Startups, small businesses, and definitions – oh my

I was recently commenting on a nPost’s blog about What Defines a Startup and ran out of room for an effective comment so wanted to expand on it here.

 
First let me re-cap the basics of nPost’s blog entry…

 
Nathan poses the question, what defines a startup and offers a few thoughts about what might define a startup. Things like:

  1. Having been around for less than 5 years?
  2. The number of employees it has?  If so, how many would that be?
  3. Whether they are bootstrapped, a sidestartup or funded?
  4. Their growth rate?  If so, how quickly do they need to be growing? 10% a year? 500% a year?
  5. A scalable business?  Can a lifestyle company be defined as a startup?
  6. A product company?  How about a professional services firm, are they a startup?
  7. Simply “I know one when I see one!”

A good discussion follows in the comments about these seven suggestions and a number of additional suggestions that are along the same line. Eric Koester has a similar post on his blog, My High Tech Startup. More opinions about how much money a company has, how long the company has been around, or how it is funded as effective measures of startups.

I pose that none of these general properties of a business define a startup. Properties like amount of cash, where the cash came from, how many employees, what the growth rate is, what the potential total market share is, etc are all properties that any kind of business can have. Whether it is a services business, a retail business, or a manufacturing business, a multi-national conglomerate, a national chain, or… a startup, any company can have any combination of these properties.

If we look past the generic properties of the business and into the core we can easily recognize a startup. If we look at the core of a business we see two basic things:

  1. What a company has to offer (product, service, etc)
  2. How a company will make money with that offering

When we look at traditional businesses – consulting firms, web design firms, data center hosting firms, coffee shops, etc, etc. What comes to mind is a well known offering and a well known way the company plans to make money with those offerings. These types of companies can meet nearly all of the generic properties listed above, it just depends on how it’s being run, what the goals of management are, etc.
Any type of business owner can build these traditional companies; they can be built as business lines for well-established companies, as new ventures (locally or worldwide), as lifestyle businesses, or be as any other kind of new business scenario. The fact that they are a traditional company does not necessarily make them less fun, less interesting, or in some way less cool, or as Eric puts it – less sexy. That is all up to management.

 
If we look at a startup though, we see something different. We see a company that has something different from the traditional companies above. These different companies, these startups have been around for a long time; however, they only seem to be abundant during large societal advances (such as the industrial revolution, the internet revolution, etc). The properties of the startups that we relate to (high risk, high reward, generally VC funded, generally small teams, generally dynamic in nature) are all a byproduct of the fact that the business the startup is in, is bringing something new to the world. Bringing a new product to the world and offering it in a way that will make them money in a new way. This is hard to do with a business that has properties different than those we generally associate with a startups (most banks won’t give loans to unproven ideas, large teams make the flexibility hard, etc).

It doesn’t matter if that new product is new to the world, new to a segment, so long as it is new. If it is a net new product on the market (not a new shoe design, but a new product) AND is being produced to make the creating company money in a new way, then the company definitively falls into the category of startup.
For tech companies, the examples are easy to dig up…

 
Web 1.0 companies like; homegrocer.com, pets.com, and eToys all fall into this category – new product (offering groceries, pets, and toys for sale online) – new business model (no store front, just a web front w/inventories managed in various ways). Yes I know pets.com didn’t sell pets, but maybe they should have.

 

Of course, these companies failed, they didn’t quite get the right mix of product and business model (which is another property we associate with startups – high failure rate). There are others that did get the mix right – amazon.com for one, was able to stay flexible and fluid until it could find a way to make this online sales thing work with a business model that made money. Others like paypal and ebay all found the right mix of product offering and business model that worked. These were all startups and are now in established markets with products and business models that aren’t new, so they are no longer a startup.

 
Fast forward to 2008, companies like Amazon are continuing to build startups within their existing companies; Amazon Web Services is definitely a startup – new product offering, new business model. Facebook is definitely a startup – new product offering, new business model – time will tell if it will truly be successful, but it’s definitely a startup. There are lots of other startups around with new products, new business models. More are cropping up in clean tech, bio tech, and continuing to pop up in other areas as well. Look at the iPod and the online music store – incremental innovation over the walkman (new product) and a new way to buy music (new business model)… voila – another startup within an existing company.

 
On the other hand there are lots of companies that are high tech companies that are not startups. There are lots of young companies that have products or business models that are well known and at least moderately understood. They are simply trying to execute better or with different goals than other companies who have done it before. Some of these companies are even in funky spaces, have long working hours, and the look and feel of a startup (VC funded or bootstrapped, under 20 employees, work out of a loft in pioneer square, etc); however, they are building a business that has been built before – which means – not a startup. A small business, a high growth company, call them something else (something other than a startup).

 
If you are looking for a good measure to evaluate your status of startup against, take a look at the case studies at the major B-Schools, take a look at the existing companies that are out there, take a look at your competitors, and take a look at what business models and products are the hot topic these days. If you fall into one of these categories – if your product and business fall into an existing group – you are not a startup. On the other hand, if you are innovating with your products and your business model, well – welcome to the club!!

 
I’m sure there are lots of other opinions about this, Wikipedia has some random definitions that I think need updating as I’m sure all of you do.

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3 Responses to “Startups, small businesses, and definitions – oh my”

  1. Nathan Kaiser Says:

    I will definitely see about increasing the size available for each comment on our blog. Great post!

  2. Damon Torgerson Says:

    Very interesting post.

  3. Linn Says:

    fantastic post..

    i think web 2.0 has changed the world so much.. and i wanna see how bloggers will turn out with economic crisis because this means less ads in the future and i think next 18 months will be tough to bloggers and working from home businesses.

    thanks for sharing

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