What Is a Startup?

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.

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:

• 
  Startups
  
  
  How to Come Up with Startup Ideas Worth Pursuing
  
  
  Eddie Earnest


• 
  Startups
  
  
  Startup Idea Qualification and Risk Elimination in the Early Days
  
  
  Eddie Earnest


• 
  Ideation
  
  
  How to Simplify Your Business Ideas
  
  
  Celine Roque

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.

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:

• 
  Startups
  
  
  The Lean, Agile Way to Build Your First Product
  
  
  Andrew Blackman

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:

• 
  Finance
  
  
  Borrowing Money to Fund a Business
  
  
  Andrew Blackman


• 
  Finance
  
  
  Raising Money For Your Business Through Crowdfunding
  
  
  Andrew Blackman


• 
  Finance
  
  
  How Angel Investors Can Fund Your Business
  
  
  Andrew Blackman


• 
  Finance
  
  
  How to Raise Money From Venture Capitalists
  
  
  Andrew Blackman


• 
  Startups
  
  
  How to Tell if an Accelerator Is Right for Your Startup
  
  
  Charles Costa

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.

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:

• 
  Startups
  
  
  Recruiting a Team of Founders: How to Attract Talent to Your Idea
  
  
  Eddie Earnest


• 
  Management
  
  
  How to Hire Your First Employees
  
  
  Andrew Blackman


• 
  Diversity
  
  
  How Tech Firms are Becoming More Diverse by Changing the Way They Recruit
  
  
  Rachel McCollin

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:

• 
  Business Plans
  
  
  How to Write a Business Plan
  
  
  Andrew Blackman

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:

• 
  Management
  
  
  Should You Manage With a Carrot or a Stick?
  
  
  Lisa Jo Rudy


• 
  Management
  
  
  7 Key Tools for Coaching Your Management Team
  
  
  Lisa Jo Rudy


• 
  Management
  
  
  The Strategic Guide to Managing Difficult Employees
  
  
  Lisa Jo Rudy


• 
  Creativity
  
  
  How to Bring Out Your Team's Creative Best
  
  
  David Masters

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:

• 
  Management
  
  
  How to Decide What to Delegate
  
  
  Andrew Blackman

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.

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

• 
  Business
  
  
  How to Start a Business
  
  
  Andrew Blackman

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.