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Hold on a second: what’s a startup?

#Beyond books

Gianluca - Berlin

21 novembre 2018

Defining what a startup is, as well as actually defining all the complex and constantly changing details, is a very difficult task. Each expert has its own definition in mind, more or less adherent to reality, with opinions often prevailing over facts, and in some cases it comes down to personal beliefs instead of open, honest comparison.

In Italy’s case (but it is quite like that in continental Europe too), it seems that creating a startup means having a company or a basic project that meets at least one of two criteria: it is new, it is technological, or both.

Startup then becomes the agency that develops websites (because it "makes technology"), the small medium business born a couple of months before (because it is "small and newborn"), the ice cream maker who introduced a new way to enter the ice cream shop and order the ice cream ("we believe to be in some sense a startup"), a consolidated company that introduces some kind of technical innovation to differentiate itself from the competitors, or have some more newspaper titles and reassure their shareholders (" we believe to be, in some sense, a startup ", once again).

Defining the true meaning of a startup is very complicated, but of fundamental importance. Especially because it keeps in line expectations, in the macro world of media and institutions, in the micro "wannabe startuppers" and "wannabe investors". In short: knowing what you are going to do ensures that you do not lose money in the expectation that you’ll make some, when there is not even the premise that this might happen.

For how sparse they are, some fixed facts that we can count on do exist: for instance, only certain types of very specific companies have the possibility of receiving investments to become international businesses. And their novelty, or technological component, or small size, is only a consequence of their structure.

But it is not the cause. The cause lies in the structure of their business.

So, what is a startup?

One of the most fitting definitions comes from a gentleman, such Steve (Blank). Steve, grizzled hair, glasses and reassuring smile, teaches at Stanford, Columbia and Berkeley. And, incidentally, it has been one of the founding fathers of the startup movement since the 1990s.

Blank defines a startup as a temporary organization created with the aim of finding a scalable and repeatable business model.

Temporary, repeatable, scalable. The sacred trinity that identifies a startup. Any company that does not meet these criteria, cannot be called a startup, will not receive investment from a venture, it will not become a global business in a very short time. Which is, in the end, all that matters in the world of startups.

Temporary means that a startup cannot last forever. It will either become a huge business, maybe even renowned (like Google, to be clear), or it will fail. Nothing in between.

Repeatable means that if it worked today, it can still work tomorrow. It does not ride a fashion (fad), but applies the idea of a structural business. Like a search engine.

And finally scalable, the real core of the definition: it can, on an abstract level, become a global business because the marginal costs at regime are low. In other words: revenues, potentially, can grow much faster than the increase in costs.

Do you have a communication agency? In addition to a certain amount of customers, to grow further you have to hire more people, and costs and revenues will grow more or less together. Do you have a search engine? One customer, two customers, two hundred million more customers, do not impact your costs proportionately.

You can climb.

It is therefore clear why technology and startup go hand in hand: technology (Internet in particular) is that wonderful thing that allows you to have very low marginal costs in the face of potentially infinite revenues, in a short time.

How much does it cost to open an airline? Permits, huge capital, hundreds of thousands of employees.

How much does it cost to put on a website visited by millions of people? A laptop, a programmer, and a good mind (basic stuff I’m explaining for the sake of clarity).

Why is climbing so important for a startup?

Why is climbing so important, asks the devil's advocate? I can be a startup even without climbing, as long as I am technological.

Here we enter the insidious terrain of lexicology, where we inevitably need to agree, since the words are only conventions. But for the vocabulary of those who make professional investments in this very peculiar asset class, startup is those who scale. That business that becomes a colossus in ridiculous times compared to investments (with parameters) on the cheap side.

This is how venture capital funds work. They require astronomical returns in a short time ("you have to climb!"), because they in turn have promised them to those who have invested in them - the so-called LPs. To be as short as possible, it is simple economy. If you want to get rich in a short time, you risk all at the game known as startup, somewhat of a gamble, somewhat of a solid investment.

Putting these characteristics on the table, one can soon realize that a startup also has a strategic and managerial approach that is completely different from the average SME.

If an SME aims to break even (revenues above costs in a structural way) in a short time, and to stay there, startups have this particularly counterintuitive attitude of "we don’t care about profits, the important thing is to grow and grow". Growth, growth at all costs, to paraphrase Churchill.

A growth that is carried out in an aggressive and scientific way, using very special iterative methodologies: I try and measure everything that can be tried, until the product-market fit, that moment when I found a product that grows at reduced costs, which generates revenue, which is desired by the market and which can be scaled. And that therefore can make tons of money, and impact millions of people with only the work of a few dozen or hundreds of employees.

This is a startup.

It's not a communication agency, it's not the burger joint you can find in a small town, it's not who creates an app, it's not who's technologic, who's new, who's small. Who invented a new communication platform (Buffer), who has discovered a new way of communicating in a more authentic and instantaneous way (Snapchat), is who has collected social experiences around the world through an app (Facebook).

Who, with a few people, a lot of money, a scientific method and the will and the courage to risk everything, tries to change the life of millions of people.

And, along the way, get rich in the meantime.