What is a startup company?

Is a startup a company that has just started? Is it a smaller version of a large corporation? Is a startup a tech company necessarily and is every new tech company a startup?

With some startup or the other raising eye-popping investments from big venture capital firms every other day, there’s a lot of interest in and noise around startups. And there’s an equal amount of confusion as to what they really are. This article takes a look at all the things that make a startup a startup, beginning with answering the question: What is a startup company?

Table of Contents

A. Definitions of a startup (including under the Startup India initiative)

B. Difference between a startup and a small business

C. Difference between a startup and a mature company

D. Features of a startup

1. Innovation
2. Growth intent
3. Business model
4. Uncertainty
5. Risk
6. Funding
7. Exit

E. Common questions about startups

1. Are only tech firms considered startups? Is every tech company a startup?
2. How do startups get funding? Does every startup need external funding?
3. How many founders should a startup have?
4. What are the stages of a startup?
5. When does a startup stop being a startup?
6. What is a unicorn startup?

A. Definitions of a startup

There are many ways to answer the question: What is a startup company? Eric Ries, entrepreneur and author of The Lean Startup, says it is:

“A human institution designed to deliver a new product or service under conditions of extreme uncertainty.”

Founder and CEO of Fractal Solutions, Jacob Fenuccio, says:

“A startup is a young, ambitious, growing collection of people with momentum around an idea or innovation. A startup is not any company with a ping pong table, cool office decor, employee outings, loose regulations, and/or casual behaviour.” 

One of the most widely accepted definitions is the one given by entrepreneur, author, and professor Steve Blank. He says:

“A startup is a temporary organization designed to search for a repeatable and scalable business model” and to do so quickly, in a way that significantly impacts or disrupts the current market.

If all of this sounds like vague and philosophical ideas about what a startup company is, here’s a straightforward and technical definition that’s especially relevant to startups in the Indian context. Government of India’s Department for Promotion of Industry and Internal Trade (DPIIT) lays down five criteria for a company to be recognized as a startup under the Startup India initiative and become eligible for a variety of tax and related benefits. These criteria are:

1. Company’s Age (Should have less than 10 years of existence and operations from the date of incorporation)
2. Company Type (Should be incorporated as a private limited company, a registered partnership firm or a limited liability partnership)
3. Annual Turnover (Should have an annual turnover not exceeding Rs. 100 crores for any of the financial years since its incorporation)
4. Original Entity (Should not have been formed by splitting up or reconstructing an already existing business)
5. Innovative & Scalable (Should work towards the development or improvement of a product, process or service and/or have a scalable business model with high potential for creation of wealth and employment)

B. Difference between a startup and a small business

The new kirana shop in your neighbourhood takes orders on WhatsApp, accepts mobile payments, and offers free home delivery in 15 minutes. Why are the likes of BigBasket, Blinkit (formerly Grofers), and Dunzo considered startups but this new, local kirana shop just another business?

You may argue, “Oh, but BigBasket is a unicorn. How does it make sense to mention BigBasket and a small, local shop in the same breath?”

You see, that’s the point, or one of several points. Startups are created with the intent to grow rapidly and capture as big of a market share as possible. The focus on growth is so intense that it takes many, many years for startups to earn their first profit. Do you know Zomato, Ola, Oyo, Paytm, BigBasket, and most other Indian startup stars are still making losses?

Small businesses, on the other hand, want to start earning profits as soon as they can. Growth happens at its pace and, as is the case most of the time, is not spectacular.

Innovation and startups are inseparable. Startups are guided by the desire to “make a little dent in the universe” by offering something new or unique to the customers. Small businesses have no such ambition. The founders’ motivation is often to have a source of income or to make money from an activity they are passionate about or to serve the needs of a local market. And they do so by following a tried-and-tested business model unlike startups whose job it is to search for a business model that they can successfully repeat and use to scale their business.

C. Difference between a startup and a mature company

Remember Steve Blank’s definition of a startup? He defines a startup as “a temporary organization designed to search for a repeatable and scalable business model” This somewhat puzzling definition becomes crystal clear when seen in contrast to his definition of a mature company.

He says:

“A (large) company is a permanent organization designed to execute a repeatable and scalable business model.”

Blank emphasizes that a startup is not a mini version of a large company. The difference between the two is essentially of type. A startup is still looking for a business model that can be successfully repeated and scaled. For this reason, it is normal for most startups to change their business models several times in their journey until they find one that allows them to increase their revenue, customers, traffic, and so on in a repeatable way.

The day a startup finds that business model, it ceases to be a startup and transitions to become a mature company. In their quest to find the right business model, some startups perish, while others succeed and stop being startups. This is what makes startups a “temporary organization.”

Contrast all of this with a large company which has already achieved product-market fit and has a proven business model, which it keeps implementing to earn profits. There’s no next stage for the company to transition to. This, and the fact that it has a tested and proven business model, means that it is a stable and, by extension, a permanent organization.

The stability of a large company is also its weakness as it makes it status quoist and less able to innovate. Innovation, on the contrary, is the bedrock of startups and gives them the power to pose an existential threat to the giants in the field. Big companies often acquire startups to either fend off competition or to add capabilities that complement what they do. The acquisition of WhatsApp and Instagram (By Meta; formerly Facebook), BigBasket (By Tata Digital), and NetMeds (by Reliance Retail) is a case in point.

D. Features of a startup company

Having done quite a bit of talking on what a startup company is, we already know some of the things that set startups apart from seemingly similar organizations. There are some other characteristic features of startups too that make them such unique entities. Let’s go over all the features of a startup one at a time.

1. Innovation: If it’s run-of-the-mill, it’s not a startup. Startups are rooted in innovation. Some startups are so innovative, they shake the status quo so strongly as to cause disruption in the way established companies are used to working, forcing them to reinvent themselves or face extinction. Think Netflix, Amazon, Airbnb, and Spotify.

That said, a product doesn’t have to be unique to the point of being unseen or unheard of. Product improvements count as innovation too.

2. Growth intent: Startups go by the mantra: Growth first, profit later. Growth typically means increasing revenue, adding new users/customers, hiring more employees, expanding into new markets, and so on. The kind of growth startups aim for is a rapid one. BYJU’S, founded in 2011, and Swiggy, founded in 2014, have become decacorns (valuation of more than USD 10 billion) in just a few years of operations.

3. Business model: Every startup searches for its own business model. Using tried-and-tested business models is for main street businesses, aka mom-and-pop stores, aka small businesses. For startups, finding a business model that can be repeatedly used, in a way that it allows them to scale the business, is an integral part of being a startup. Here’s a very short (and free of charge) course of ours that helps you understand what a business model is and how it is different from related concepts of business plan and revenue model.  

4. Uncertainty: For early-stage startups, there’s no escaping uncertainty. Uncertainty is any kind of a future event that cannot be predicted with the presently available information, cannot be measured, and cannot be managed. It can show up in many forms – a war, an economic crisis, a pandemic, political upheaval, a military coup, change in bilateral relations, a natural disaster, new government regulations, arrival of a new technology, and so on.

The outcomes can be positive for some and negative for others. While uncertainty affects all businesses, it particularly affects early-stage startups that are still trying to find their feet with unproven business models and little-to-no information about their target market.

Shuttl, an Amazon-backed bus aggregator for office goers, gave itself up for acquisition in 2021 after being badly hit by the work-from-home regulations mandated by the COVID-19 pandemic. The company was on a fast-growth trajectory before the pandemic. But the uncertainty of when the offices were going to open again – putting office goers back on the road – put brakes on its operations.   

5. Risk: Like uncertainty, risk too comes in many forms. With risk, however, the outcomes of a future event can be predicted with varying degrees of certainty and, therefore, aren’t entirely unmanageable. The biggest risk startups face comes from their use of an unproven business model with untested assumptions and little-to-no information about the target market. Running out of money, underestimating competition, having team problems, and problem protecting intellectual property are some of the other kinds of risks.

Since risks are manageable to some degree, there are steps startups can take to protect themselves from failure.

6. Funding: Because of their attention focused sharply on growth, which means their costs tend to far exceed revenue, startups have a massive appetite for capital. While personal savings, loans and government grants are usually enough to get started, once a startup starts growing rapidly, it needs investments from external sources to keep the momentum going. This is where angel investors and venture capitalists come in. The need for funding is so great, even comfortably-placed, bigger startups keep raising capital.

7. Exit: For people running small businesses, when they no longer want to remain in business, the exit options tend to be to pass the baton to a member of the family or to sell the business to an interested buyer. In the case of startups that receive investment from angel investors or VCs, exit is an opportunity for the investors to get returns on their investment. Exit for a startup typically means opening itself up to public investment with an IPO (Initial Public Offering) or going in for an M&A (Mergers and Acquisitions) by a bigger competitor or another bigger company that’s has an interest in the startup’s product.

It is important to note that an exit does not necessarily mean an exit for the founders of the company. While many founder CEOs do quit after an acquisition, quitting is not a requirement. In the case of an IPO, founders generally stay put although they have to give up a part of management control. An exit, therefore, is basically a means for the private investors to earn the returns they were expecting when they made the investment.

E. Common questions about startups

We hope we’ve satisfied your curiosity about what’s a startup company to some extent. The startup world is large and constantly evolving. So, it’s understandable if you still have doubts. In this section, we address some frequently asked startup questions and hope the answers clear the fog.

1. Are only tech firms considered startups? Is every tech company a startup?

Because of the astounding success of a long list of tech startups that are now mega corporations – like Facebook (now Meta), Google, and Amazon – startups have come to be seen to belong to the technology sector by default. While a majority of the startups tend to be centred around technology, there’s no dearth of non-tech startups. It’s a different matter that given the centrality of technology to modern lives, even non-tech startups make a good use of technology in their operations. That doesn’t make them tech companies though.

Chaayos, OYO, boAT, Lenskart, Mamaearth, Zoomcar, Treebo Hotels, Pee Safe, Chumbak, and Epigamia are some of the best-known non-tech startups in India.

A new tech company may call itself a startup to sound cool, but it doesn’t become one just because it is new and offers tech services. Earlier on in this article, we spelt out what a startup company is. If a new tech company has those characteristics, it’s a startup. Else, it’s a new, small business, and there’s no shame in that.

2. How do startups get funding? Does every startup need external funding?

Like any business, startup founders can tap into their personal savings to get started. This is called bootstrapping. Borrowing money from family or friends, obtaining a loan from a bank or an NBFC (Non-Banking Financial Institution), and getting a government grant are the other traditional means of securing capital. Getting crowdfunding through websites like Kickstarter, Indiegogo, GoFundMe, and Ketto is another option.

For early-stage startups, getting an investment from an angel investor in exchange for a stake in the company (equity) is a good option. Angel investors are high-net-worth individuals who fund early-stage startups with their own money. Angel investors take the risk of investing in companies that have not yet proven themselves but show the promise of being profitable. They invest relatively smaller amounts. They may act as mentors and help with networking but do not involve themselves in the running of the startup.

Finally, there’s the venture capital option for startups that exhibit a high growth potential. Venture capitalists are firms that fund startups and small-and-medium businesses that have a strong, long-term growth potential in exchange for equity. VCs invest in companies that have already become established. They invest very large amounts of money and expect a high level of involvement in the running of the business and often demand a seat on the board of directors.  

External funding is not a mandatory requirement for startups. Bootstrapping is always an option and has many advantages too. Zerodha and Zoho are perfect examples of bootstrapped startups becoming successful, established companies.  

3. How many founders should a startup have?

This is a difficult one. As far as investors are concerned, they like placing their bets on companies that are run by a team than by a solo founder, especially a first-timer.

Generally, two is a good number. Three is okay, but any more than that can mean problems of all sorts. Co-founder conflict is the third-most common reason why startups fail, the first two being no market need and financial problems. A common vision, complementary skill sets and personalities, and shared values are the most important ingredients of team cohesion and success.

All things said and done, there’s no rule prohibiting you from being a solo founder.    

4. What are the stages of a startup?

A startup passes through the following stages in its evolution from idea to market fit.  

1. Ideation stage

This is where every startup journey begins. You have an idea but little else. The first thing to do is to explore if products similar to the one you propose to build already exist. If the market is overcrowded, you may face too much competition. If there’s hardly any competition, maybe there’s no market need for your product.  

If you think your idea is worth pursuing, spend some time defining the problem you are trying to solve and write it down in the form of a problem statement.

At this stage, you know very little about your customers and market. So, you make assumptions about different aspects about your business using the Business Model Canvas, which you are going to test in the subsequent stages.

2. Product development stage

This is the stage where you start gathering information from the real world by talking to your potential customers. Define a value proposition. Raise initial capital to start working and build a team. In this stage, you also develop a minimum viable product (MVP), a version of your product with the most essential features your customers would want to have in the product.

3. Validation stage

The validation or traction stage is where you launch your MVP and get your initial customers. You then test how your customers respond to the MVP by collecting feedback from them. Depending on how they respond, you may refine your product to better meet the customer expectations, or you may have to pivot and change the direction of your business if it turns out that your product isn’t meeting the demands of the market.  

4. Growth

When a startup makes it to this stage, it starts expanding its user base rapidly and keeps refining the product and improving the user experience.

You hire more employees, enter new geographical markets, and increase your revenue. This is also the stage where, having shown your growth potential, you can attract the interest of VCs and get funding to further grow your business.

5. Expansion

This is where you shift your focus from growing your business to scaling it. This means increasing both revenue and customers exponentially while minimizing the costs. You increase your workforce, expand into new markets and distribution channels, offer new products, form new business partnerships, and raise more funding to consolidate your business.   

6. Maturity/Exit

After the expansion stage, a startup company becomes an established business. At this stage, some companies choose to focus on sustainability and long-term growth as high value organizations. They keep improving their product and operations to increase the profitability of the business while increasing the customer base and retaining the existing customers. Other companies take the exit route either by selling themselves or by listing on an exchange with an IPO.

5. When does a startup stop being a startup?

There are wide-ranging opinions about this. In general terms, when a startup achieves product-market fit with a business model that’s repeatable and scalable, it stops being a startup and becomes an established business. In more concrete terms, different people propose different cut-offs in terms of:

• Revenue: When the startup attains an annual revenue of USD 50 million or more
• Profit: When it turns profitable
• Employees: When it has > 50 employees according to some, > 100 employees according to others
• Rounds of funding: When it has raised angel or seed funding and done two rounds of VC or private equity investment
• Years of existence: If it has been in existence for 5 years or more. Some put the cut-off at 10 years.
• Exit: When the company lists on a stock market with an IPO or gets acquired.

For startups in India looking to avail benefits under Startup India, they lose the startup status as soon as they become older than 10 years from the date of incorporation or cross an annual turnover mark of Rs. 100 crores.

6. What is a unicorn startup?

A unicorn is a privately-owned startup which has a current valuation of USD 1 billion or more. The term was coined by venture capitalist Aileen Lee in 2013 and its definition remains unchanged. Another term, decacorn, is used for startups whose market valuation is more than USD 10 billion. Startups can lose these labels if their valuation falls.