A startup is an organisation that prioritises (exponential) growth over every other metric, while a small business prioritises profits.
Startup versus Small Business
Over the last few years, I found much confusion in the definition of “startup”. Some large companies call themselves startups when clearly, they show no resemblance to the high-growth companies we call startups. Also, with new and smaller companies, the term is used loosely and incorrectly many times. Clearly, most newly found and small companies are just that, small businesses. At the same time, startups are a very distinct set of companies.
Even in academic research, companies are more often than not defined as the type of company that the researchers find in their data sample. Therefore, much entrepreneurship research is sub-par, and the insights from this field of study are far behind practitioners’ knowledge.
What is a startup?
Here is the simplest and truest definition of a startup:
A startup is an organisation that prioritises growth over all other success metrics. In comparison, a small business is primarily concerned with bottom-line profitability, as is true for most larger organisations.
The legal framework for companies is usually designed to force companies to be profitable or to become profitable quickly. The rise of venture capital enabled companies within that legal framework to work on growth with ignoring profitability for an extended period. That said, growth is not the opposite of profitability. Plenty of examples of companies that achieved tremendous growth from their cash flow.
Please note that the definition only implies intent. A startup defined that way is prioritising growth. At the same time, it can fail in that target and switch to profitability instead, thus becoming a small business. Likewise, a small business can fail to be profitable and either pivot to a growth model or run out of business.
This definition has all the implications that we came to associate with startups. Let’s take a quick look at culture and business model.
Implications for a startup culture
Since the startup focuses on growth in a legal framework that rightfully requires them to pay bills, it is highly risky. For that reason, and that reason, only startup culture had to evolve the way it did. Most employees are not a good fit for such an environment. Furthermore, small businesses that try to emulate a startup culture will not succeed as the demands for action enormously vary. While every company can buy bags and add a foosball table to their break room, authentic startup culture is only efficient in a company that focuses on growth.
Implications of a business model
Growing one- or two digits year over year is not startup growth. An agency is usually not a startup. Likewise, an online shop is usually not a startup. To sustain high growth over time, startups must follow a business model that allows elongated growth through market building or disruption. Building an alternative to an existing product usually does not qualify for this criterion. Of course, in the beginning, every company grows strongly. This high growth is a mathematical fact. Elongated growth means exponential growth as opposed to linear growth. Exponential growth means the percental growth rate remains constant (i.e., growth of 20% month over month for several years). Linear growth means the absolute growth remains steady (i.e., growth of 10 units monthly for several years).
The corporate startup
A quick word on corporates that claim to be “like a startup”: An established corporation is no startup. While every company wants to grow, no CEO of a large firm will prioritise growth over profits. In fact, for rules of the capital markets, it is almost impossible to return to a growth focus once profitability is reached. For the same reason, startups inside corporations often fail, as these are cost centres inside an organisation that require profitability. I’ll write more in-depth about this in a later post.
Please note that there is no rating implied in those definitions. A startup is not better or worse than a small business. They are just two organisations with different goals.
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