In my previous life as a developer in numerous agency environments, tech meetups and startup events one question that I have regularly heard but never heard a single, sufficient answer to is “What defines a startup?”.
Some people seem to know the answer and then suddenly realise that they have no idea when it comes to putting it into words. Or they are sure it is down to one thing like “being funded by investors”, “the idea or concept being new” or “not yet being funded by its own revenue”.
Although all of those ideas may apply to some/many startups they are are not the definition and more a symptom.
For example, opening a new kind of restaurant may innovate the restaurant business somehow. It may be more efficient in costs or superior in delivering a quality meals but it can only grow as large as its current location allows. Sure, in future you can open more restaurants via franchise or investment but the growth is slow & competitors can copy quicker than you can dominate.
So tell me, what defines a startup?
There are only two elements that any new business must meet to be considered a startup. They are:
- A startup innovates.
- A startup must be able to scale independently of location.
You may be wondering why these are the two key features that make a new business a startup & I’ll tell you.
This matters because the pace & scale at which you can grow is key.
Airbnb is the perfect example. They built their service around utilising other people’s property to achieve its goals. This means that they could scale as quickly as users in new locations learnt about & adopted the service. Such freedom allowed Airbnb to grow globally so quickly that other competitors could not create, market & establish an equivalent competitor in other markets before Airbnb with its existing reputation could get there & dominate itself.
Imagine that Airbnb’s business model depended on them travelling to these locations beforehand & finding and acquiring suitable accommodation they would then buy and rent out to their users before being able to offer their service. Their service would have never worked due to the excessive costs associated with their growth and the time it would take to do.
Peter Thiel explains in Zero to One how there are 3 ways to innovate.
- Market Creation
If a business meets one of these criteria then it can be considered innovational in the product or service that it offers.
This can be increasing production efficiency for example to be able to offer the same product or service at a lower price point than your competitors or to make the product/service much more efficient for the end user. For example you could create the exact same car but it travels 100 miles further on 1 full tank of fuel which makes you stand out from your competitors offering a vehicle with the same specifications otherwise.
You product/service must deliver a more powerful, effective or thrilling final product. A website that provides a new level of User Experience requiring 2 steps to allow the user to achieve the same goal that previously took 7 steps or a car that can travel faster using the same fuel for example.
Your product creates a whole new market for itself. The ultimate definition of innovation. For example consider the world of mobile phones. Nokia dominated the market for years and was considered innovational for delivering new phones longer battery life or smaller size or a better camera. They innovated by improving efficiency & performance.
Then, along came Apple with the iPhone. They created a whole new way to interact with & use your phone, revolutionised the mobile phone and made it something totally different. As a result of this they created two new markets for both touch screen phones & apps with the AppStore.
A startup has the ability to quickly reach interested parties wherever they may be. There is no dependance on a user being in a particular location at a particular time and it must offer some form of innovation to stand out from the rest of the market.