…So, What Exactly Is A Startup?

There are certain buzzwords in information technology that can get quite confusing. One very good example is the term ‘Web 2.0’. Can anyone actually give a short, one or two-sentence definition of the concept of ‘Web 2.0’?

The word ‘Startup’ is one of these overly used words that can get quite confusing at one point or the other. The term became popular internationally during the dot-com bubble when a great number of dot-com companies were founded. Given the ease with which it rolls off various tongues these days, it might seem somewhat naive to wonder what the term ‘startup’ actually means. What exactly is a startup? Can Twitter and Facebook still be classified as startups? At what point does a company stop being a startup? What is the difference between a small business and a startup? These are all questions with answers that might vary amongst a large number of people.

Most startups begin small, but definitely not all small businesses are startups.

We have all heard wonderful stories of startup companies that have now become multibillion dollar conglomerates (Google, HP, Apple, Facebook, etc.) It is hard to forget the really inspiring stories of how most of these companies were started in garages by one or two “geniuses” who ingested lots of caffeine, never slept at night, dropped out of school and took outrageous risks. These stories are great and have gone a long way in shaping the average individual’s basic conception of what a startup actually is. But this basic conception that most people have seems to be flawed in quite a number of ways.

Such stories tend to give people the impression that any time they see a couple of guys attempting to put up a web site/application or some sort of other contraption together, then that is automatically a startup. Also, the word ‘Startup’ has now become so widely used in relation to computing and technology that numerous other kinds of startups that appear in other settings are simply ignored or not considered to be startups (in the real sense of the word). There are remarkable similarities between small businesses and startups, but that does not mean that any small business is a startup.

So, what is a Startup? In order to adequately define a startup, one has to shake free of the mental shackles created by the most famous startups we have today.

In this blog post by Eric Ries, one finds quite an interesting definition. Eric Ries says:

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.

 

This seems like quite a good definition of the term. Eric Ries first of all makes it clear that startups are HUMAN institutions. He says:

…we so often loose sight of the fact that startups are not their products, their technological breakthroughs, or even their data. Even for companies that essentially have only one product, the value the company creates is located not in the product itself but with the people and their organization who built it. To see proof of this, simply observe the results of the large majorities of corporate acquisitions of startups. In most cases, essential aspects of the startup are lost, even when the product, its brand, and even its employment contracts are preserved. A startup is greater than the sum of its parts; it is an acutely human enterprise.

 

Eric Ries goes ahead to explain some other very important aspects of his definition. You can check out his blog post here.

One thing that is worthy of attention in the definition above is the part that talks about “delivering a new product or service under conditions of extreme uncertainty”. In Nigeria today, we find so many Twitter and Facebook clones that want to call themselves startups. Even in the small business scene, we find an ever-increasing number of people providing the same products and/or services provided by everyone else. There seems to be an acute lack of innovation in our tech scene. What we seem to do most of the time is open up new “businesses” that are exact clones of other existing businesses. Businesses of this nature are simply not startups. Eric Ries rightly said:

Startups are designed to confront situations of extreme uncertainty. To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup, because its success depends only on decent execution – so much so that this success can be modeled with high accuracy. This is why so many small businesses can be financed with simple bank loans; the level of risk and uncertainty is well enough understood that a reasonably intelligent loan officer can assess its prospects.

True startups face unknown risks, not challenges that have been surmounted over and over again by thousands of other wanna-be startups. Why do you have to build another social network or “SIMPLEMACHINE” forum when there are other viable services you can offer (in Nigeria especially). This is the same question Aito Ehigie (Pystar) asked in his blog post, Dear Wanna-be Startup Founder…. He also went ahead to outline some viable services that are as yet unexistent or improperly implemented in Nigeria that desperately need a midas touch from adequately skilled people. You might want to check out his blog post here.

Startups might face unknown risks, but this does not mean that they operate under high risk situations. The risks are just not yet known. A startup might not necessarily be building a “risky” product but products of true startups are often characterized by the fact that is usually impossible for anyone to know ahead of time, just how successful such a product would be. Due to the uncertainties startups face, running a startup is usually quite different from running a traditional business. Apparently, and just like Eric Ries has noted, the most sensational startup failures result when people are running a startup (without knowing it) and are rather trying to run it as a traditional business, failing to recognize what running a startup actually means for the behaviour of an entrepreneur.

The phrase “startup company” is most often associated with high growth, technology oriented companies. It turns out that the growth rate of a company is an important element in determining whether the company is indeed a startup. True startups are notorious for their extraordinary growth rates while adding enormous value to themselves. This is usually achieved through significant outside funding. This outside funding could be provided by venture capitalists and/or angel investors.

Another important feature of a startup is that these sorts of businesses are often TEAM DRIVEN, at least if they are to successfully manage the extraordinary growth rate that is typical of a true startup. A fast growing company needs a vast array of skill sets and expertise and no single individual can hope to manage the growth of a startup alone. Small businesses are typically run by a single entrepreneur and growth rates are usually quite manageable and less than extraordinary.

Eric Ries’ definition of the term ‘Startup’, says absolutely nothing about the size of the company involved. Does this mean that the size of a company has nothing to do with whether or not the company can be said to be a startup? When does a company stop being a startup? Can we still call Facebook or Google startups? Facebook and Google, as far as I am concerned, are definitely no longer startups. A startup typically starts with the intention of building a product or a service. Let’s call this product/service X. Once they build X, they become a business that sustains and develops X further. Once the startup moves from the initial product/service build to having to sustain and maintain it, and once the startup has been successful at figuring out a stable business model, such a startup becomes a business. Another popular opinion is that a company remains a startup as long as it is still growing and only ceases to be one when it levels out and stops growing significantly. This is true to an extent.

These days, almost every business, especially in the Information Technology sector, seems to be termed a ‘startup’. Whether or not this is wrong or right is not exactly the focus of this article. Nevertheless, the next time you are tempted to use the term ‘startup’, take a moment to think about the qualities of the business you are referring to, and then decide if it is actually the right term to use in referring to the business in question. It could be that the company you are referring to is closer to being a ‘small business’ rather than a ‘startup’.

There are definitely quite a number of people that would disagree with what has been said in this article. Do you agree (or disagree) with these views? Please feel free to make your contributions in the comments section.