What is a Startup?

The startup has been a trending appellation in the business world for decades. However, during many discussions with participants in the seminars and workshops I've been giving, I heard individuals saying that a startup is just a new company. That word is just a fashionable, sexy way to call it. Others believe that it is an exclusive name for tech companies.

Creating a business does not necessarily mean setting up a startup. However, the term has fallen into everyday language and is often used to designate a young company. In that case, the startup differs from the traditional company by several elements.

In this article, you will discover what a startup is and the characteristics of this type of business. I will focus, in particular, on the temporary nature of the development phase of a startup.

I. Definition of a startup

The term startup appeared in the 1920s on Wall Street during Radiomania, a critical period in American stock market history characterized by massive investment in companies specializing in wireless transmission. But it was in the 1990s that the term was popularized by the proliferation of dot com companies (internet companies) and venture capitalists in the United States.

Literally, "startup" means "starting a company" or "young shoot" in French. Therefore, the notion of a startup is linked to experimentation relating to a new activity, in a new market, with a risk that is difficult to assess.

The most common definition is that of Steve Blank, a famous Silicon Valley entrepreneur known for having developed the Lean Startup method:

“A startup is a temporary organisation designed to search for a repeatable and scalable business model”.

This definition puts your finger on the most fundamental point of differentiation between a startup and a company.

A company is organized to execute and optimize an already established business model by marketing a product or a service on an ideally identified market.

A startup is experimenting with a business model and testing a still uncertain market. Unfortunately, this only allows him to clearly define some of its components of it and, consequently, to ensure immediate profitability.

Dave McClure, the founder of the 500 Startups accelerator, offers a slightly different definition, emphasizing the experimental nature of any startup:

“A startup is a company that’s confused about (1) what its product is, (2) who its customers are, and (3) how to make money.”

For him, a startup is, therefore, a company that does not know exactly what:

• What is his product?
• Who are its customers?
• How to make money?

The startup is, therefore, also distinguished by the risk associated with experimentation: the first years of the life of a startup are made up of numerous iterations and tests, and it is common for many projects to fail.

As you can see, there are several theoretical definitions of a startup, depending on the element you want to focus on. In practice, however, there are characteristics common to all startups.

II. The characteristics of a startup

Whatever its sector of activity, several years of training, and size, a startup always meets the following three characteristics.

The transient/temporary aspect: a startup cannot last indefinitely. Instead, it is a particular phase of development, the main objective of which is to get out of it. However, by definition, the startup lasts the time of the degree exploration and experimentation phase. It covers the period during which the business model is sought and the various parameters refined.

The prospect of intense and rapid, even exponential growth. This is the main feature highlighted by Paul Graham, co-founder of the famous YCombinator incubator:

“A startup is a business designed to increase. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, take on venture capital funds, or have some “exit.” The only essential thing is growth. Everything else we associate with startups stems from growth.”

This could be translated as: "A startup is a company proposed to increase. Being newly created does not make a company a startup. Nor is it necessary for a startup to be in the tech field, whether VC funds fund it or whether it has some "exit." The only essential thing is growth. Everything else that we associate with startups stems from the growth."

Scalability, i.e., its ability to maintain high profitability despite exponential growth. A scalable business is a structure in which revenue is not directly related to rising costs. The scalability of a startup depends on its ability to attract many users and get people talking about it. Therefore, it is essential to aim from the beginning on a global market and set up a structure that can grow exponentially.

It is important to note that a startup is not necessarily technological. However, it is no coincidence that most startups generally evolve in the sector of new technologies or integrate a technical dimension.

This universe indeed offers unique opportunities.

• Internet and cloud storage is inherently scalable.
• We can create cheaper and cheaper products or services.
• It is possible to attack large markets very quickly.
• Innovative products and services are likely to affect the whole world.

In the same way, a startup does not necessarily require raising significant funds. While traditional businesses need large startup investments (purchasing stock and premises for a company, for example), this is not the case for startups, which can launch a product or service online. Cheaper.

There is now a range of inexpensive services and tools to experiment with. The many no-code tools and the possibility of working with freelance profiles thus make it possible to overcome a potential technological obstacle: today, a developer is no longer needed to create an application!

In reality, some startups' spectacular fundraising occurs after their idea is validated to meet the need to finance the acceleration of technological development. Fundraising generally occurs after the phase of building a prototype and finding customers, when massive investment in human capital (recruitment) and technology (research and construction of solutions) is required before generating revenue. Investors generally meet this financing need.

III. The life cycle of a startup

The lifespan of a startup is, by definition, limited. But, as famous Silicon Valley entrepreneur Peter Thiel says in his bestseller: the goal of a startup is to go from 0 to 1, to turn an idea into a sustainable business with a profitable business model by finding a new way of rendering service and creating value.

We can schematically identify four phases in the life of a startup:

• Ideation:?consists of placing an idea and testing it with potential users, then formulating the foundations of a model that works.
• Early stage: in which the startup accelerates its commercial and technological development and begins to generate revenue to find its business model.
• Growth: reached when the business model has been found. The startup then faces the challenge of scalability. During this phase, she wonders about her model's relevance and solidity if she multiplies her customers and her income (by 100, by 1000…).
• Maturity: marks the startup's transformation into a traditional company with an established and viable economic model over the long term. It can then go public (the famous IPO) or be bought out by another company or an investment fund.

For example, Google and Facebook are no longer considered startups today because they are companies that have succeeded in defining and stabilizing their business model. Conversely, companies like Uber or Twitter — whose economic model is still evolving — remain startups, mainly because they need external financing to survive.

Finally, it should be noted that many startups need help finding a market, a scalable model, or sometimes for lack of cash. This is why it is essential to adopt the right reflexes from the start and to build a solid foundation for your project.

As a business advisor and mentor, I'm here to help you in the ideation phase, which is critical for the rest of your entrepreneurial adventure, and then follow up with you on the rest!

Reach out to me, and let's make your dream comes true!

Follow me for more insights and stories if you enjoyed this reading. Also, join me on LinkedIn, Facebook, and Twitter to exchange knowledge and ideas.