This is one question where you instinctively know the answer; but when you are asked, you still manage to get confused. Is a startup a business? Is a startup a small business? Is a startup a new business? Is a startup technology business? Or a combination of all of the above — a new small technology business?
Simple answer; a startup is a business that is still trying to see if its way of doing business will work.
Key phrase here is, “if its way of doing business will work”. And it implies novelty and learning. That is, the business is doing something different and learning from mistakes.
There is not much reference on the history of the word “startup”, except for some Forbes article from 1976. What we do know is, it has always been associated with technology – from the semi-conductor businesses of the 1970’s to the software businesses of the 1990’s. Strictly speaking though, I do not think a startup has to be a technology business. It’s just that most novelty comes from technology.
Before I continue, it will be a good idea to define the term “business model”, since I will be using that phrase a lot. A business model is a plan for the successful operation of a business. It involves identifying sources of revenue, the intended customer base, products, and key business activities.
Alright. So we know a startup is doing something different, it is why a startup is trying to see if its way of doing business will work. Put another way, a startup is really just trying to answer the question “will my business model work?”. The startups that get funded by investors are those, who have been able to convince the investors that there is a great chance their business model will work.
This is very different from a new business with well known business models. For example, if I wanted to start a restaurant business. I don’t think I would need to convince anyone of my business model. I think the only concern from potential investors will be choosing the right location, assuming of course, that I already have experience running a restaurant.
So where does all these, put the innovator — the entrepreneur that has decided to things differently, and needs to figure out how to make a business out of it? Well, he needs to be in a constant state of learning, embrace mistakes and be resilient.
A big emphasis on “learning”. Don’t raise a million dollars if you have not learnt anything; else you will make a million dollars mistake. And don’t even think you can raise enough more to cover up a mistake in your business model. Amazon’s predecessor, WebVan, raised over $800 million between 1996 and 2001, but still ended up filing for Bankruptcy in July 2001. Most of WebVan’s executives went on to work for Amazon who learnt from first selling Music CDs, Videos and Books.
You don’t want to be the guy who makes an eight hundred million dollars mistake. If what you are doing is a startup, make sure you are setup for learning till your business model is proven to work.
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After writing this post, I found out, a lot of people define startups differently. For example, Investopedia says “A startup is a company that is in the first stage of its operations”. While Wikipedia defines it as some new business that intends to validate its model and then scale it. I couldn’t write the exact Wikipedia definition, it is a complicated sentence, and I don’t like to complicate things. Read it for yourself here.
I think the Investopedia definition is way too broad. The Wikipedia definition focuses on business validation and scale, which is more in line with my thoughts, except, I don’t think every startup needs to scale, but that’s a debate for some other time.