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

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?