When is a startup not a startup, and why can’t we agree?
Tuesday, January 22, 2019/
Here at StartupSmart, we spend all day every day talking about startups to those running and investing in them. But, never has an industry been more difficult to define.
The Australian government has no set definition for what constitutes a startup.
In a statement given to StartupSmart, the Department of Industry, Innovation and Science said different definitions are often used in different contexts, depending on things such as “macroeconomic analysis, policy research and program criteria”.
For example, one study on Australian entrepreneurship used the OECD definition of startups, which categorised them as “young firms within the first three years of operation”, the statement said.
“Applying a one-size-fits-all set of criteria to determine eligibility to programs or support may not always be appropriate and could fail to recognise important differences across startups,” it said.
At the other end of the scale, however, LaunchVic, the Victorian state government agency responsible for startups, has a clear checklist defining what is or is not a startup.
The Startup Characteristics Checklist resource suggests startups are “primarily recognised by their desire to grow quickly across a number of metrics including number of employees, revenue or market share”.
LaunchVic also suggests startups are globally-focused from the off, have plans to exit eventually, and are “innovation active”, applying a new idea or methodology to an area of business that could change the way the industry works.
Speaking to StartupSmart, Alex McCauley, chief executive of StartupAus, says a startup will “tend to be young, small, high-growth and using technology to address a large market”.
And it’s this large market and scalability that the definition seems to hinge on. For McCauley, it’s all about growth potential, and investability.
But, that’s not to say a startup must be looking for outside funding. A lot of companies bootstrap their way to success, McCauley says.
It’s more about having the features that would attract investors: growth, a problem it’s solving, and a big market that’s experiencing that problem.
“When I say investability, mostly I mean a prospect someone would invest in, not that somebody does invest in,” he adds.
Shelli Trung, investment fund manager at QUT Creative Enterprise Australia, defines a startup as “any business that is highly scalable, and that has potential for mass scale”.
While every startup starts off as a small business, not every small business is a startup, she says.
“The difference is really scalability.”
A startup will typically have a small team that’s able to access a mass market very quickly.
For Trung, there’s also less of an emphasis on the technology side of things. In her experience, technology is just a tool that enables scalability.
Most businesses — not just startups — are tech-enabled in some way, because “without technology scalability would be incredibly difficult”, she says.
Massimo Garbuio, a senior lecturer in entrepreneurship at the University of Sydney, also wouldn’t necessarily consider technology a prerequisite for a startup.
“Tech is something that may help a startup to deliver a product or service or business model,” he tells StartupSmart.
“It’s not necessarily part of it.”
For Garbuio, it’s more about the innovation, and bringing something to the market “that is new and that hasn’t been done before”.
A startup state of mind
Startups are often defined by the ‘build-fast fail-fast’ Silicon-Valley mindset, and while Garbuio considers this an important aspect of the ecosystem, McCauley suggests it’s just part of it.
“Most founders are looking to succeed fast, but failing fast is the next-best thing I guess,” he says.
It’s not the failure, but the pace that differentiates startups from regular businesses, McCauley explains.
“If you’re looking to grow a business really rapidly, you’re probably doing something different to what’s already out there,” he says.
Founders may just have to try a few different business models or product iterations before they get the one that sticks, he adds.
“That’s why there’s so much iterating, pivoting, and all the great words used about startups that really imply experimentation and innovation.”
McCauley also rejects the assumption that startups are, or should be, disruptive. While some may disrupt an industry, that’s by no means the case for all of them.
“A lot of them are reactive rather than disruptive,” McCauley says. “They’re creating new markets in places that didn’t previously exist.”
He takes Aconex, a construction startup that was acquired for $1.6 billion in 2017, as an example of a company that helped established incumbents to be more successful.
Aconex provides software to help construction companies run more efficiently.
“They’ve helped construction firms become more profitable, and helped those companies drive costs down for their customers,” McCauley says.
“They haven’t disrupted anybody, they’ve made existing businesses more efficient at the same time as growing a great business themselves.”
In Australia, in particular, McCauley notes, a lot of startups are operating in the B2B space.
“They’re not trying to disrupt businesses, they’re trying to work with them,” he says.
Not a numbers game
Part of the issue here is that startup’s don’t fit comfortably into any metrics. They’re not easily defined by age, employee numbers or revenue.
But for Trung, these kinds of metrics are not important.
“Some startup founders work on it part-time for five years, and they haven’t figured out what they need to figure out to scale it,” she says.
Some of these might become “lifestyle businesses” that are never scalable, she says, but some will still take off big time.
“The scalability component is where it starts and ends for me,” Trung says.
“A startup really wants to gain that mass scale.”
Garbuio agrees these kinds of metrics are largely arbitrary, calling them “just too restrictive”.
Any clear-cut definitions will not consider the industry a startup is in, the country its based in, or the kind of product it is making. In some cases, for example, a startup may be well-funded, with a significant number of employees, but still pre-revenue.
“There has to be a little more context,” Garbuio says.
“More and more companies are starting out with an idea that doesn’t have a revenue model. They don’t know how they’re going to make money … but over the years they figure it out.”
When is a startup not a startup?
Although Trung isn’t hamstrung by numbers, she does suggest that at about 100 employees, a startup is probably, realistically, becoming a tech company.
This is the point where a company is likely managing its own resources, rather than relying on funding, and putting operations and processes in place.
“It’s when they have certain pieces of the puzzle worked out and the ability of that viral scalability,” she says.
“It’s more business-as-usual than testing,” she adds.
Startups are constantly focused on testing and experimentation, dealing with “a lot more unknowns than knowns”, Trung says.
When they reach a certain size, however, while they may have an innovation agenda and a lean strategy, and invest in R&D for new channels and products, “to me, that’s a strategy — I don’t believe it’s a startup”.
For Garbuio, a startup stops being a startup at the point of exit.
“Going public is a clear point at which you startup is becoming something else,” he says.
It’s the addition of governance mechanisms, professional boards and shareholders that make the difference here.
“They might retain the mentality and mindset of a startup, but at that point, requests from shareholders and the share market have to influence how you operate,” Garbuio says.
But, for McCauley, it comes down to how a company operates and, crucially, “how they see themselves”, he says.
“Every lean startup is trying to become a bloated corporate,” he adds.
“Some get there quicker than others, and the ones that take their time would keep calling themselves startups for a very long time.”
Atlassian, for example, as one of Australia’s biggest startup success stories, has listed on the NASDAQ stock exchange and has a market cap of more than US$21 billion.
But, according to McCauley, it’s still a startup.
“They’re lean, they’re open to new ideas, they feel young and they’re averse to the traditional features of big corporates,” he says.
“As companies grow, hey will shift away from the startup mentality at different speeds,” he adds.
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