Attracting media’s attention, the term ‘Startup’ has become a buzzword in recent years — but poorly understood by most people. Find out what is a startup and why they (will) change everything!
We are in the midst of a silent revolution – a triumph of the creative and entrepreneurial spirit of humankind throughout the world. I believe its impact on the 21st Century will equal or exceed that of the Industrial Revolution on the 19th and 20th.
— Jeffry Timmons, The Entrepreneurial Mind, 1989
We are living in the Entrepreneurial Enlightenment – a society and an economy of entrepreneurs!
The risk of failure is smaller than the benefits of truly going after your passion.
Apple, Google, Facebook, Uber and many others — and many more to come — have brought considerable attention to startups and entrepreneurship. Thousands of startups are started around the globe every day.
Attracting the media’s attention, the term ‘Startup’ has become a buzzword in recent years. It is the tip of the iceberg. In the United States, it is expected that more than 40% of the workforce will be freelancers by 2020.
That’s for sure: It has been a decade of rapid change — forecasted to accelerate in the years ahead.
Welcome to the Global Entrepreneurial Enlightenment!
StartupGeist: The Startup Mindset
Intellectually thinking about something doesn’t create impact.
People regularly come up with ideas. But only a few — the entrepreneurs — act on them. They embrace change as much as they thrive for progress.
That’s why startup best practices and success principles are openly shared — more than ever before — to enable the few to become successful. This has resulted in the evolution of business mindset — and created a special way of approaching starting and learning.
Now what! You might be asking yourself: “What is so great about this”?
These success principles are universal and do not only apply for startups. They help any entrepreneur to start and build a business. In their essence, they are success principles about how to start, test and execute an idea.
Well, let’s dig deeper to understand the true nature of startups.
I aim to demystify startups: what they are, why they matter, why they broadly emerged 10 years ago and why their number has globally exploded over the last 5 years!
As you will see, there are many different paths to success.
Startup mystery (or better said: Startup hysteria?)
The term ‘startup’ is poorly understood and greatly misused by a lot of people. Not surprisingly, there isn’t a common definition everyone agrees on. This creates myths and false illusions — especially created by outsiders who foolishly write and talk about this phenomena.
It feels like every entrepreneur starting a business nowadays calls his business a startup — either an agency, a freelance activity or a bakery with an online ecommerce store.
They might aim at using the startup-like mindset for their business to accelerate it — the StartupGeist — but they are not a startup by definition.
What is a startup?
A ‘startup’ is a company that is confused about (1) what its product is, (2) who its customers are, and (3) how to make money.
In other words, startups are designed to learn what problem or need (product) is solved for whom (customer) and how much customers are willing to pay for this (business model).
A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.
Similar to McClure, Ries omits anything about the startups size, sector or industry in which it operates. Ries focuses on figuring out the right thing to build (as quickly as possible) for coping with extreme uncertainty. The nature of startups is to deal with uncertain situations that cannot be foreseen. Risk must not be large necessarily — it’s simply not yet known.
One of the most cited definitions comes from Steve Blank, the startup godfather of the global startup movement:
A startup is a temporary organization used to search for a repeatable and scalable business model.
He points to an important paradigm shift in understanding startups. Most people think of startups as smaller versions of large companies. He thinks that’s wrong. Startups are designed to search for a business model, but not execute one.
Established companies execute proven stuff. It’s certain. It’s predictable. Stuff that universities teach their students: accounting, finance, marketing, sales.
Startups, however, are highly uncertain and — if successful — grow really, really fast.
Paul Graham defines startups as high-growth engines.
Startups are designed to grow fast.
He goes on:
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.” The only essential thing is growth. Everything else we associate with startups follows from growth.
David Cummings, successful serial B2B SaaS startup founder, also sees a startup as “a scalable growth-focused company”. Cummings and Graham don’t distinguish between search and execution, but focus instead on the intended growth character of a startup.
To conclude, there are two camps defining the term ‘startup’.
One camp thinks that startups are temporary organizations that will need to prove to be a business by finding a repeatable business model under conditions of extreme uncertainty.
The other camp thinks that startups are designed to become high growth-oriented companies. This is ingrained in the startups DNA and mindset of its founders from day one.
Both camps think that startups face significant amounts of change and uncertainty on a weekly basis and are not smaller versions of large companies. Hence, startups are truly special and unique.
Six different types of entrepreneurs
Overall, there are six different types of entrepreneurs. Being a startup founder makes you one of them.
Any of these six types of entrepreneurs search for change, embrace it (instead of fighting it) and exploit it as an opportunity.
I slightly modified Steve Blank’s types of entrepreneurs relating them to Paul Graham’s growth definition of startups:
- Lifestyle Entrepreneur:
- Offline Entrepreneur:
- Purpose: Work to feed the family.
- Example: “My parents ran a grocery store.”
- Startup Entrepreneur:
- Purpose: High-growth, scalable. Born to be big. World-changing companies. “Billion or Bust” attitude.
- Example: “I will start the next Facebook.”
- Software Entrepreneur:
- Purpose: Acquisition targets, work to live their passion. Not all Tech Startups Have High Growth Potential – depends on Timing, Market, Customer Value & Capitalization.
- Example: “I will create SaaS or mobile app to solve a specific need.”
- Social Entrepreneur:
- Purpose: Driven to socially make a difference.
- Example: “The 21st century version of the Peace Corps.”
- Corporate Entrepreneur:
- Purpose: Be an Innovator or stay a Bureaucrat.
- Example: “People in big companies, trying to innovate.”
Do we really need this new concept #startup?
Can’t this just be called high-growth intended company?
People argue that a startup is a mindset and ingrained in a company’s culture. It shouldn’t be defined by growth metrics. A startup can remain a startup at all ages and sizes.
Most startup experts don’t think so. The intention to grow is the main reason why we use the distinct word ‘startup’ for super fast growing businesses.
Let’s explore why!
Because most startups fail (also read: necessary evil of the innovation game), the immense attention the very few successful ones get seems unfair to many ‘ordinary’ entrepreneurs of the small- and medium-sized businesses.
According to Graham, the mistake most people do lies in looking at median numbers in a domain of extreme uncertainty and therefore variation. The span from positive to negative is unbelievably big. The most successful startups, like Facebook, Uber or Whatsapp make such significant returns and quickly reach valuations of companies, like Toyota, Siemens or Total within a few years of existence.
P.S. Read about three remarkable examples of hyper-growth startup valuations in my article ‘Startup Fundraising: The Crazy Startup Madness’.
Okay! Okay! I Get it — but how fast do startups GROW?
Paul Graham suggests to determine the growth rates of the most successful startups, rather than answering what growth rate is required to make a startup successful.There are two reasons.
Firstly, startup growth is a pole — not a threshold. Paul Graham says:
Starting one is at first no more than a declaration of one’s ambition. You’re committing not just to starting a company, but to starting a fast growing one, and you’re thus committing to search for one of the rare ideas of that type. But at first, you have no more than a commitment.
Secondly, growth rates change over time. That’s why you can’t define threshold accurately — only give benchmarks.
According to Graham, startups normally have 3 phases of growth:
- Phase 1: Initial slow or no growth while the startup tries to figure out what it’s doing.
- Phase 2: Rapid growth.
- Phase 3: Slow growth because startups turn into big companies and their market’s saturate.
Paul Graham shares benchmarks about startups going through Y Combinator (YC) — a 3-month program that provides seed funding for startups. Seed funding is the earliest stage of startup funding — besides your savings, family & friends, or initial revenues. It is supposed to pay expenses for the startup founders while they get started.
Keep in mind that these benchmarks are Silicon-Valley based. They might differ for your startup hub. The following benchmarks refer to weekly growths that startups aim at during YC:
- Exceptional rate: 10% or above
- Great rate: 5-7%
- Bad rate: less than 2%
A bad growth rate is often a sign that startups haven’t yet figured out what they’re doing.
Y Combinator recommends to measure growth preferably with revenue — or with active users. Active users is a “reasonable proxy for revenue growth, because whenever a startup starts trying to make money, their revenues will probably be a constant multiple of active users.”
Stop! Right expectations, please…
Paul makes it clear that it is extremely hard to find something that grows consistently at several percent per week. It’s an exception — not the norm.
If you are the lucky one who found something that grows week by week by several percent, you found something of extreme value.
Let’s look at the numbers to see why.
A company that grows at 1% a week will grow 1.7 times a year, whereas a company that grows at 5% a week will grow 12.6 times. A company making $1000 a month (a typical number early in YC) and growing at 1% a week will 4 years later be making $7900 a month, which is less than a good programmer makes in salary in Silicon Valley. A startup that grows at 5% a week will in 4 years be making $25 million a month.
These numbers clearly show why compounding interest is so compelling.
That’s why startups’ impact on societies and economies can’t be overstated.
In the next article — the Startup Economy — you will read about what macro trends and which innovations enable the rise of startups.
It’s clear that we are not dealing with a passing trend.
Startups are here to stay, are here to outcompete traditional businesses, are here to change the world — how we live, how we do business, how we do everything.
Welcome to the Startup Economy!
AND always remember: Not every company is a startup. If successful — startups grow rapidly.
- Steve Blank: What’s A Startup? First Principles.
- Steve Blank: Search versus Execute
- Steve Blank: Why the Lean Startup Changes Everything
- Eric Ries: What is a startup?
- The Economist: The Startup Explosion
- Peter Thiel: Free summaries of a student from Thiel’s Stanford lectures on which his book ‘Zero to One’ is based.
- How to Think Exponentially and Better Predict the Future
- Technology Feels Like It’s Accelerating — Because It Actually Is
Next on StartupGeist
- Clayton M. Christensen: The Innovator’s Dilemma
- Geoffrey A. Moore: Crossing The Chasm
- Tom Kelley: The Art of Innovation
- Peter Thiel: Zero to One
- Brad Feld: Startup Life | Startup Communities
- Guy Kawasaki: The Art of the Start
- Steve Blank: The Startup Owner’s Manual
- Eric Ries: The Lean Startup
- Ash Maurya: Running Lean
- Jessica Livingston: Founder’s at Work
- Ben Horowitz: The Hard Thing About The Hard Things
- David Cummings: Startup Upstart
- Seth Godin: What To Do When It’s Your Turn (and it’s always your turn)
- Chris Guillebeau: The $100 Startup
- Reid Hoffmann: The Start-up of You
- Tim Ferriss: The 4-Hour Workweek
PS: Have you checked the StartupGeist Podcast? It’s revealing the journeys of 7 entrepreneurs and startup founder in Berlin.