There is no current centralised definition of a ‘startup’ in Australia. Competing definitions exist across existing programs, requiring startups to requalify for each scheme. As startup-focused programs proliferate, this regulatory burden is likely to increase. ~ StartupAUS 2018 Policy Hack Outcomes
This was the observation made by leaders in the recent StartupAus 2018 Policy Hack stream on the topic of “Startup Status”.
Startups have a specific contribution to local economic outcomes. Regions invest in creating and supporting startups to achieve these outcomes. There is a definition challenge of agreeing on the definition of a startup. Is a small business a startup? Can a corporation create a startup? When is a startup no longer a startup?
These are some of the questions faced by those tasked with helping startups, particularly in regional communities where the density of startups is much lower than metro areas.
The Startup category in the Australian Financial Review is listed under “small business”. Yet this category has stories that would challenge many small business owners self-perspectives. Such as the likes of Pedestrian which began in 2005, employs around 75 staff, and is valued at just under $100 million. Or Instaclustr, which began in 2014 and is growing to over 150 employees. Or training platform Go1 which started in 2014 and employs 100 staff.
A formal definition can help to test the media representation of what is and is not a startup. Given the amount of thought that has gone into the topic by others, it would not be appropriate to create a competing definition or pick a winner from existing descriptions. Rather, the aim is to understand the conditions that go into determining what a startup is and is not so others can better decide for themselves.
A definition is important for a few reasons:
Startups play a role in the local economy
Startups, and in particular successful startups that become high growth firms, have potential to create a disproportionate positive on the local economy. These companies take advantage of the rapid pace of technology change and access to global markets. These same conditions are both a challenge and an opportunity to local economies that are vulnerable to limited industry sectors. Raising awareness of what is meant by a startup helps to focus local attention towards a specific type of economic activity to both mitigate and take advantage of these conditions.
Startups are receiving a lot of investment
A significant amount of time and financial investment is spent on startups by governments, corporations, academic institutions, and private markets and individuals. Agreeing on what a startup is helps focus this attention and ensure we are all talking about the same thing.
Startups require local and global collaboration
An ecosystem has emerged to help startups. Local chambers of commerce and government economic development bodies have been around for decades to help businesses grow and export. Local businesses have been “starting up” for centuries. Being clear on what a startup is and is not helps all parties work together for shared outcomes.
How others define a startup
The term startup is in a set of definitions within the new business economy. Other terms include entrepreneur, ecosystem, innovation, hackathon, accelerator, and incubator. As startup is a common entity to each of these, we will focus there for now.
To consider what has gone before, we can look at what other thought leaders say as the definition of a “startup”. Some of the definitions below are descriptive and explicit to a startup, and others are conditions of an organisation accessing funds or a program designed to support startups.
“An organization formed to search for a repeatable and scalable business model.”
“A young high-growth company that is using technology and innovation to tackle a large, probably global, market, with two defining characters: Potential for high growth and disruptive innovation.”
“An early stage business that has a large addressable market that utilises technology to capture that market quickly.”
“Have proprietary technology or intellectual property at the core of their product or service offering (ie: they are commercialising a technology they have developed) OR they are a high growth potential Startup (which will generally have technology at its core). Companies younger than 10 years old or the company has had a significant pivot and is effectively reborn OR if the company has yet to launch a product that has had an extended development period.”
“Recognised by a startup authority, financial criteria to be determined, operates in a STEM-related field.”
“Not listed on the stock exchange, incorporated less than 10 years, aggregate turnover less than $50 million”
“Registered business, not listed on the stock exchange, annual expenses less than $1M, annual income less than $200k AND a principle based test (focused on developing innovation for commercialisation, high growth potential, demonstrated ability to scale, ability to address a broader market, demonstrable competitive advantage) OR a points test.”
“Seven years old (ten for biotech); annual turnover less than AU$5M; and working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.”
“A company primarily focused on developing innovative digital technology, with a high leverage on labour, an innovative scalable business model, capable of rapid growth, and under five and half years in age.”
“A business with high impact potential that uses disruptive innovation and/or addresses scalable markets.”
Conditions of a startup
So after reviewing these definitions, what is a startup? Rather than a statement of fact, we can consider certain conditions.
1. Age of organisation
Some definitions use age of the organisation, but this can be problematic. A five-year-old software app can be mature when compared against outliers such as Snapchat and Instagram. By comparison, a pharmaceutical company or battery storage firm may require ten years of trials before going to market.
There can also be questions as to when the clock starts. A technology may be developed as a product in a company for years before emerging into the market overnight as its own entity. A ten-year-old traditional service-based company may develop a new scalable product and release it under its own brand. The startup may operate for 5 years as the founder’s side project before finding its fit. The customers may be government or large corporations that have over 18-month sales cycles.
These reasons are likely why many of the definitions above do not include specific time requirements.
2. Size and structure
Size can be measured in employees and finances, including revenue and costs. There is a thought that once a company reaches a certain size, it may no longer be considered a startup. This can be based on an assumption that with size comes structure, repeatability, reduced uncertainty, and reduced speed of scale.
Similarly, there are certain assumptions made about structure of the company. It usually needs to be incorporated in some manner to be considered an entity and receive revenue. At the other end, the structure required for a public listing usually precludes the conditions of a startup.
3. Business model, market potential, and scale
The size of the market and potential to scale are two conditions to test whether the business model is appropriate for a startup. Specific questions that need to be answered include: Who are the customers, how many can there be, what channels will you use to access them, and what is the relationship with the customers.
This test usually precludes a traditional service-based business reliant on a person to meet demands such as consultant, lawyer, or agency. Brick-and-mortar retailers such as cafes or automotive companies are also not considered as startups for this reason. These models are difficult to scale beyond a fee-for-service model unless the delivery is automated or systematised in some way.
4. Use of new technology or existing technology in new ways
Technology is inherent to startups, but this does not just mean digital technology. Scale requires the use of technology, and the inclusion of technology in a new way that makes it interesting to a wider market. Traditional approaches that are reliant on human delivery and those that do not create new forms or uses of technology are unlikely to have the scale potential to rapidly access new markets.
5. Speed to market
A startup tends to have potential for rapid growth and the means to achieve that growth. The business model can demonstrate that if they were provided funding they could exponentially increase their customer acquisition or revenue.
In search of a “startup status”
At a national and even global level, there should be agreement on the definition of a startup. A shared understanding is critical as we measure and report on this particular aspect of economic development activity.
It is important to distinguish a startup from a traditional small business. A startup has significant potential for increase in wealth compared to a traditional business. Startups also need different support mechanisms to allow for rapid scale, investment opportunities, use of technology, and to navigate the uncertainty associated with new business models. These support mechanisms form the “startup ecosystem” that offers specialised services for startup companies.
Distinguishing a startup from other forms of business does not put it in opposition to the other businesses, but raises awareness of when a business might or might not be a startup.
Beyond a simple definition, I believe that “startup” is a status that anyone can enter. The corporate executive establishing a new company out of internal R&D. The university student creating a business out of new technology. A consultant scaling a learning platform. A small service-based business developing internal systems they then use to create a new company and sell globally to those who were previously competitors.
These examples join the ranks of the millions of people with ideas, experience, networks, and passion giving it a go.
I welcome other’s feedback, perspectives, and challenges as we collectively come to a common understanding.