What Is a Startup?

The word “startup” has become ubiquitous in the American vocabulary. However, there is really no common understanding of the definition.

Wikipedia defines a startup as “an entrepreneurial venture, typically describing a newly emerged, fast-growing business.” Yet, if you look further, you’ll find that different people mean radically different things when they use the term.

Some people define a startup simply as a newly registered firm with at least one employee – the founder. However, many also include the attribute of scalability in the definition. Others only consider businesses that develop software or produce hardware as startups.

Why do we care that there are various ways the word “startup” is used? Well, since there are so many conflicting definitions, it’s difficult to keep everyone on the same page when you’re discussing such things as economic policy issues related to new businesses.

The reality is that a startup is a temporary status applied to all business ventures when they’re looking for a viable business and economic model. When you are a startup, you are still searching for a repeatable and scalable business model that will create revenues that will exceed its expenses.

I pretend that a startup is any business that has not yet reached profitability. Once they reach profitability, they lose their status as a startup and are, in fact, a business.

A startup is any business that has not yet reached profitability

However, I have recently noticed that the press, and even certain groups of business mentors, imply that a startup is an innovation-related business that will need to raise capital from investors at some point. These same people also use the phrase “small business” to describe service-oriented businesses such as a freelancer, subcontractors or restaurants.

All of this can be very confusing to the new entrepreneur. To provide a bit more context around the definition of a startup, we must know the market structure that the startup will be competing in. Additionally, I would add that most startups come in four basic types.

Existing Market Startup

What is an existing market startup? In an existing market, there are users that already use your type of product or service. There are competitors that already exist in your market. Users can tell you the basis of competition such its price, performance, customer service, etc. There are known channels that create customer demand. If you want to, you can actually go out and talk to users to see what they want.

In an existing market, your job is to mainly have a better offering to take market share away from the competition. Because you operate in a known market, you can develop marketing material for your sales channels on day one. The biggest problem is that you are not the only business in your market segment.

New Market Startup

There is another type of startup called a new market startup. In a new market, there are no users and no competitors. In fact, you have something so new that you have to educate your prospects about your solution.

There are many challenges when creating a new business category. When I was an Invisible Fencing dealer in the 1980’s, it was a brand-new product and customer acquisition costs were very high. I had to spend a lot of time and money to make prospects even aware of the solution that we offered since no one had heard of it before.

While many startups are trying to create a new category, the downside is it makes customer discovery much harder. You can’t just go outside and ask people direct questions such as “Would you like this feature?”. You will need to figure out how they spend their day and be able to share what the world’s going to be like if they buy your solution.

Your biggest challenge in a new market is to figure out how will you will acquire customers. Since what you are offering is new, your revenues will very likely be very flat for the first couple of years until the market recognizes your offering and adopts your solution. If you’re lucky, there will be a tipping point where revenue takes off. Hopefully, this will occur before you run out of money.

What is really important to understand is the distinction between existing and new markets. The startup capital required to launch a business in an existing market is very different than the capital requirements and the time need in a new market.

Existing Market with Incumbent

In an existing market, if there is an incumbent or a dominant player, attacking them head-on might be suicidal. I have heard an axiom that you need about four times the sales and marketing budget of an incumbent to win over their existing market. Being a small business, you are better served by relying on a different strategy than a head-to-head competition.

You might decide to be a low-cost provider by whittling down or limiting the features of your offering to create a less featured, but lower cost alternative solution. You might decide you know a lot about a small niche segment of the incumbent’s customer base that the incumbent is ignoring. The incumbent might have a generalized offering, but you might know something about that niche that’s large enough for you to attack with a dedicated set of features or service.

For example, since women will soon become the richest demographic, what if an auto repair shop focused on servicing cars owned by women and included educational materials about how cars operate and how repairs are performed- something that many men clients are likely more aware of then women? Or what if they offered a waiting area that included a play area like McDonald’s, so that moms with kids could have their child entertained while they waited for an oil change or a tire rotation?

Market Clone

Another market type is to clone an existing business model employed in another country. Remember, there is no prize for originality. Juice boxes and Barbie Dolls are examples of products that were offered in other countries and introduced to the US consumer.