpost is when the startup exits. If and when, a startup’s founders get bought out, or a startup lists on a stock market with an initial public offering, one can safely say the entity that was a startup is no longer one.
The growth curve
Paul Graham of Y Combinator fame, explains that startups cease to be startups when they reach the plateau phase of a classic S curve. According to Graham, a startup’s growth essentially occurs in three phases:
- Extremely slow to non-existent growth due to a startup being in the beginning processes of developing its product.
- Rapid growth when target markets have been identified and startups quickly scale their product to meet demand.
- The Plateau phase: the saturation point of the market when a startup is at scale and growth reduces to nominal levels to meet diminishing demand.
This beckons the question though, how do you know when rapid growth stops and plateau begins? Well if you were to graph it out it should be fairly obvious, but to specify it more clearly, a continuous decline in your growth rate from peak to nominal levels would likely mean a drop from about five to seven percent per week (Y Combinator’s suggestion) to eventual bluechip-like growth of seven percent per year.
The concept of product/market fit is about the suitability of your product for your target market. Once a potential market for a product has been established, demand for the product needs to be gauged sufficiently to ensure a sustainable business.
Product/market fit can be determined in a variety of ways, either from evaluating your business position and operations or through customer polling.
Are you selling through all your stocks, are you acquiring users quicker than you can scale your servers, are you struggling to hire enough sales/support staff to keep up with demand, are some of the popular indicators as suggested by Marc Andreessen of venture capital firm Andreessen Horowitz.
Another popular method as described in a blogpost by Sean Ellis, a marketing guru and serial entrepreneur, recommends startups profile customers with a survey on how they would feel if they no longer had access to a given product.
If at least 40 percent of customers respond in the extreme negative – that is, they would be extremely disappointed without access to your product — Ellis considers your startup to have found product/market fit.
When a startup has become indispensable to users and is hitting the above previous metrics, it has almost certainly moved out of startup territory.
A final point: many people consider “the startup” more of a mentality than an actual business category, suggesting that a company becomes a mature business when it loses the startup culture.
Again, this comes down to the common differences between startups and large corporations. Large corporations have first and foremost, shareholders to consider and bottom lines to meet and this means their outlooks tend to be short term-focused and more conservative.
Startups on the other hand typically have more wiggle room and are more free to take risks and act quickly without regard to long established company protocol or bureaucracy.
Having said that, it is not unheard of for large corporations to have internal units that act with a greater degree of autonomy and flexibility and in a way very similar to a startup — think Google X.
Like so many things, the distinction between a startup and a company is mostly in the details and there is no one clear benchmark that will take your from the former and into the latter. To paraphrase a Quora contributor: a venture is always a startup for its founder, but it ceases to be one when an entrepreneur feels so.
Image by Heisenberg Media via Flickr
This article by Rohan Malhotra originally appeared on Tech in Asia, a Burn Media publishing partner. Image: Tech in Asia.