What is a Startup?

We live in a world in which companies that didn’t exist 25 years ago now dominate much of our daily life. Google, Facebook, Twitter, and Amazon – It’s impossible for us to imagine life without them, even more so after relying on them so heavily while living through the COVID-19 pandemic.

The achievements of these and a myriad of others have drawn people of all ages, backgrounds, nationalities, and dispositions to the startup life.

What is a startup?

A startup is an experiment designed to test a hypothesis that there’s a previously untapped market niche for some kind of transformational change. That change or product has to be capable of evolving into a scalable business with massive impact.

That may sound like a lot – so let’s take it in turn.

It’s an experiment to test a hypothesis

A typical small business is a new enterprise whose purpose is to provide a good or service for which there is an established market. In deciding to launch a new small business, the entrepreneur knows there is demand because  competitors already provide what she looks to sell. She will begin her new company to satisfy demand that isn’t being met, or perhaps deliver value more efficiently.

So while startups also begin small, they aren’t the same as a small business.

An entrepreneurial team decides to launch a startup when they have an idea. They have no credible way of knowing if it will succeed. They don’t know if there is demand. They don’t know if they can deliver it efficiently. In many cases, they don’t even have the skills to do something like what they propose, beyond a grab bag of technical and commercial talents.

It has to promise transformational change

The change that a startup seeks to ignite in the world is transformational, not incremental. These entrepreneurs don’t want to make a slightly better mousetrap. A startup wants to change the way we think about mice. It reframes the way people see and do things.

Google fundamentally changed the way Internet search engines worked by indexing results based upon citation and building an advertising model around this novel methodology. Amazon changed the way we purchase books, replacing the in-store experience with an online one, enabling us to broaden our horizons beyond what “Big Reading” thought would sell. Facebook radically changed the meaning of community for billions of people.

A startup can exist on its own or within a larger organization.

It seeks a market niche

Marketing is about change. It comes down to convincing people that this is the change they’ve wanted all along. A marketing tribe is a group of “people like us who do things like this”.

Typically, marketers will refer to Geoffrey Moore’s model of the chasm in which the first members of the tribe are the so-called early adopters.

If the entrepreneur can seed the tribe with a few early adopters and those users have a positive experience, then this is proof of the feasibility of creating a market niche. Those early adopters will tell two friends, who will tell two friends, and so on.

It has to be scalable

A scalable business is one that can grow into something massive. It has the DNA to mature from infancy into full-grown adulthood.

Plenty of companies think of themselves as startups, but they are not, because they suffer from delivery problems or demand problems.

Delivery problems occur when the business is designed to serve a small group of users, but looks like it may struggle to expand sustainably as demand kicks in.

Cloud computing and the evolution of new software development tools over the past 20 years led to technologies such as containerization, which help software companies overcome the delivery problem inexpensively.

Demand problems are the other signal that a business may not be scalable. It’s when a startup shows exciting growth initially only to discover that the tribe had a finite set of potentially interested users all along, which is a more difficult problem to overcome.

It has to have massive impact

A startup has to deliver a product that is so meaningful that it changes the lives of its users in such a way that they struggle to imagine what life was like without it.

If you can combine massive impact with scalability, growth will follow organically. A startup with a successful hypothesis and a scalable design couldn’t control the growth if it tried. The product flies off the shelf or the service sells itself.

People talk about a concept called product-market fit without really knowing how to define it. It is one of those “you’ll-know-it-when-you-see-it” phenomena. When the product starts flying off the shelf, that’s pretty much the only proof that you have of product-market fit. If you’re grinding out sales with tremendous effort and uncertainty, then you don’t have it yet. Sometimes it takes a while to tip over to product-market fit. It is a phase change in demand that is impossible to articulate or predict with any confidence.

There are also many things a startup is not.

It is not a quick turn

While there may be startups that look as if they emerged from nowhere only to be instantly successful (a perception reinforced by the apparent youth of many founders), the truth is that it takes years for most startups to test their hypothesis and build scaled-up, successful businesses.

In a paraphrase of the familiar Hemingway line, success for most startups comes slowly, then quickly. It’s exponential. It looks risky and unsuccessful, until it doesn’t.

It is not a glamorous endeavour

For all of the LinkedIn pictures of founders holding a microphone in front of crowds of acolytes, for all the images of smiling teams ringing the opening bell at the Nasdaq as they take their company public or the sycophantic profiles of companies acquired for Croesus-like riches, a startup is a grind.

Imagine what it takes to work without getting paid, with little to no resources, on an idea that may or may not work, possibly in partnership with investors who rapaciously want to take as much for themselves without killing the Golden Goose. Imagine doing that for a few years.

You’d have to be crazy, or stupid, or delusional, or possessed.

The possessed are the most interesting entrepreneurs. Those people who are like a dog with a bone, who have to play this theory out, who are driven to see what this idea could become are the ones worth backing.

The least compelling founders are the ones who promote themselves personally, exploiting the unfamiliarity of most people with the mystery of entrepreneurship.

If you see someone shrouded in the cult of personality, coveting his or her spot on some Top Forty Under Forty list, maybe that’s a flag.

It is not well understood by outsiders

Many startups do things that sound contrarian. They have to do something profoundly different just to exist. If a startup were suggesting a change that everyone thought was obvious, then someone would have already tested that hypothesis long ago. And even then, the impact is unlikely to be massive.

Who would have thought that you could develop a marketplace in which people rented out spare rooms in their homes to travelers and that Airbnb would scale enough to challenge the hotel industry? How many people told CEO, Brian Chesky, he was insanely stupid (using anodyne business jargon, of course)? Here are just a few of the rejections he actually received.

Startup life isn’t easy, and like anything else, the more educated you are about a topic the better equipped you will be to make good decisions.

This is the first of a series of articles about startups and venture capital, where we’ll explain some of the concepts people might see discussed in the press. We’d love to hear your feedback.

3 weeks ago