What is a start-up?

Published at Jul 26, 2016, in Features

Have you ever seen a company refer to itself as a start-up when clearly it is not?

We’re talking about that business which has been in operation for about five years but has little to no cashflow and is bankrolled by private investors.

We’re talking companies like Uber: a $40 billion company (on valuation) still classed by some as a start-up.

At what point does a company stop being a start-up and what are the parameters of definition?

Perhaps if we can get the definition right, it will stop companies rushing to be defined as start-ups when they’re obviously just small businesses?

The term start-up has become a byword for a fast-growing small company. It’s a term you use to describe a tech play shifting paradigms and shaking the foundation of modern commerce from a warehouse office complete with a ping pong table.

As The Castle’s Dennis Denuto would put it: it’s the vibe of the thing.

It implies that these companies are on the cutting edge of commerce, with a row of coders all looking to create the next killer app...

For an investor, it means the company could be ‘the next big thing’ – whereas investing in a small business or a small cap company doesn’t quite come with the same cachet.

Running a ‘small business’ simply doesn’t have the same ring to it as running an ambitious start-up – does it?

The term ‘small business’ conjures up images of mum and dad corner stores, of businesses serving a very particular market segment in the industrial sector rather that creating consumer-facing tech solutions.

It’s not very sexy.

That could be why a raft of companies are twisting the rules of logic to call themselves start-ups.

They can get away with doing it because, there’s no real universally accepted, cut and dry definition in the business community of what a start-up actually is.

That’s not to say a definition hasn’t been attempted.

Ex-TechCrunch writer Alex Wilhelm has tried to define what a start-up is with a list of what a start-up isn’t.

He writes:

I think that we can instead rely on the 50, 100 or 500 rule, which I just made up...if your company has, or is any of the following, you have to hang up your Start-up Uniform.

  • $50 million revenue run rate (forward 12 months);
  • 100 or more employees;
  • Worth more than $500 million, on paper or otherwise.

It’s a good place to start, but it does open up the definition to myriad companies.

Is a gold explorer looking for the next big hit in the Democratic Republic of Congo a start-up under this definition?

What about the corner store where you buy your milk every weekend? Is that a start-up?

Wilhelm isn’t the only one to try and come up with a definition.

Co-founder of Homejoy, Adora Cheung told Forbes in 2013 (that’s how long this question has been batting around for) that a start-up is a “state of mind” rather than an objective set of criteria.

“It’s when people join your company and are still making the explicit decision to forgo stability in exchange for the promise of tremendous growth and the excitement of making immediate impact.”

...that doesn’t really help as an objective view of what a start-up actually is.

That can pretty much be any business which is being driven at the speed of light.

Companies such as Google, Tesla, and Apple all have this mentality – but you’d be hard-pressed to describe them as start-up companies.

According to the Oxford dictionary, a start-up company is “a newly established business”.

The Australian government also had a swing at defining a start-up.

Well, not a ‘start-up’ exactly, but rather an ‘early-stage innovation company’ (ESIC) – because when it comes to government legislation why use two words when you can use four?

Prior to the last federal election, the parliament passed legislation which would allow for more funding into ESIC companies.

So basically it has a rather convoluted way of working out which companies qualify under the scheme:

A company has to both meet an ‘early stage test’, and either a 100 point innovation test or a principles based innovation test.

To meet the early-stage test, a company has to be registered on the Australian Business Register; have total expenses of $1 million or less in the previous income year; have income of $200,000 or less in the previous year and; not be listed on any foreign or local stock exchange.

We won’t get into the 100 point innovation or the principles based innovation test – but suffice to say it’s pretty complicated.

So where does this lead a person wanting to call out small companies for labelling themselves a ‘start-up’ to seem more exciting than they actually are?

Well, honestly, the definition is completely up in the air and comes down to intuition.

All start-ups do have some things in common, though.

They are small businesses aiming to develop a scalable business model to grow revenue at a more rapid rate than an established business.

That’s our definition.

It doesn’t involve ping pong tables, black skivvies, or a warehouse – all those things are just window-dressing.

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