Who Cares What a Startup is? You Should.
Note: This article first appeared in Xconomy during San Diego Startup Week.
According to the Oxford English Dictionary, perhaps better known these days as Oxforddictionaries.com, a startup is defined as “a newly established business.”
To purists, perhaps, this might be true. But language evolves, and definitions change. One reason language evolves is because nuances come to light that need to be reconciled. Because language is a model overlaid on reality, the ultimate truth is not in the language, but in what the language is trying to represent. These days, the startup community is changing the dictionary-based definition of a startup.
From the experts, for example:
Steve Blank: A startup is an organization formed to search for a repeatable and scalable business model.
Eric Ries: A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.
Paul Graham: 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.
Mark Suster offers a more nuanced view, believing an overemphasis on growth hurts some startups. Some business models simply take longer to grow than others, yet still fit in the startup category. Some are even, perhaps, destined to make a “dent in a smaller world.” (I might put it as a smaller dent in the same world.) The fact remains that even in Mark’s qualified view, a startup is not the same as a “small business.”
As startup financing evolves, my belief is that Mark will be proven correct. Venture capitalists will only finance a small fraction of companies that seek to be worth billions, and the rest will finance growth through investment capital not dependent on the black swan “big win.” In the end, the distinction of what makes a startup is not what level of growth one aspires to, but rather, whether one truly, in the heart of hearts, has ambitions for growth at all.
A restaurant on Main Street that wishes to expand their business across the West is more similar to a new military uniform manufacturer seeking scale through global defense contracts than it is to a nearby PR agency, drycleaner, or a family-owned electronics repair shop on the same block.
The financing, mentoring, legal advice, real-estate needs and so on, are fundamentally different for fast-growth companies than traditional small businesses. So are the requirements for success. For the former to achieve their ambitions, the founders must hire a team, including sales and marketing, delegate authority, hire experts, outsource parts of their businesses, seek partnerships, and so on. Profits (if there are any) go back into the business. The small business founders (this is not a criticism) typically maintain tight reins on their businesses both in terms of hiring and engaging outside influences. The owner seeks profits as soon as possible, and is not concerned with putting the profits back into the business.
It's All Fun and Games Until Someone Loses an Eye
The point is that fluffy articles that have great fun pondering the question, “what is a startup?” are completely ignorant of the implications. So let’s see if we can set this straight. All of the above definitions would agree that though startups start small, “small businesses” are not the same thing as startups. The definition of a startup has less to do with how long you’ve been in business than with the scale of business you attempt to achieve.
Equally contentious is the question of when a startup ceases being a startup. Again, it isn’t defined directly by how long it’s been in business. Dropbox has been in business for seven years. It’s received about $1 billion in funding (including debt financing). It needs to get a lot bigger to provide a return to its investors. It’s still a startup.
While there’s a lot of gray area, there are three ways to define the end of a startup: 1) Through an equity event, such as acquisition or IPO. The investors get their money back, maybe more. 2) The market has spoken, and the company in its current state will not continue to grow. It has essentially morphed into a small or medium-sized “lifestyle” business. No equity event is on the horizon. 3) The company folds.
Startup entrepreneurs seek to disrupt markets or at least bring significant change to the status quo. A startup ceases being a startup when that has been achieved, the market has limited the potential size, or the founder has given up seeking that, due to any number of factors.
Small business owners might object to the notion, but most small business owners prefer to stay small. Fast growth causes problems that most small business owners do not want to deal with. Why? Because they can have a satisfying lifestyle without stressful growth. Sane people wish for nothing more. You are happy when you align your objectives with your lifestyle. BOOM!
The broader implications are immense. Only recently did some federal and state officials recognize the difference between startups aiming to be big companies, and small businesses founded by people who are simply trying to provide for their family.
The latter is nothing to sneeze at; Small businesses are the backbone of the American economy. In my opinion, we should do whatever we can to support the efforts of entrepreneurs seeking to improve their lives by starting their own businesses. That is at least half of the American Dream.
What Businesses Create More Businesses?
But small businesses do not create scalable businesses. On the other hand, scalable businesses create small businesses. When TakeLessons, a local scalable startup, grows from 10 employees to 100 in two years, it requires larger and better office space, and spends more for office supplies, accounting, legal fees, and so on.
Scalable startups are important because they increase demand for other products and services. Their growth induces other businesses to grow. Even large businesses cannot impact local businesses in this way. They increase or decrease demands on the local economy on the margin. New growth companies create new demand for legal, accounting, office supplies, design, architecture, food, drink and so on.
“Small Business” is not a pejorative term. Neither is “lifestyle business.” These are incredibly important to the San Diego economy. But the resources required for small business and scalable businesses are vastly different. The City of San Diego, as well as civic organizations, the media, and others need to recognize the difference to align and move with the changes we hope to bring about by fostering a startup culture in San Diego.
Startups are not small versions of big companies or big versions of small businesses. So there are all sorts of things we need to do differently.
Through the Downtown San Diego Partnership and the San Diego Regional Economic Development Corp., San Diego’s city government has made great strides in supporting the local startup scene, without perhaps, overtly recognizing the fundamental policy differences required by its varied constituencies. Nevertheless, the City of San Diego should consciously recognize the differences between small business and startups. Recommendations:
—Evaluate current programs through the startup lens. Are they designed for startups or small businesses?
—Engage with startup founders to determine if they might benefit from modifications to existing programs.
—If it is determined startups can be assisted, market to them as startups, not small businesses. City services will not successfully recruit startup founders by referring to them as small businesses.
—Brainstorm new programs, including zoning, tax incentives, and real estate spaces that might attract startups, which would create a demand for retail and other small businesses.
Governments, especially local ones, must understand the difference between small businesses and scalable startups, if they intend to support economic growth.