A Beginner's Guide to Understanding the Startup

What is a Startup?

About this Article:

The term Startup has many definitions. This Article short lists three famous definitions of a Startup, to discuss in the study circle. It also explains Taxonomy of a Startup. and Startup ecosystem. 

Definitions of Startup

1. SBA definition of Startup

The Small Business Administration defines a Startup as:

“In the world of business, the word "startup" goes beyond a company just getting off the ground. The term startup is also associated with a business that is typically technology oriented and has high growth potential. Startups have some unique struggles, especially in regard to financing. That’s because investors are looking for the highest potential return on investment, while balancing the associated risks.”

[Small Business Administration]

2. Startup-definition by Steve Blank

Blank is recognized for developing the Customer Development method that launched the Lean Startup movement. He is also an adjunct professor of entrepreneurship at Stanford.
As per Blank:

"A startup is an organization formed to search for a repeatable and scalable business model."

[Steve Blank] 

3. Startup-definition by Eric Ries

Ries is a famous author of the Lean Startup Methodology. He is co-founder and CTO of IMVU, the largest online metaverse. He defines a startup as:

"A Startup is a human institution designed to create a new product or service under conditions of extreme uncertainty."

[Eric Ries]

Summary:

Startups are not smaller versions of large companies, but require their own set of processes and tools to be successful.




What comes to your mind when you hear the word Startup? Please leave your comment.

Pivot or persevere? The hardest decision in product managemnt!

Pivot is extremely important in Basketball, because it is used very frequently whether you are on the way, you are facing problems, whether you catch the ball in the lane, you are able to choose which foot you can pivot with.

Although it looks like a beginner's move, the best players have been able to master and utilize it to dominate at all levels.

"There is no bigger loss of creative potential than the misguided decision of persevere"

[Book: the Lean Startup]

Mastering the Art of Exit Strategy

While looking at SBA definition of Startup, you might have noticed that it says:   

"Startups have some unique struggles, especially in regard to financing." 

During their financial struggle, silicon valley startups normally look for funding towards angel investors or venture capitalists. Here a fundamental question arises; what can be the return on Investment (ROI) for an angel investor or venture capitalist? exit strategy gives the answer of this basic question.

So what is an Exit Strategy?

An exit strategy is to plan what may happen if an investor who has previously put money in a startup years before, will get their money back?


As a startup you must have an exit strategy for your investors and yourself.

• For investors an exit strategy enables them to cash in on their investments.
• For co-founders an exit strategy also protects the value of your startup.

Below are some common examples of exit strategies:

1. Initial Public Offering (IPO)
2. Private Offering
3. Merger & Acquisition

Conclusion

In short investors want to know how they will get their money back before they invest it in your startup. A startup must be able to write and pitch an effective exit strategy to protect its own value and to enable its investors to get their return on investment after a predetermined criteria meet or exceed.

Demystifying Startups: Know Your Types with Ease

Not all startups are of same type, neither their people and goals are same nor their strategies and funding. The taxonomy by Blank categorizes startups into 6 types. Knowing to which class of taxonomy it belongs to can increase the odds of success of a startup. 

Following is a brief understanding of each type of startup. 

1. Lifestyle Startups

Lifestyle startups are those entrepreneurs who are passionate about living their own life. They do not work for others, they are committed to live life their own way, they do what they love no matter how little monetary value they get out of it.  Or in simply words they are passionate about whatever they do.

2. Small Business Startups

Small business startups are those who want to own their goal is to feed their families. They hire local employees and they are not targeted towards growth or scaling up their business.

 

3. Scalable Startups

This is the type of Startups which think big, they have high growth potential and are in search of repeatable and scalable business model. That's why Venture Capitalists have attraction in them. 

These kind of startups can be seen in Silicon Valley.

 

4. Buy-able Startups

The goal of these startups is acquisition. They are focused to be acquired after some time till they reach to a medium sell-able price. They are normally sold in millions of dollars.

 

5. Social Startups

These Startups work to make a positive difference in society. They work for social good to contribute to a better world.

 

6. Large Company Startups

To avoid becoming a potential disruptee, and to assure their survival, large organizations establish such kind of Startups. Large companies do this to invent new business models for their future. But keep in mind these are not smaller versions of larger companies, to be successful these startups require a totally different organizational structure and environment than that of the large organization.

For a detailed understanding of each of these Startup types please visit this Wall Street Journal article  

Steve Blank: The 6 Types of Startups.

Unraveling the Distinctions Between Incubators, Accelerators, and Angel Investors

The startup supporting institutions including Incubators, Accelerators and Angel Investors are sometimes misunderstood and are also used interchangeably. There are however differences among  these startup supporting institutions, which are necessary for a startup to know. I found Susan Cohen doing a pretty good analysis in identifying and describing the differences among these. The following chart explains them.

Understanding Startup Incubators

An Incubator can simply be thought of as nonprofit-central working-space established to thrive startups. They also provide education, mentoring and training. They are often non-profit. If a Startup decides to choose an incubator, this means it is getting ready to physically locate its business to a central working space provided by incubator. Incubators selection is often assumed less competitive, however some incubators serve only specific industry verticals.

Accelerate Your Success: A Comprehensive Guide to Understanding Startup Accelerators

The concept of Startup Accelerator is sometimes misunderstood, and there are different  understandings or definitions available, I however found the best definition of Startup Accelerators by Susan Cohen, she define accelerators as"

"Broadly  speaking,  they (accelerators)  help  ventures  define  and  build their initial products, identify promising customer segments, and secure resources,including capital and employees. More specifically, accelerator programs are programs  of  limited-duration—lasting  about  three  months—that  help  cohorts  of startups  with  the  new  venture  process.  They  usually  provide  a  small  amount  of seed capital, plus working space. They also offer a plethora of networking opportunities, with both peer ventures and mentors, who might be successful entrepreneurs,  program  graduates,  venture  capitalists,  angel  investors,  or  even  corporate executives.  Finally,  most  programs  end  with  a  grand  event,  a  “demo  day”  where ventures pitch to a large audience of qualified investors."

[...Susan Cohen,2013]

In a later work she further refines  an accelerator as

“a fixed-term, cohort-based program, including mentorship and educational components, that culminates in a public pitch event or demo day.”

 [...Cohen and Hochberg, 2014]

So the most important attributes of an accelerator that differentiate it from other startup supporting institutions are that:

1. Accelerators are Fixed-term 
2. Accelerators are Cohort-based
3. Accelerators are Mentor-driven
4. Accelerators culminates in a public pitch event or demo day

Susan Cohen

Susan Cohen is a leading scholar on startup accelerators, and is professor of entrepreneurship at the University of Richmond.

Demystify the Role of Angel Investors: Grasping Investment Strategies and Startup Support

The term "angel investor" was coined by William Wetzel, founder of the Center for Venture Research and business professor at the University of New Hampshire. 

An angel investor invests his/her own money in small startups or entrepreneurs. Angel investors can be sometimes family and friends. It is often assumed that angel investors provide more favorable terms to a startup than others. They invest in startups in exchange for ownership, equity or convertible debts.

An angel investor have to meet the standard of Securities Exchange Commission (SEC) for accredited investors. An angel investor must have annual income of $200,000 and a minimum net worth of $1,000,000.

Angel investors are also know as business angels, seed investors or private investors.

Understanding Disruptive Innovation

Have you ever thought of how unexpectedly very cheap, and simple products can topple very expensive or complex existing products from corporate giants.

As per Clayton Christensen

"Disruptive innovation describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors."

[...Clayton Christensen.]

The very expensive or complex previously established product becomes Disruptee and the new simple, accessible and cheap product is known as Disruptor.

Clayton Christensen

Clayton Christensen is World's top management thinker. He is a Harvard Business School Professor. He has coined the term, is an architect of, and is the world's foremost authority on Disruptive Innovation. In his famous book "Innovator’s Dilemma” he introduced the concept of “Disruptive Innovation”. See more...

 

Understanding Ries definition of Startup

Erik Ries defines a startup as:

"A Startup is a human institution designed to create a new product or service under conditions of extreme uncertainty."

[Eric Ries]

The  significant aspects of Ries definition are broadness, institution building, newness and extreme uncertainty.

Broadness

An important thing to understand over here is what Ries deliberately excluded from the definition, and that in fact made this definition really broad. Please note that the definition does not say anything about

• the size of the  company
• the sector of the company
• the related industry
• or technology 

Institution building

 A startup is an institution building. This institution building is an important part of the definition. This means as  as startup we are trying to create institution building when we don't know what we don't know. In other words startup is an institution building to cope up with conditions of extreme uncertainty.

Newness

  A startup is designed to create something new. The newness of the product or service is an important aspect of this definition. That is why if you open a new business that is an exact clone of an existing business, that can not be a startup.

Extreme Uncertainty

 Extreme uncertainty is the most important part of the Ries definition of startup. Startups are designed to face the challenges of extreme uncertainty. According to Ries the harsh soil of extreme uncertainty is the place where startups thrive.

Eric Ries

Eric Ries

Ries is a famous author of the Lean Startup Methodology. He is co-founder and CTO of IMVU, the largest online metaverse.

Understanding Blank's definition of Startup

Let us see how Steve Blank's defines a Startup as:

"A Startup is a temporary organization formed to search for a repeatable and scalable business model."

[Steve Blank]

When you first look at this definition of startup, a few questions may arise.

• When is meant by a temporary organization?
• What is the Goal of a startup? 
• What does a startup search for?
• What is a business model?

 Let us look at these closely.

Temporary Organization

A Startup is a temporary organization, the reason it is called temporary is because its is specifically designed to achieve a goal - and after its goal is achieved it will no longer remains a Startup.

Startup's goal is to search 

Because Startups do not know what they are doing. That is why they have some people who are comfortable dealing with "how to deal with unknowns?".
The goal of a Startups is to search for repeatable and scalable business model.

 

Business Model

Business Model is a broader subject, and requires separate article or study circle session.
In short from a Business perspective - a Business model portrays the answer of following general questions.

• how your company creates values?
• how your company capture value?
• how your company deliver value?

NOTE: The specific success criteria may be measures depending on your company's metrics of success.

In simple words a business model means how your company makes money.   

In the end I have a question which definition do you like more? and why? Steve Blank's definition or SBA definition of a Startup? Leave your comments.

Steve Blank

Steve  Blank

Steve Blank is recognized for developing the Customer Development method that launched the Lean Startup movement. He is also an adjunct professor of entrepreneurship at Stanford.

Understanding SBA Definition of Startup

The Small Business Administration (SBA) defines a Startup as:

“In the world of business, the word "startup" goes beyond a company just getting off the ground. The term startup is also associated with a business that is typically technology oriented and has high growth potential. Startups have some unique struggles, especially in regard to financing. That’s because investors are looking for the highest potential return on investment, while balancing the associated risks.”

[Small Business Administration] 

Here we need to understand the three key attributes of a Startup.

Startups are High Tech

A key aspect that differentiates a startup from a small business is that the footing of a startups is high tech. This sound footing provides a solid foundation for innovation right from the formation or Ideating phase of a startup.

Startups have High growth potential

Another key aspect differentiating a startup from a small business is growth. As startups think big, they grow fast in terms of users, customers, market share. They have potential to scale up in a fast growing target market. For most of the startups, since past few years, this has become possible because of internet.

Startups have unique financial struggle

Startups strive to get investment from startup funding organizations.


What comes to your mind first when you think of Startup?
I would like to see your comments.

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