There is a certain ‘allure’ or ‘swag’ to being called a startup. Picture this: beanie bags, hoodies, hoverboard, well-stocked pantry, foosball table, vegan options, gym and flexible working hours and you are most likely thinking of startups from anywhere in Silicon Valley or tech giants like Google and Facebook. Or will the word startup conjure images of starving tech geeks labouring it out in a garage?
What is a startup anyway? If you look up the definition of a startup, it can range from the simple “fledgling business enterprise” or to the more comprehensive “company or project undertaken by an entrepreneur to seek, develop, and validate a scalable economic model”. In the broadest sense, any new company is a startup. But until when can you carry the ‘startup’ label? Beyond the aesthetics and what people refer to as the ‘startup’ mindset, when are you no longer a startup?
One way to frame it, is to think that when you have achieved these metrics below, then it is high time for you to stop calling your company a startup:
Product – market fit
Startups begin with the assumption that their product or service will be attractive to a large group of people. When a startup has created a product or service that people buy, proving the ‘attractiveness’, then it will have validated its business model and achieved product-market fit. In other words, when a product or service has gone beyond alpha or beta versions (for software for example) and prototypes (for hardware) and are actually being bought by people.
If we look at the more comprehensive definition of a startup, it cannot just be any ‘fledgling’ business enterprise, it has to be focused on growth and scale. You are no longer a startup if you have achieved scale, albeit the arbitrary the definition of scale. Scale is typically measured in terms of revenue, number of employees and valuation, but can also include age i.e. categorizing companies that are more than 5 years old as no longer startups. In terms of revenue, number of employees and valuation, there is a set of metrics popularized by Techcrunch’s Alex Wilhelm called the 50-100-500 rule. This means that you can no longer be called a startup if you achieved or surpassed any of the following:
- $50 million (around €41.9 million) revenue run rate (forward 12 months)
- 100 or more employees
- Worth more than $500 million (around €419 million), on paper or otherwise
Yet these metrics can still vary depending on who is looking. Some VCs would still consider lower revenue figures, employee count or higher valuation. If your company has also become public and is listed in a stock exchange, then it is safe to say that you are no longer a startup.
Another metric that is considered an important measure in deciding whether to lose that startup label is profitability. It is not just revenue but turning a profit after expenses are considered. Profitability measures efficiency and indicates that a company can produce a return on investment.
When thinking about your company, how does it rank on this scale? Check out this article from Investopedia on The Best Way to Calculate Profitability for Startups, and consider multiple levels of the business before making your decision.
Another indication that you are probably not a startup anymore is when you become more bureaucratic. You have standardized your processes and operating procedures and have adopted more formal communication channels.
For example, if you already have a designated team member (or members) handling multiple departments of the business, such as accounts & finances, press & marketing, business development, etc. and the innovative standards of working and daily processes in each sector have levelled out, then operations may becoming formalised. In this case, creativity and innovation have brought you to where you are, but does not make up a large part of your current daily work. You might now consider yourself instead an SME, or small-to-medium-sized business, rather than a startup.
In the end, it actually boils down to semantics. A lot of companies want to retain the ‘startup’ mindset that hinges on innovation, and growth eschewing the bureaucratic sluggish mentality that is often associated with traditional and established companies. There is something energetic and exciting about the word ‘startup’, that somehow the word ‘innovation’ may have lost. In that case, if it is beneficial for a company to continue calling itself a startup….then by all means!
Now over to you: What do you class as a startup, an SME, and a scaleup? How do you classify your own company?