This week Nima Salke, a School of business senior enrolled in Business 454 at Cal Poly, asked me an excellent question: “what criteria exactly, defines a company as a ’startup’?”.
This is an not a particularly easy question to answer, and it is not a question that there is any perfect, black-and-white answer for. This question reminds me of famous quote by Supreme Court Justice Potter Steward while discussing the Larry Flynt Pornography case: ”I do not know what hard-core pornography is, but I know it when I see it”.
Defining what constitutes a startup business may be a little easier question to tackle. But it is highly subjective and varies depending by type of startup (business sector), type of financing, and other criteria.
That being said, here’s how I define a startup company
The term “Startup” generally refers to a newly founded company, but in Silicon Valley where there are a huge number of tech startups (over 10,000 new ones annually, that succeed in getting started, by my estimate) and a similar number of them that have operated for years as going concerns. The term refers to companies that have some/all of the following attributes:
- A privately held and financed company. There is usually some level of outside equity and/or debt investment such as friends & family, angels, Venture Capital; occasionally a reverse merger. Some startups may be immediately profitable so they can “bootstrap”; but is the rare startup that can succeed without someone providing risk capital
- A long-term goal (vision) for delivering new and/or improved goods or services, often disruptive in nature. Startups are not “lifestyle businesses” or “cash cows”. They are on a burning mission to change the world.
- Most startup firms have not yet achieved several consecutive quarters of cash-flow positive financial performance. Once that occurs, they move into the real of mid-market “growth firms”.
- Startups usually aim at developing new technology or taking advantage of new technology (no restaurants or REITs).
- Startups go through several phases of development, with the organization changing as the company becomes larger; with profitability coming in the later phases.
- Startups typically use their own stock as their (most valuable) currency, and there is almost always an equity mechanism (stock options or warrants) for rewarding investors and employees.
Some startups reach their goals (i.e. grow up). Others may be trapped in mid-development (like perpetual adolescents). Those that become stagnant move into the dreaded class of startups which are sometimes referred to as “the walking dead”. The huge boom in Venture Capital investment over the past decade has unfortunately, greatly increased the number of startups falling into this latter category.
What do you think defines a startup company?
Do you think the six criteria above are correct? How would you modify this list, and what criteria would you add? Thoughts and observations are welcome – we will modify and update this list as our own thinking about it evolves.
Thanks to Colin Mick of The Mick Group (Palo Alto, CA) for a spirited discussion and some out-of-the-box thinking to explore this question.
Is my company a startup who is just me and my friend working on creating the initial product and business plan? We are funding our ownself so far and work day and night at home.
Owaseis, thanks for stopping by Startup Trek TV and posting your question!
Well, defining “what is a startup” is complicated. There are different stages that Startups go through – like a child, from newborn to infant to toddler, to terrible two’s etc. I would classify your venture as a “concept-stage, pre-funding” level startup. Each month in Silicon Valley alone, I would estimate there are around 10,000 new ventures that emerge to fall into this class. Some of them go on in that state for months or years; others are funded in one manner or another fairly quickly.
So the key question here is what level of MOMENTUM do you have? How well defined and realistic are your plans? Depending upon what type of business you are starting, it could take months or even years to pull together a fundable venture.
Often the key catalyst is one of the founder, a friend, or a family member provides a little “friends and family” money, it could be as little as $1 to $15k, to get things really moving.
But the short answer is “YES”, as long as you’re really serious and working hard on it; even if you still have a day job (many great startups begin that way).
But the only completely objective answer is, this question can only be answered 100% accurately “in arrears” (after the fact).
Best of luck!