The Definition of a Startup

I recently read an article on "crunchbase" claiming the definition of a startup has changed from (2014):

upward to (2018):

These people are crazy!

So how do I define it?

A "startup" is just starting up. I don't use specific metrics, nor do I particularly care about the word. But, in the terms of "you might be a redneck":

On the other hand,

Growth companies and up

There are companies that are not startups that are also not "exited". Uber is not a "startup". They are a multi-billion dollar enterprise.

I generally differentiate companies based on sales, workers, or similar metrics, give or take as follows:

But I just started this $150M company

Fair enough. You and your 1,500 people are likely the spin-off of a large enterprise. But even if you started only a year ago, by this point, you are no longer just starting up. You are operating. And if you are not operating and only got the money from investors, then you are likely far better than anyone else I know at raising money.

I know a company that got $10M to start and is now operating at $50M in revenues in less than 6 months. They are indeed just starting up, but they are not operating like a startup, and they don't have most of the characteristics of most startups. They were born from a set of customers putting money into a trusted party to do what is essentially a joint venture. The funders are also the customers, and they are helping in every conceivable way. Sure, there was a risk of failure, but the CEO was paid from day 1, they hired whoever they needed, they bought all the infrastructure, outsourced all the development with access and license to all the customer content, and so forth.

And then there are lots of startups with essentially no assets that claim massive valuations. That means that investors pay a very high price per percentage with a very high likelihood of losing it all. I generally ignore these asserted valuations of companies because I have seen enough great opportunities at rational rates to know better.

For early stage companies, the price per percentage tends to range from $10K/% ($1M post money for seed level) to $50K/% ($5M post for high end first round angel investment), and up to $500K/% ($50M post for bridge funds during a pending exit). The last case is usually a special offering for previous investors to assure enough cash to execute through an exit that is all but completed, and may yield up to 2x returns in 6 months. It's often called a bridge round.

The real key differentiator for a startup in my mind is the risk profile. The number of unknowns is high because the business is young (the nature of the key performance parameters and their values are not clearly understood for lack of time, resources, or experience to determine them) and the risks have not yet been baked out.

In summary

The notion of the $50M startup seems to me to be ridiculous. Such entities are almost always nothing like startups. But then I'm not a big money investor with a major fund behind me. I deal with angel investments in startups that are actually just starting up or companies that have stalled or are having problems growing past a few million dollars per year of revenue. They normally have very little available cash, few people, limited resources, and a willingness to work hard and long for a reasonable chance of success.

While I also advise entities of all sizes and types on a wide range of issues, startups have special needs. They are far more stressful on their founders, higher risk by far, and potentially higher reward for early stage investors. The thing that makes them a startup is the extreme uncertainty about days and weeks ahead. By the time you have $50M flowing through, while you can still fail, you are no longer worried about the next few days and weeks, unless you know something you are not telling the investors or customers.

Copyright(c) Fred Cohen, 2018 - All Rights Reserved