The popularity of startup culture over the past few years has created some confusion in the world about what exactly it means to be one. I’ve seen new restaurant ventures and solo consultants calling their new partnerships and sole proprietorships “startups” as if they have no idea of the business context in which they are entering.
Remember when “Indie” referred to an independent artist not a whole genre of music? The word “startup” seems to be breaking through it’s original constraints much like Indie did. More and more people are being seduced by stories of heroic battles fought in Silicon Valley where starting a startup meant either cashing out big of failing publicly. There is a lot of truth to this growing mythology- founding a startup is a difficult and great thing to be sure.However, would-be founders who crave the warmth and dignity the title “Startup Founder” offers them have stretched its common usage to organizations that are decidedly NOT startups.
Defining startups with clarity.
Let’s revisit two of the most influential definitions that have been used to define what a startup is and isn’t. First, Steve Blank.
“A startup is a temporary organization designed to search for a repeatable and scalable business model.”
A restaurant? Not a startup. Restaurants follow well established business models, don’t try to scale, and are not temporary unless they are unsuccessful.
Now, Paul Graham’s definition.
“A startup is a company designed to grow fast. For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people.”
He goes on to say that most companies have trouble with one of the two prerequisites listed above. Most new companies have a product problem or a distribution problem.
So let’s combine these two definitions to come up with a super definition as to what a startup is.
“A startup is a temporary organization designed to search for a repeatable and scalable business model. A startup must make something lots of people want and have the ability to reach and serve all those people.”
Only a small fraction of newly founded companies successfully pass our definition. Most are in violation, and often more than once. Here’s how.
Rule 1: A Startup is a temporary organization designed to search for a repeatable and scalable business model.
In most cases, a pizza shop is in a ton or trouble if its owner describes it as a temporary organization. He’s either horribly uninformed or a bad business person if he tells you he’s searching for a repeatable business model. Most businesses like this simply calculate their costs, margins, and their break-even revenue, and then do whatever they can to lower the cost, grow the margin and follow the same business model that they’ve seen succeed elsewhere.
Why must a startup be a “temporary organization”? The simple answer is that a startup is different from a traditional business. The incentives and the goals are different from the outset. Because startups create new business models that don’t exist yet, a startup’s main goal is to experiment and engage in structured learning in its search for a potential beachhead to base a future business on. Once a repeatable business model is found and validated, their incentives change from “discovery” to “growth”. Then, organizations transition from startups into enterprises.
Seeking a new business model is risky, and there is often a long period of time between being founded and finding and validating a new business model. Traditional business begin right away as businesses. But startups are not businesses yet. Startups are more like research groups tasked with creating a new business model. And like most research, they are often backed by investors who stand to make money from them. And because startups are often funded, the goal is to be able to create or find a big enough market to be able to fulfill the mandate created when they decided to go out and raise money. In other words, startups must scale. That leads us to rule number two.
Rule 2: A startup must make something lots of people want and have the ability to reach and serve all those people.
Startups must make a popular product and own or create distribution channels to reach as many of their potential customers as possible.
A pizza shop can be a great business. People want pizza, and are willing to pay for it.
But there are constraints that prevent a pizza shop from scaling up. There are only a certain number of people within a certain kilometre radius. Pizzas only stay hot in their boxes for twenty or so minutes. There are even other pizza shops competing for the same set of potential customers.
So, even when a pizza shop is making something a lot of people want, other forces get in the way of them reaching and serving all the people who want pizza.
There’s a reason why most companies that can be called startups are also classified as “technology companies”. Companies steeped in tech from the beginning stand a much better chance at passing the second half of Rule 2 because they are more likely to be able to leverage technology into distribution channels their product can use to reach potential customers.
Let’s assume that a tech company is making a new app that a lot of people want, and they’ve put the app in Apple’s App Store. They’ve solved the structural part of the distribution problem. Everyone who owns an iphone can access their product. It’s difficult for a pizza shop to do that. This company is most likely a startup.
**Sidenote: If the scarce resource new startups needed to seek was channel to reach their market, easy distribution tools like the App Store have pushed the scarcity further down the supply chain. With hundreds of thousands of apps in the app store, the hard thing about product distribution is now capturing potential customers attention and converting them into users. However, that conversation is for another day.**
Why this all matters
There are a lot of good reasons to start a business that isn’t a startup. It’s great for the economy, there is a lot of room to create personal wealth, and businesses can help people create happiness and fulfillment by providing a channel to manifest their ideas in the world.
But a traditional business is not going to change the world. A regular business does not shift paradigms and does not have the ability to create rippling change across industries. Starting a hotel can not change the world like starting AirBnb can.
However, traditional businesses now have the ability to take on characteristics of startups like never before. Leveraging technology in new ways opens up the possibility for traditional businesses to create new business models that could significantly grow the opportunities they have. And as more and more venture capital flows into technology companies using tech to modify and improve the physical world, and as investors get more and more jittery around unprofitable startups, there is more opportunity than ever before for the traditional businesses and startups to learn from each other. Even so, properly understanding the context and framework in which your organization is operating sits will be a boon either way.