In the words of the legendary Paul Graham of Y Combinator fame, "A startup is a company designed to grow fast. 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."
Startups are here to stay. At least for now. Everyone we know is either talking about startups or working with startups or investing in startups. Some people like me are even writing about Startups.
But what are startups, and how are they different from traditional businesses? Why do most startups need venture capital while traditional businesses are usually bootstrapped? Does running a startup means burning cash and offering discounts to acquire customers? Can non-tech companies be startups? Do all startups need an exit strategy?
High growth is the biggest differentiator between startups and other businesses. In the immortal words of Paul Graham of Y Combinator fame, "A startup is a company designed to grow fast". This is as good a definition of a startup as there can be. Any company is a startup as long as it's growing quickly.
But does high growth always need external capital? Not necessarily. Some startups didn't need VC money to expand aggressively and become market leaders. Nike is a superb example. There were no VCs in the USA when Nike was founded. Nike grew at such a breakneck speed for its first few decades that it always needed cash to expand. Since the business was not able to generate the required money, Nike survived on the float for the first few years of its existence. Phil Knight, the creator of Nike, talks about the early days of the company in his excellent book – The Shoe Dog.
So where does Venture Capital come in?
Venture capital enables startups to grow quickly. Since fast growth comes at a cost, and most businesses don't internally generate enough money to fuel their expansion, venture capital fulfils this need for growth capital. Venture Capitalists are always on the lookout for highly scalable businesses that can allow them to increase their investment multifold. But this quick growth comes with a risk. Most startups fail to turn the initial promise into sustainable businesses. Venture capitalists understand the risks of startup investment, and hence they invest in multiple startups to hedge their bets.
What about the internet and related tech?
Why technology is an integral part of most startups? The reason again is high growth. You have to use technology if you want to grow fast. That is why most of the startups are internet-based or use the internet to reach more customers. It is next to impossible for any business to aggressively expand its customers without digital marketing. And to leverage the power of the internet you need a website or a mobile app. Uber is a prime example. It is supposed to be a taxi rental company. But in reality, it is a mobile app. Uber's app connects drivers and customers. And Uber uses some form of online banking for payments. Imagine Uber without its mobile app and online payment solutions. It would have still worked, but there is no way it would have grown this fast. You can start an organic vegan restaurant which has nothing to do with the internet. But you will need to market it on the internet if you want to quickly reach out to more customers.
Acquisition, merger, sell-offs and other exit strategies?
"Exit" is a buzzword in the startup ecosystem. Most VCs want an exit strategy in place before investing. Some founders think about exit strategies even before starting the business. But do all startups need to have an exit strategy? Not necessarily unless you think of an IPO as an exit route. Most exits happen when startups stop growing because of the competition. Then they get acquired or merged with rivals to create better, bigger companies. The most successful ones like Google and Amazon turn into billion-dollar behemoths and make themselves public companies.
There are certain questions that all entrepreneurs ask before starting any new venture. The few starting ones are – What is the problem? Is there a need to solve this problem? How can I solve it? Will people pay for this solution? Who will pay for this solution? And many more.
"But unless the solution involves quick growth, it is not a startup."