How Do You Define A Startup?

How Do You Define A Startup?

Posted by Guest Blogger

If you ask most people what is the first thing that comes to mind when they hear the word “startup”, it’s likely they will say “tech company”. This, of course, is a very broad perception, but it’s easy to see why that association is made by so many people; indeed many modern companies have courted it.

The truth is that in the startup era, lots of companies want to be associated with what the startup culture denotes, including innovation, disruption, creativity, and making the world a better place. But the size, valuation, and structure of many companies mean they are not actually startups at all.

First, let’s start with a basic definition. There is quite a bit of ambiguity around what exactly a startup is, with different indicators such as profitability, age, and management structure all paying a role. But put most simply, a startup is an early-stage company which is relying on investor funds to pay for its operations. It is not yet on the stock market and it doesn’t necessarily have to be associated with any one industry, though lots of startups happen to be tech companies.

Despite this fact, “it’s too easy to label a private company as a “startup”, no matter the number of employees working there, no matter their revenue achieved, or how many years they’ve been in business or selling product,” says one expert and blogger Louis Gray. Take, for example, Uber. The data research company Pitchbook just came up with a list of the 14 most valuable startups in the US, and Uber is number 1 with a valuation of $68 billion and an 8-year history. It has thousands of employees, and asserts itself as a major player in economies all around the world. For all these reasons, it’s hard to class it with scrappy tech companies that were founded last year, and just have a few employees.

Uber isn’t the only company we refer to as a startup when it fact it’s a lot more powerful than that. Also on Pitchbook’s list were companies like Airbnb, WeWork, and Dropbox, which long ago ascended to the top ranks of business. The only thing they haven’t yet done, notes GigaOm founder Om Malik, is debut on the stock market with an IPO.

“In a different Silicon Valley, they will all be public companies and they won’t be deemed startups,” Malik wrote recently. “Revenue, growth, relative size, market share – pick a metric (except for lack of profits in many cases) and you know they aren’t really startups. So can we stop calling them startups — and instead maybe call them VC-backed private companies — otherwise the label startup loses its meaning.”

Indeed, when you take all these metrics into account, it becomes clear that we need to be a little more discerning when applying the “startup” label to a company. Just because it seems cool, tech-related, and has a headquarters in Silicon Valley, this doesn’t mean it makes the cut. Indeed, most companies we call startups these days are in fact private companies backed by venture capital, rather than publicly traded.

Tech journalist Alex Wilhelm came up with a helpful metric—which takes into account revenue, size and valuation—for determining if a company still falls into the startup category. He wrote in TechCrunch: “I think that we can instead rely on the 50, 100 or 500 rule, which I just made up. Here’s the term sheet: If your company has, or is any of the following, you have to hang up your Startup Uniform, and realize that you are just another technology company either hunting for or actively avoiding an IPO:

$50 million revenue run rate (forward 12 months);

100 or more employees;

Worth more than $500 million, on paper or otherwise.”

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