Can we please get back to a real definition of a "startup"?

Next Story

Radiohead Dips Into Online Distribution Again – This Time With A Price (For Charity)

This is a guest post by Inma Martinez of Stradbroke Advisors (and blog), a consultancy which works with VC firms and startups in Europe and the US. Throughout the summer we’re running guest posts we like – preferably exclusive to TC Europe – written by people on the tech scene in Europe. If you’d like to contribute get in touch.

I spent the whole afternoon and evening yesterday evaluating a list of about 50 UK startups that will compete for the title of “European Tech Media Company of the Year” in a high-profile October event in London. Not that I haven’t been involved in similar processes before but the point that I want to highlight hereby is the absolute mental maze that we, the evaluators, got ourselves in for at least a good five hours. Amongst us were some of the highest profile investors, lawyers and execs in the entrepreneurial world.

The mind-boggling issue was to be presented with a list consisting of a mixture of early stage startups alongside companies trading for a large number of years as well as companies turning over about £100m per annum. To everyone’s amusement, a good number of companies dated back to 2000 – yes, almost ten years ago – and still no one in the room had a clue as to what was going on with their businesses because sales figures had not shown up in their applications, so they still looked to all appearances like pre-revenue or bootstrapped up to their eyebrows. So are we to still call them “startups” because they are either still unfunded, or showing very little footprint in their market? Which leads me to ask:

When is a startup no longer a startup?

We can apply several measuring indicators:

(a) A startup can no longer be called a startup when their brand and footprint in the market is recognisable, they sell in several countries and – even if you don’t know if they are cashflow positive or even sell anything at all (Twitter); their brand has entered into popular culture and the Queen of the United Kingddom, no less, may even have a subscription to it (would you follow the Queen on Twitter if she wrote her own tweets? I bet you would even if you abhor the monarchy).

(b) A startup can still be a startup even when they get Angel money. Pre-revenue or with little sales to account for, half of their professional management are still in “startup training” and cannot be accountable for their sins entrepreneurial early days sins. Nowadays, by the time a VC gets involved, things are very different from “starting up”. Company founders are challenged to deliver businesses for a Series A investment round that pretty much means they have not only started the engines up but they left home and Mama a long time ago. You cannot call a company a startup when they have proper clients, have a PAYE payroll going, pay national insurance contributions, corporate taxes, rent office premises that cost over £25,000 a year and operate like a proper small limited company. It may trade in a risky market – in banking we call them “emerging” – just so that the asset managers don’t get freaked out – but operationally they have the same dynamics and responsibilities of a SME.

Back at the World Bank we used to invest in project financing, a term that ended up meaning something very close to venture capital. Ask the EBRD (European Bank for Reconstruction and Development) what happened to the Vienna-Budapest toll road project. Hundreds of millions awarded to 3 engineering companies to build a toll road between the two cities for the glory and the benefit of all drivers in the region. What happened? So, the toll road opens and nobody uses it. Not because it is badly built or the re-payment model has not worked before in other markets – toll roads are mega successful in the UK – but because in Vienna, back in 1995, nobody cared about driving to Budapest. And in Hungary Eastern European drivers could not afford toll roads. Doh!

This is exactly like investing a series A on a company – Spotify – seemingly poised to rule the world at Star Trek-style valuations even though they have only been trading since June 2009 (ahem, nothing like wiping out the Swedish/Luxemburg past, OK….).

VCs, and challenge me if you want, invest in companies these days, not startups. They invest post-revenue and in markets where the company operates with a high amount of “it’s a sure-thing” ingredients. If you doubt this, do you honestly think for one crazy minute that Spotify would have raised that amount of wonga if there had not been a Pandora years before, rocking every consumer’s music dreams? Wake up and smell the decaf risk, kids.

VCs can argue that “major” risks can jeopardise their investment. For instance, the CEO and the rest of the team – bright young things who are rarely as focused as Steve Jobs – can go mad and mismanage the company. Or the marketing strategy can fail to generate more sales. These are realities that represent the day to day of SMEs and big multinationals. It is called running a business in the real world. The size of the company is irrelevant. Ask any CEO who’s been sacked – Porsche, anyone? (2009) – or big FTSE company with a disastrous marketing campaign, like BT and their riduculous “Surf the Net, Surf the BT Cellnet” ad campaign (2000). Risk – market, human capital, credit crises, is business.

Leaving that heated argument aside, I can propose a safer line of thinking: that of the passing of time. Is a startup really a startup after 2 years of trading? Because this is the point where many run out of money or patience waiting for (a) angels (b) miracles (c) the market (d) a regular, salaried job back in the industry.

Could we now start talking about startups with some kind of proper definition?

What does one call an entrepreneur with a business plan looking for money? A hopeless romantic?

  • http://www.newscred.com Shafqat

    Interesting post… You examined the mature end of the spectrum, when a company is no longer a startup and graduates to the next phase.

    But what about the other end? There are so many examples of a “guy with a website” being called a startup, that it’s worth putting some definitions there as well. When does a website become a startup? Is it when it generates revenues (or is that asking for too much?!). Is it when they have a team? Or when they’ve found investors? It’s pretty difficult to define, and there is a lot of fluidity between the different phases – I guess that’s why startup life is so exciting!

    • http://stradbrokeadvisors.com Inmaculada Martinez

      I totally agree with you on the “guy with a website”. In this case, angels will fund the business if the company manages to get some initial clients who do not care that they still trade from their homes and the co-founder is still working at his full-time job. In these cases – and I have a Scottish one in mind that I will not name, the infrastructure of the corporation matters less and the fact that the industry has found value in their services and is happy to become clients is what rolls. Still, it is a startup.

  • http://phreadz.com Kosso

    A great post which touches nerves I have tried to describe to people in the past after finding myself (a true ‘startup’ entrepreneur) being pitted against companies with investments, employees and some with years of trading at some ‘startup’ ‘competitions’.

  • http://danieltenner.com Daniel Tenner

    Ultimately “start-up” is just a word like any other, so its definition is driven by usage more than by anything else.

    That usage is both a function of the company itself, and of the person doing the name-calling. It’s a bit like the word “kid”. To a 20-year-old, “kid” means something very different than to a 50-year-old. This is probably where a lot of the disagreements and vagueness arises.

    My own definition includes more than one factor. Factors that go into whether a company is a start-up include:

    – Whether the company is breaking even

    – Whether the company has generated a positive return on investment

    – Whether the company still has a start-up mentality (hard to pin down, but very important)

    – Whether the company is growing fast or has the potential for fast, high growth

    – Whether the company is doing something innovative (i.e. not a traditional business model like a restaurant)

    There’s probably more, but those probably make for a good starting point.

  • Peter

    Nonsense post.

    > You cannot call a company a startup when they have proper clients, have a PAYE payroll going, pay national insurance contributions, corporate taxes, rent office premises that cost over £25,000 a year and operate like a proper small limited company.

    Erm. Like a large % of “startups” in the world? By that definition any startup that has taken seed isn’t a startup. Don’t be daft.

    Twitter, Spotify, Songkick, Huddle … all not startups because they’re “real” companies?

    Being a startup is as much about the *culture* of a company as some bullish definition.

    You can’t have a list of checkboxes and suddenly “you’re no longer a startup” – its nonsense.

    You’re a startup if you aspire to something large. Where you want to be in a commanding position in a market. You’re hungry.

    > VCs, and challenge me if you want, invest in companies these days, not startups

    This isn’t new. It’s always been like that. VCs like startups that already have traction to prove they’re in a lucid market, is that surprising?

    VCs still invest in unproven ideas and markets. But think about it logically and a VC should do anything they can to minimze the risks.

    • http://stradbrokeadvisors.com Inmaculada Martinez

      It depends what you understand by Seed.
      In the world of TAG and other Seed investors, the amount of money is around the 100k-200k. If a startup raises 500k in seed – and they are to run with it for about 12 months, this is a round that will finance the transformation into a company process – yes that PAYE thing, and take them to revenue.
      I have done enough Seeds at those early levels to know the amount of things that need to be changed in the company to take them to a “professional level of trading”, with structure, processes, reporting, board meetings, yes , bureaucracy. By the time they roll like that, I would not call them a startup anymore.

      Huddle
      Huddle trades and conducts its business with all the corporate governance that a bigger SME would. Why would they be referred to as a startup when they have maturity, clients, good traction and they are in growth of business mode as opposed of “learning how to run a company” mode, which is what goes on in a startup?

      You talk about the startup culture.
      By that rational, Google is the biggest startup in the world right now. Have you been there? I have and have friends that work in the US or the UK Google. My post was about defining the level of growth and maturity that I company must have in correlation with (a) the amount of funding they have and the kind of investors they have, which prompts very different expectations from each (b) the real truth about their sales and revenues – how much longer do you finance a startup with grants and angel rounds and still no sales?

      VCs talk about investing in startups but these days, and SPECIALLY since the credit crunch, all of that delusion is way in the back of their heads and tend to go for very defined and bulletproof investments. It was not like that years ago. The fact that some companies are still trading does not mean they have achieved the investment objectives of their backers. I cannot name them but you do the math as to the zero amount of IPOs in the last 12 months and the very low M&A activity.

      VCs do NOT invest in unproven ideas or unproven markets. The cannot take that cavalier attitude because they have Limited Partners to report to.

    • http://stradbrokeadvisors.com Inmaculada Martinez

      It depends what you understand by Seed.
      In the world of TAG and other Seed investors, the amount of money is around the 100k-200k. If a startup raises 500k in seed – and they are to run with it for about 12 months, this is a round that will finance the transformation into a company process – yes that PAYE thing, and take them to revenue.
      I have done enough Seeds at those early levels to know the amount of things that need to be changed in the company to take them to a “professional level of trading”, with structure, processes, reporting, board meetings, yes , bureaucracy. By the time they roll like that, I would not call them a startup anymore.

      Huddle
      Huddle trades and conducts its business with all the corporate governance that a bigger SME would. Why would they be referred to as a startup when they have maturity, clients, good traction and they are in growth of business mode as opposed of “learning how to run a company” mode, which is what goes on in a startup?

      You talk about the startup culture.
      By that rational, Google is the biggest startup in the world right now. Have you been there? I have and have friends that work in the US or the UK Google. My post was about defining the level of growth and maturity that I company must have in correlation with (a) the amount of funding they have and the kind of investors they have, which prompts very different expectations from each (b) the real truth about their sales and revenues – how much longer do you finance a startup with grants and angel rounds and still no sales?

      VCs talk about investing in startups but these days, and SPECIALLY since the credit crunch, all of that delusion is way in the back of their heads and tend to go for very defined and bulletproof investments. It was not like that years ago. The fact that some companies are still trading does not mean they have achieved the investment objectives of their backers. I cannot name them but you do the math as to the zero amount of IPOs in the last 12 months and the very low M&A activity.

      VCs do NOT invest in unproven ideas or unproven markets. The cannot take that cavalier attitude because they have Limited Partners to report to.

      The invest in NEW ideas and EMERGING markets. They fund INNOVATION.

  • http://www.ciara-byrne.typepad.com Ciara Byrne

    I really like this post although I may not agree with all of it. I would stretch the definition beyond 2 years if some of the other parameters apply, e.g. only low-level angel funding.

    I have worked in startups and the idea that “being a startup is as much about the *culture* of a company” (as Peter commented) sounds a bit silly to me. When my last startup employer was bought by a 1000 person company, although we were the same people in the same office working on the same products, we hardly qualify as a startup anymore.

  • Peter

    oops, my post sounded rather rude – sorry.

    • http://www.fanduel.com Nigel Eccles

      LOL

      What a civilised country Britain is – even TechCrunch commentors apologise for being rude!

  • http://www.alaintheriault.com Alain Theriault

    Just like “business plan” the word “startup” covers way too much ground.

    A startup has not reach any kind of cruising speed
    A startup is always in “nimble and quick” mode
    A startup manegement team is always walking “the edge”
    The busines model of a startup is still “a-work-in-progress
    And for the article purpose, a title like the one they were competing for, will “really” propel the startup company forward (instead of just being another trophy on the CEO’s desk!)

  • http://startupcoaching.wordpress.com/2009/08/05/what-is-a-startup/ What is a startup ? « StartupCoaching:

    […] article in UK’s Techcrunch on what is the definition of a […]

  • http://1daylater.com/ David King

    Being part of a pre-startup, I know where I am in the world in that we’re still in the RnD phase, haven’t decided whether we’re applying for funding, have no clients (but a few lined up for launch) – things are very much black and white at this point.

    For me, I’d say we’d be a startup from the launch up until one of two stages:

    1) When the business has been truly established – ie we know our market position, marketing methods are in place, support systems etc AND we’re earning enough money from our clients to be autonomous.

    2) When enough time has passed (say 2 years) – If we’re NOT established at this point then I’d say we’re a “changling” company or in trouble.

    A company simply cannot be a “startup” after 9 years, if they’re surviving and existing at this point then they’re a straight up company – Regardless of whether they’re out of “beta”, have achieved their goals or are still using up VC funding. Maybe they’re new value comes from innovation or spin-offs, maybe they’re a quango and don’t know it but I would feel ashamed to call myself a startup after such a long time!

    Nice article – might see if I have anything to contribute too :-)

  • http://uk.techcrunch.com/2009/08/06/write-a-guest-post-for-techcrunch-europe-this-summer/ Write a guest post for TechCrunch Europe this Summer

    […] preferably exclusive to TC Europe – written by people on the tech scene in Europe. Here’s an example. If you’d like to contribute get in touch. One email, pitch us the idea for a post in one […]

  • http://www.newsjacker.co.uk/media/write-a-guest-post-for-techcrunch-europe-this-summer/ Write a guest post for TechCrunch Europe this Summer 

    […] exclusive to TC Europe – written by people on the tech scene in Europe. Here’s an example. If you’d like to contribute get in touch. One email, pitch us the idea for a post in one […]

  • http://www.freddestin.com Fred Destin

    This is a semantic debate … a bit like wondering whether we should drop the word “digital” from digital media.

    To me, startup is a state of mind.

    Seatwave is a mature company, yet it’s a startup. So are DailyMotion or Zoopla. They are scrappy, fast and paranoid.

    So you can have startup companies that are at seed stage, build stage, expansion or acceleration stage, and still be startups.

    I will continue to use that word as an alternative to company with the positive connotation I associate with the word. I fund startups !

  • http://stradbrokeadvisors.com Inmaculada Martinez

    Thanks Fred, now we’re getting there.

    So perhaps the market should talk about “companies in startup phase” and take this as an adjective to imply either the “state of mind” of their management – scrappy, fast, paranoid (this one made me jump), or the early formation of their business governance and activities.

    I think it is fair to define it as a “phase” because running a business, growing a company is a “path in motion”, it is an active, not a passive activity and so transformation and change (all movement forces) are a key element of their composition as living organisms.

  • http://inmamartinez.wordpress.com/2009/08/13/i-am-a-vc-and-im-40-years-old-or-how-some-investors-are-revealing-the-mac-side-of-their-doings/ “I am a VC and I’m 40 years old” – or how some investors are revealing the Mac side of their doings « INMA MARTINEZ

    […] are somewhat grassroots, not just the cool ones that everyone wants to attend. They care – “I invest in startups, not companies!”, Fred Destin voiced last week, or today, the other Fred, Mr Wilson of New York City, “I do my […]

blog comments powered by Disqus