Is it Venture-Backed?
For many, a startup is a venture-backed company. The logic goes something like this:
Startups are risky: Only a few will succeed.
We need unicorns: For startups to be a viable investment class that returns profits to investors, those that do survive need to do really, really well.
Unicorns need to grow fast: Doing well means capturing marketshare before other companies can catch up.
Fast growth is inorganic: You can’t grow fast enough simply by reinvesting profits.
Inorganic growth takes equity investment: A bank won’t lend a high-risk business any money, so growth must come from venture funding.
US Startups are going to have an even harder time bootstrapping thanks to changes in US tax law, specifically Section 174. Until now, they’ve been able to expense the salaries of developers against the revenues they generate, but under this new law, they’ll have to amortize the cost of R&D across several years (specifically, “employing software engineers can no longer be accounted as a direct cost in the year they are paid.”)
So one filter for “is it a startup” might be, “it’s risky enough that it requires venture funding.”
Is it a tech company?
Paul Graham lays out a good argument for this in Startups = Growth: “A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of ‘exit.’”
Indeed, Whatsapp took relatively little money, had a tiny team of only 55 employees despite a massive number of users before Facebook (now Meta) acquired it. What allowed the company to grow quickly was a ruthless focus on technology. As Wired pointed out, the company made smart technology choices that resulted in resilient systems that seldom crashed and were highly efficient.
A second filter could be, “it needs to grow so fast that it’s a technology company.”
Is it the search for a new business?
Steve Blank and Eric Ries, two of the most influential startup thinkers out there, says that “A startup is a temporary organization designed to search for a repeatable and scalable business model.” For Blank, it’s the act of searching for a new business model, rather than executing on an existing one, which defines a startup.
This is more about innovation, which happens by identifying an unsolved problem and a solution that can be delivered as a viable business. As a result, a third criteria might be, “is it searching for, or building, a new business model?”
Lifestyle is a dirty word
In the startup world, “lifestyle business” is practically slander. We prefer founders. We want a team that’s “crushing it”; a lifestyle business sounds lazy (props to Rob Kennedi for banging this drum.)
But there’s nothing wrong with work-life balance, founder self-care, passive income, or milking the cash cow. Those are proven, honorable life choices, but they don’t line up with the Venture Capital narrative.
Maybe the tide is changing:
Jenny Fielding has been writing a lot lately about “one-and-done” startups who don’t need a continuous stream of money: “ 2 different startups pitched me their pre-seed raises, claiming that this capital would be the last VC $ they ever take. Both had innovative models for sustainable growth, big visions + ambitions to scale quickly. It’s wild to see such a mindset shift from 2021, I wonder if it has legs?”
In 2016, Bryce Roberts launched Indie.vc to see if there were more founder-friendly models in which a VC could make less money from more successes. It failed fairly publicly, with Bryce sharing his thoughts about why it didn’t work. But at the start of 2024, Indie.vc returned, fully funded, focused on “leading or co-leading a company’s first, and ideally last, round of funding.”
Something’s in the water.
Perhaps it’s that the risk of startups has shifted from build-then-market approaches that need upfront cash to audience-then-product models where you create a target market, then figure out what to sell it. Maybe every channel is a digital channel, so everyone’s a tech company. Maybe it’s the rise of no-code storefronts (Shopify) and AI-assisted coding that has reduced barriers to entry.
Whatever the case, there are many definitions of startup, and at least three dimensions to consider:
Is the company executing a known business model, or searching for a new one?
Is the company bootstrapped from its founders and its own revenues, or funded by loans and equity?
Is the company possible because of technology, or is it a brick-and-mortar business?
These three questions say a lot about what you think makes a company a startup.
Here are some examples of these eight kinds of companies:
A bootstrapped, non-tech company executing an existing business: Someone selling produce at the farmer’s market. Retail sales is a well-known business, small farms aren’t tech-focused, and many farmers already own the land.
A bootstrapped, non-tech new business: Going door-to-door, selling a monthly subscription knife sharpening business. This is a new business model (subscription knife sharpening) but requires no technology and can be funded from initial sales since operating costs are relatively low, requiring only upfront capital, labor, and gas money.
A non-tech business that received outside funding: A restaurant franchise is a good example of this company type. The business model is well-defined, and running a restaurant is about filling seats and cooking food. Upfront costs for franchisees usually mean a bank loan against the business, since revenues are relatively predictable.
A bootstrapped, existing business model that’s technology-based: A local alarm company is technology-focused, since the core product is alerting and sensors and the space evolves relatively quickly, with products like smart doorbells and mobile apps entering the segment. Yet it’s also well understood, and could be launched without significant investment.
A venture-backed business operating a new business model that’s not based on technology: In 1988, Curt Jones founded Dippin’ Dots, a dessert made by flash-freezing ice cream in liquid nitrogen. The product is sold in franchised retail outlets. Regions Bank funded the company’s growth.
A bootstrapped company operating a new business model based on technology: This is a small business with fast growth potential and relatively little capital investment. Dating site Plenty Of Fish is a good example: Founder Markus Frind launched the site in 1999, and only added other employees in 2008. The company was acquired for $575M in 2015.
A company executing on an existing technology business that’s received funding: This could be any capital-intensive, tech-focused business where upfront investment is needed prior to revenues, and assets are amortized over time, such as a data center or telecom provider.
A tech business focused on a new business model that’s received funding: This is what we most commonly think of as a startup, and it’s what Paul Graham, Steve Blank, and most VCs would all agree on. Think Uber, Masterclass, or Robinhood, all of which challenged existing businesses such as taxis, learning, or funding.
Based on these examples, what do you think qualifies as a startup?