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Business

What Is a Startup?

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Startups are in the news all the time, often accompanied by large doses of hype.

On the day that I’m writing this, for example, the “white-hot phone startup Xiaomi” is planning its US launch, the same-day delivery startup Deliv is getting a funding boost from UPS, Farmville co-creator Mark Skaggs is joining Indian mobile gaming startup Moonfrog Labs, and much more.

But what is a startup, exactly? Making phones, delivering packages and designing games are three quite disparate activities. So what makes something a “startup”, as opposed to a regular old “small business”?

The term tends to be used in the tech industry, but technology is not the main reason for something to be called a startup. The “same-day delivery startup” Deliv, for example, is in the very physical, real-world business of delivering packages—it does use technology, but no more so than many other 21st-century businesses.

And plenty of technology firms are not startups: think Google, for example, which may have been a startup 15 years ago but is now a huge multinational corporation, as shown by its recent indulgence in the favourite corporate pastime of restructuring.

So a “startup” is something else, different from a “small business”, and different also from a “tech firm”.

In this tutorial, I’ll give a basic definition of a startup, and then we’ll look at all the characteristics of startups one by one. As we explore them, you’ll learn some useful lessons that you can apply not just to startups but to any kind of business.

Startups, after all, conjure images of growth, innovation, and many other things that are good qualities for any business to possess. So whether you’re trying to launch the next Google from your garage or to make your regular old Mom and Pop store more successful, there’s plenty in here for you to learn from.  At the end, we’ll also look at the process of launching a startup.

Startup Illustration
Startup launch and growth (illustration).

1. What Is a Startup?

Usually, when I want a definition, I turn to the Oxford English Dictionary. But in this particular case, it’s not much use. It begins by noting that Shakespeare used the term in Much Ado About Nothing:

“That young start-up hath all the glory of my overthrow.”

But Shakespeare is describing a person, not a company: the kind of person we’d now call an “upstart”.

The OED then gives a more up-to-date definition:

“A business enterprise that is in the process of starting up.”

Interestingly, this usage started as early as 1976, with Forbes referring to the “unfashionable business of investing in startups in the electronic data processing field.”

But this definition seems inadequate to me. If I open a restaurant in my local town, that’s a “business enterprise that is in the process of starting up”, but I’d never refer to it as a startup.

It pains me to admit it, but in this case, Wikipedia clearly beats the Oxford English Dictionary:

“A startup ... is an entrepreneurial venture or a new business in the form of a company, a partnership or temporary organization designed to search for a repeatable and scalable business model ... the essence of startups is generally related to the concepts of ambition, innovation, scalability, and growth.”

In a way, the difference in definitions is a good example of the “startup” mentality versus a more established business model. Wikipedia is fast and flexible, changing quickly to adapt to recent events, frequently making mistakes but quickly correcting them. The OED moves more slowly: it will probably arrive at a superior definition of a startup in the 2027 edition, but in the meantime it looks rather dated.

One thing Wikipedia doesn’t really address is when a startup stops being a startup. I think we can all agree that Google was a startup in 1998 and it isn’t one any more, but when did that change occur?

There’s no clear dividing line: it’s not about reaching a certain age, a certain number of employees, or a certain dollar amount of revenue, profit, or assets. Perhaps it’s the moment when that “search for a repeatable and scalable business model” ends, and the focus shifts towards implementing that business model as effectively as possible.

There are a lot more factors involved, too, and we’ll look at them in the next section. By the end, you’ll have a clear idea of the main characteristics of a startup, and that will give you a much fuller definition of what a startup is (and isn’t).

2. Characteristics of a Startup

So now that we’ve arrived at a basic definition, let’s expand on it by looking at the main characteristics of a startup. There’ll be a subsection on each of them in turn, and then afterwards we’ll look at the lessons we can learn, both for startups and for other types of business.

A. High Growth

Startups exist to grow. If you start a plumbing business, just making enough profit to support your lifestyle may be enough, but a startup aims much higher: some people say a startup should be growing 5-7% a week.

Of course, that’s just an estimate, and actual growth rates vary widely, not just between companies but also at different phases of a single company’s life. A startup may not grow at all in the beginning, when it’s still figuring out its business model and how to execute it. Then it will, if all goes well, hit a phase of rapid growth. But, of course, 5-7% a week is not sustainable forever, so it’s likely that growth will slow in later years—that’s happened even with success stories like Twitter and Facebook. Slowing growth is one of the signs that a company is transforming, or has already transformed, from a startup into a mature business.

But although growth in a startup may be uneven, it’s an inherent characteristic of a startup, and a key factor that differentiates startups from other businesses.

It goes back to that “scalable business model” mentioned in the definition. A service-based business like a photography studio or web design business is often not very scalable. You’re providing a direct service to as many customers as you can, but at some point there’s a limit.

If you hire more people, your business can grow, but it’s tough to achieve the kind of turbo-charged growth that would warrant the “startup” label. 

Startups, on the other hand, usually have a business model that’s highly scalable. Snapchat, for example, went from zero to more than 100 million users and a valuation of $15 billion in less than five years. That’s a very scalable business model. When a new teenager signs up and starts sending photos around, there’s little incremental cost to the company, so it can grow very quickly.

Snapchat did have to upgrade its technology to handle higher volumes, and has hired some new people as the company gets larger, of course, but rapid growth is much easier than with other types of business. Imagine serving 100 million clients in your web design business, and you’ll see the difference. High growth is not just an objective of a startup—it’s a key component of its business model.

B. Doing Things Differently

To achieve that high growth, startups usually do things differently. That doesn’t necessarily mean inventing a whole new industry, but it does mean taking a markedly different approach to the companies that are already established.

When Google started up, for example, a search engine was not a new idea. Other companies like Yahoo, Lycos and AltaVista were already up and running, with a few years’ head start and boasting large user bases.

What Google did was to take a different approach, building a search engine that was based not only on the content of the page but also on its authority, judged by how many other authoritative websites were linking to it. It delivered more relevant results, with a simpler interface than its competitors’ cluttered “portal” sites, and achieved huge user growth as a result.

So a startup usually has a clear idea of how it can disrupt an existing industry. It’s not just aiming to be another company; it’s aiming to dislodge huge, established competitors by doing things differently, and doing things better.

Again, that’s different from a regular small business. If you open a café, you’re probably not aiming to overturn the café industry and rewrite the rules on how cafés are run. You’re probably just hoping to serve good coffee, be popular with your customers, and create a successful, sustainable business—very worthy aims, of course. But a “coffee-shop startup”, on the other hand, would probably have an idea of doing things so differently that it ends up growing super-fast and overtaking Starbucks.

For examples of how startup founders can come up with these game-changing ideas, see Eddie Earnest’s articles from the Launching a Startup series, as well as Celine Roque’s recent tutorial on simplifying your business ideas:

C. Commitment

Starting a business—any kind of business—can be a huge and all-consuming endeavour. Most people who do it are very committed, and end up working long hours and putting their heart and soul into making it work.

Startup founders often take this passion and commitment to an even greater level. Here are a couple of quotes from startup founders, courtesy of Y Combinator co-founder Paul Graham:

“I didn't realize I would spend almost every waking moment either working or thinking about our startup. You enter a whole different way of life when it's your company vs. working for someone else's company.”
“It's surprising how much you become consumed by your startup, in that you think about it day and night, but never once does it feel like ‘work.’”

Successful startup founders manage to communicate that passion to their staff as well, so that employees become similarly obsessed. Because startups usually have lofty ambitions and innovative methods, it’s easier to energise people than it is with a more traditional business.

Startup staff at work
Startup staff busy at work (illustration).

In the book Creating Passion Brands, Helen Edwards and Derek Day describe the obsessive commitment of Google employees in the startup’s early days, observing:

"Super-bright people aren’t ‘fanatical’ just because the company provides a pay cheque each month. Science PhDs don’t ‘obsess’ just because senior management demands it. For Googlers, the motivation to break records, improve and invent has to come from something other than purely commercial considerations, something loftier than adding a few more dollars to the share price. That ‘something’ is the all-pervasive belief at Google that what the company does really, really matters."

You may or may not agree with the loftiness of Google’s mission, but the company’s ability to infuse its early employees with this belief was a key factor in its success.

D. Strong Incentives

Startup employees aren’t only committed because of idealism. Stock options also help.

In fact, when startups are hiring new employees, particularly in the very early stages when they don’t have much funding, they may not be able to offer very high salaries. What they offer instead is the chance to take a real, monetary stake in the future of the company, potentially enjoying a huge windfall if it takes off.

Who wouldn’t want to have got in on the ground floor at a startup like Google or Facebook, or, further back, Apple or Microsoft? Back in 1992, The New York Times ran a story on Microsoft’s Unlikely Millionaires, noting:

The base pay at Microsoft, for technical and marketing people alike, falls well below the industry average. But that doesn't mean millionaires are lacking. The reason is a generous package of stock options, granted to more than half of the company's employees based on seniority, position and value to the company. 

Well before the company went public, Microsoft's chairman, William H. Gates 3d, allowed many employees to buy stock for $1 a share. When the company did go public in March 1986, it was at $25.75 a share. A year later, it hit $90, sending out the first wave of millionaires.

Of course, not all startups are as successful as Microsoft. But the pattern is the same across the board: base pay may not be that high, but both founders and staff are often heavily invested in the company’s future. If the startup succeeds, they get rich. That makes them strongly aligned with the goals of the company, and encourages people to go the extra mile.

E. Flexibility

As we discovered earlier, the startup’s idea is critical. But what people don’t always realise is that this idea can change over time, and the first idea is not always the best one. Startups have the flexibility to change course drastically until they hit on the right business model.

For example, Twitter’s founders were originally on a different track entirely. They developed “twttr” as a side-project for their podcasting startup Odeo. When they realised the potential of Twitter, they focused on that, spinning it out as a separate company and putting Odeo up for sale.

This willingness to “pivot” differentiates startups from other companies. Often a more established firm will have invested so much in supporting its existing business model that it can’t change, or can only do so very slowly. The decline of Kodak is a classic example—the company more or less invented digital photography back in the 1970s, but was so dependent on film that it failed to take advantage. It couldn't change, so it couldn’t benefit from the digital revolution.

A startup, on the other hand, is young, and it can change direction easily. Even during the process of building a product, it will often test, evaluate and change direction as needed:

This is often referred to as a willingness to fail, or to “fail fast”. Facebook’s mantra in its startup days used to be:

“Move fast, break things.”

As it has become a mature business, Facebook has moved away from that approach, but it worked spectacularly well early on.

F. Funded for Growth

Funding tends to work a little differently for startups too. In my series on Funding a Business, I covered a range of strategies that will work for most businesses, from borrowing money to crowdfunding.

But startups are funded for growth. They often seek large amounts of investment at an early stage—asking investors to take high risks, with the promise of rapid growth and a spectacular payout.

So if you’re launching a startup, you’ll often need to approach angel investors or venture capitalists early on, and even private equity firms will often get involved much earlier than they would with other small businesses.

You’ll need to be ready to pitch your idea to investors in a professional way. You can find some resources on Envato Market to help you with that, such as this slick presentation template or this startup slideshow. And of course you’ll need a website for your startup too.

See the following tutorials for more details on funding:

G. Hiring Talented People

Having a good idea is no good unless the company can execute it. Startups work hard to attract talented, often young employees to work with them.

This hiring will often take place at an earlier stage than with other businesses, sometimes when there’s nothing more than the idea to work from, and it also has a different focus. With a regular business, you’re often hiring people on an as-needed basis as the business grows, but startups often recruit people to bring their creativity in helping to refine the idea.

Sole founders do exist, but it’s much more common to see teams.  Even when there’s a highly visible figure associated with starting the business, there was often a team of co-founders. Facebook’s Mark Zuckerberg, for example, was a co-founder alongside Eduardo Saverin, Andrew McCollum, Dustin Moskovitz, and Chris Hughes, all of whom contributed to the startup’s success.

Talented Startup Team
Talented startup team (illustration).

Startups are able to attract talented people not just because of the commitment and financial incentives that we talked about earlier, but also because they often lack the fixed processes and rules of larger corporations. They’re able to create a more fun, flexible work environment in which people can be innovative and take risks.

For more on hiring, see the following tutorials:

3. Lessons to Learn From Startups

So those are some of the key characteristics of startups. But as I mentioned before, they’re relevant to all types of business. Even if you run or work for a more traditional company, there’s plenty you can learn from the startup world. Let’s go through each of the characteristics in turn, and look at what lessons we can all learn from startups.

Growth

Not every business can grow as quickly as Snapchat. But every business can incorporate some high-growth elements into their mix of products and services.

Think about your business, and ask how much of it is scalable and how much of it isn’t. Then brainstorm ways in which you can increase the scalable part.

For example, if you’re in the graphic design business, most of your business is probably not scalable. You can only work with so many clients at once, after all. One obvious way to scale up would be to hire more designers, but another way is to alter your product mix.

Maybe you could package up some of your designs and sell them online, or produce a range of ebooks, courses and other items that you sell either through your website or on a marketplace like Envato Market. This kind of business is scalable in that once you’ve created the digital product, you can generate additional sales without doing additional work.

Sure, this isn’t going to make you the next Snapchat—that’s not the goal here. The idea is to take a few principles of startups and apply them to your business. Think about how you can alter your business mix to do things that can scale up quickly. Maybe you could even set up a digital marketplace of your own!

Doing Things Differently

To be successful in business, it’s not necessary to do things so differently that you disrupt an industry as startups tend to do. But it is necessary to be clear about how you differentiate yourself from what’s already out there.

So think about why your business exists, and what sets it apart from the competition. It doesn’t have to be anything truly ground-breaking: it could be that you focus on a particular type of client, or provide more services than your competitors, or that you offer a guarantee when others don’t. I talked more about this in my recent tutorial on business planning:

Commitment

Think about what that book said about the “all-pervasive belief at Google that what the company does really, really matters.”

If you have employees, do they feel that way?

It’s a tough question, because of course it’s easier for startups to motivate their employees with the thrill of covering new ground, growing extremely quickly, and disrupting an industry. But again, you can incorporate elements of the startup experience into any business.

Think about why you do what you do. As I mentioned, most business owners—not just startup founders—are extremely committed to their business, and they’re often very passionate about it. The trick is to communicate that passion to your staff and to show them why they should feel proud to be doing what they do.

That’s easier said than done, but we have some useful management tutorials on Envato Tuts+, such as:

Incentives

This is an easy one for any business to implement. Even if you don't have a full-scale stock option plan, you can quite easily create incentives for your employees.

You could pledge, for example, that when the company hits its next profit milestone, you’ll give everyone a share of that profit. Incentives don’t have to be costly, either—you could give people extra time off, or any kind of non-monetary perk that you think they’d appreciate.

The idea is simply to get your employees’ goals aligned with your own and those of your company. If the company does well, your staff should benefit in some way.

Flexibility

You don’t have to move fast and break things, but an important lesson to take from startups in this area is that any business needs to adapt to change. Be ready to change direction as needed.

So even if you’ve invested a lot of time and resources in a particular product or service, accept that you may need to change tack if it’s not working. Envato did this recently with ActiveDen, which was a large part of the company’s business for years, but was no longer viable due to changes in technology.

Diversifying helps a lot with flexibility. Envato was able to close ActiveDen because it had a range of other products that were also making money. So whichever field you’re in, try to look ahead and see what changes could affect you. Don’t get too dependent on one product or one type of client—embrace change, keep your skills and those of your employees up-to-date, and be ready to pivot.

Funding

The funding strategies used by startups are generally predicated on promises of rapid growth, so most won’t be applicable to other businesses.

You can, however apply the principle of being funded for growth. Companies often raise just enough money to launch and stay in business, and stop there. But you could look out for more opportunities to raise the funds that would help you grow more quickly.

For example, you could run crowdfunding campaigns to fund new products. You could consider borrowing, if it’s affordable, to invest in better equipment or some other business improvement.

Or you could look for wealthy investors to take a stake in your business. Startup founders are usually willing to give away large stakes in their ventures in exchange for the capital that they know will help them succeed. You could apply the same principle to your own company. See my funding series for more.

Hiring

Startups often place a huge emphasis on attracting the best and the brightest, and actively start recruiting from an early stage. Here’s why, from the mouth of Steve Jobs:

"I noticed that the dynamic range between what an average person could accomplish and what the best person could accomplish was 50 or 100 to 1.Given that, you’re well advised to go after the cream of the cream … A small team of A+ players can run circles around a giant team of B and C players."

Of course, everyone wants to hire the best, and it helps when you have high growth prospects and/or access to a large pile of venture capital cash. But within your available resources, you can incorporate the startup principle of seeking out the smartest people you can find, and then trusting them to take your business to the next level.

To do that, you’ll also need to learn to let go—something entrepreneurs are not always very good at, as I mentioned in this tutorial:

4. How to Launch a Startup

Now that we’ve seen the characteristics of startups and what you can learn from them, let’s look at the process of launching a startup. It’s a big subject, so I’ll just give an overview here, with links to other articles and series where you can find more detail if you want to.

As Eddie Earnest made clear in his Launching a Startup series, the idea is critical. You have to come up with a startup idea worth pursuing, and you also have to qualify this idea by testing it quickly and with little investment. As we’ve seen today, the idea needs to be scalable, offering a new solution to a problem people face, and creating the potential for rapid growth.

Launch Your Own Startup
Launch your own startup business (illustration).

Once you’re clear on the idea, the process is similar to the one I outlined in detail in this tutorial:

Here’s a quick summary—you can read the article itself for the details.

  1. Come up with an idea.
  2. Identify your target market.
  3. Create a business plan.
  4. Create a financial model.
  5. Choose a name.
  6. Create a brand.
  7. Build a website.
  8. Handle the red tape.
  9. Raise funds.
  10. Build and test your first product or service.
  11. Find a location.
  12. Hire employees if necessary.
  13. Set up your accounts.
  14. Get the word out.
  15. Launch!

There are a few things that are specific to startups, however.

One is that you’ll need to incorporate the flexibility we talked about earlier. My tutorial on starting a business assumed that the idea was constant throughout, but as we’ve seen today, startups are more about searching for the right business model. It’s a process that continues as you build your products, testing and adapting all the time.

Another difference is in the recruitment process, which, as we saw, tends to start much earlier in startups. And finally, funding tends to work differently for startups, as I mentioned earlier.

When you’ve got all of that set up and have followed the rest of the steps in the Start a Business tutorial, you’ll be well on your way to a successful startup. Just remember to apply the lessons we’ve learned today from looking at the characteristics of some of the most well-known startups out there.

Conclusion

In this tutorial, you’ve seen that the definition of a startup is not just about being small or new, or about being a tech firm. It’s about a whole set of characteristics that differentiate startups from other businesses, from high growth and innovation right through to flexibility and a willingness to fail.

If you want to launch your own startup, you’re now in a better position to do so with everything we’ve covered today. And if you just want to run a traditional business more effectively, there’s plenty you can learn from startups and can begin incorporating into your own workplace today.

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