What is a "start-up", actually?

Start-ups vs small businesses

While there’s no universal definition for start-ups, Steve Blank (known as the father of innovation in Silicon Valley) perhaps comes closest, saying, “a start-up is a temporary organisation designed to search for a repeatable and scalable business model.” This also explains why start-ups are also commonly called ‘growth stage companies’.

Start-up founders and small business owners are both considered entrepreneurs, but they differ in many ways, particularly when you look at the business model, product type, funding method and mentality of each.

Product type

Start-up founders are lauded as being a new type of inventor, known as a ‘disruptor’. They create new products that don’t currently exist in the market, or enter an existing market with a modified product offering that ‘disrupts’ or changes the industry. Start-ups tend to specialise in technology driven products. This differs to traditional small businesses, which deliver an existing product to compete for a share of a local market.

Funding method

Though both a start-up and a small business rely on self-funding from their owners in the short term, before long, a start-up will seek additional finance from venture capitalists or ‘angel investors’. This is because a start-up founder looks for rapid growth and needs the financial backing to make their business scalable. Eventually start-up ownership will diversify as public investors are brought into the mix through an Initial Public Offering (IPO). This is another way start-ups differentiate themselves from small business, where ownership remains private – often a strong motivator in the decision to start the company in the first place.

Business model

Start-ups aim for a rapid growth in scale and are often not constrained by geographical boundaries due to their investment in technology, allowing a product to be sold widely.  At infant stage, start-ups focus less on structure and operations; their business model is yet to be determined while they search for the right product, market or investment. This is what being ‘agile’ means – keeping overhead costs down in order to change quickly as they develop. This stage has the biggest risk of failure, with many businesses falling by the wayside as a result of this haphazard, undefined method.

Conversely, a traditional small business is far more risk-adverse. The business model is tried and true, with set financial and operational parameters. When one or few people carry the weight of the company on their shoulders, the founders look for steady long-term growth. The trade-off is fewer opportunities to scale a product outside the confinements of its local market.

Business mentality

James Meade, head of the Business School’s Innovation Hub says, “there’s a ‘let’s try it’ mantra in start-ups and this is probably their most essential characteristic.” Start-up founders are inherently innovative, solving problems that don’t even exist yet.  They’re forward thinking and progressive in the way that they aim to disrupt the market and dominate with new solutions.  Vision and motivation are vital from all employees and investors in order to have a positive output.

Small business mentality is different since the owner generally sets out to compete in an existing market rather than dominate. A small business owner also spends less time thinking about the big picture because running the business is part of the lifestyle choice they have made.  

Dr Massimo Garbuio, a senior lecturer in entrepreneurship, believes it’s important to remember that although start-ups are sexy, both types of businesses are incredibly important.

“In an economy, it’s critical to have both small businesses and start-ups - they have very different roles,” he says. “Start-ups create future growth by exploring innovative and often life-changing ideas. Small businesses tend to ‘look after’ the needs of today. When we think about job creation, this is often fuelled by small businesses rather than start-ups.”

When does a start-up cease to be a start-up?

The jury’s still out when attempting to quantify how to measure up a business. Some strategists draw a line in the sand and promote the ‘50-100-100’ metric. It states that a company is no longer a start-up if they have earned more than $50 million in revenue within 12 months, have more than 100 employees, or are worth more than $500 million.

The problem with such rigid rules is that all businesses are different. Dr Garbuio prefers the Organisation for Economic Co-operation and Development (OECD)’s definition of start-ups, which focuses on maturity rather than size.

“The OECD distinguishes between young firms (0-5 years) and mature firms (6+ years), explains Dr Garbuio. “Start-ups are a subset of young businesses within the first three years of operation (0-3 years old)”

“If we use the OECD definition, which is relatively straightforward, a business that is over three years is not a start-up anymore. However, it is not uncommon that companies that are five or six years old are still in start- up mode, still struggling to find their business model for example. Therefore, a substantial event such as an IPO or being acquired could be an alternative way to think about ways to distinguish a start-up from a more mature business.” Professor Stephen Zhang, a lecturer in international business adds, “once a company has a professional CEO, it generally has passed its start-up phase”.

Other specialists prefer to use qualitative measures that focus on a business’s transition in mindset and model when defining them. Steve Blank’s assertion that a start-up is a temporary organisation implies that once a business has determined its product, market and investment method, they become a conventional company. This is when a business becomes less focused on the product and more on the process to create operational and staffing efficiencies, to begin scaling.

Even so, many businesses keep their start-up title because it is tied to their identity, culture and branding. They remain forward thinking and progressive though they have diversified ownership.

“As public companies, I would not consider Facebook or LinkedIn as start-ups for example. If we think about their culture and the way they operate though, then they might be closer to a start-up compared to a more conventional, mature business,” says Dr Garbuio.

So, it seems ‘start-up’ is both a trendy title and a legitimate definition at the same time.  They’re the phenomena that have gone on to define the current era of business, driving industries towards an increasingly tech-obsessed future.

Last updated: 15 January 2020