What exactly is a startup? What is the difference between a company and a startup? Is every newly founded company a startup? Recently I was surprised that every newly founded company was called a startup. I asked myself the question
My Definition of a Startup
When I think about a startup I think about a company which is founded with the intention of global dominance. In other words: exponential growth. Here is my personal definition of a startup:
A startup is a newly established company whose corporate form allows a clear distinction between different shareholders and the ability to receive outside financing while the goal is super rapid growth and market dominance by offering an innovative product or service.
A company is a startup if:
- It is an entrepreneurial venture
- Your business model allows (in theory) super rapid growth
- The legal corporate form of your company does allow it to raise outside financing and if it allows a clear distinction between different shareholders – usually a company with limited liability
Not every company is a startup and this is not bad at all. Is a very newly formed, very profitable company e.g. a consulting business with more than $750,000 in profit inferior to a high-risk startup venture with more than $750,000 in outside financing?
Definitions of a Startup
There are literally thousand opinions of what a startup actually is. I think the following definitions are pretty accurate:
Paul Graham, a co-founder of Y-Combinator defines a startup as follows: Startup=Growth
“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.”
Steve Blank says: “A startup is a temporary organization used to search for a repeatable and scalable business model.”
Eric Ries, author of The Lean Startup defines a startup like this: “A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.”
One of my favorite definitions is this one of Dave McClure, founder of the global accelerator 500 Startups: “A ‘startup’ is a company that is confused about (1) what its product is, (2) who its customers are, and (3) how to make money.”
Investopedia’s definition of a startup is as follow:
“A startup is a company that is in the first stage of its operations. These companies are often initially bankrolled by their entrepreneurial founders as they attempt to capitalize on developing a product or service for which they believe there is a demand. Due to limited revenue or high costs, most of these small-scale operations are not sustainable in the long term without additional funding from venture capitalists.”
Alex Wilhelm, a writer for Techcrunch states that: “Everyone has their own definition of just what a startup is, and nearly everyone is wrong.” He also proposes to use a 50/100/500 rule to determine whether a company is a startup or not:
- $50 million revenue run rate (forward 12 months);
- 100 or more employees;
- Worth more than $500 million, on paper or otherwise.
Read his whole argumentation here.
What’s next?
As you can see everyone has a different definition of a startup. We are living in a time when it is popular and hip to found a new startup. Tech media around the world seem to love the term startup and in every second article, they are referring to a newly formed company as a startup. I don’t think that there is anything negative at being a usual company or a small business. Still, we should differentiate between startups and, SME’s, and self-employment. If a small shop is opening around the corner and it is selling groceries it is definitely not a startup and the press should recognize this.
What is your opinion on startups? Write your definition of a startup in the comments!
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