Where’s a specific sensibility and respect that gets attached to businesses that are referred to as “startups.” There’s a general feeling of risk taking and future-facing enterprise that owners enjoy. But the actual definition of what a startup is can be murky, and even if your business meets the definition in the eyes of the investing community, at what point do you graduate from startup to established business?
Startups are pretty loosely defined. They are generally acknowledged to be a subset of small businesses (a category established by the U.S. Small Business Administration for the purpose of qualifying for federal contracts) and earn their name based on either how long they have been in business or in the way that they have approached the industry that they are in. Let’s take a closer look at each.
How long they have been in business
There are plenty of entrepreneurs who proudly refer to themselves as startups simply based on the fact that their businesses are new and have only been operating for a couple of years. Though this belies the notion that a startup is a disruptor that is doing something new and risky, any new business owner can tell you that whether they’re selling a novel service or an iconic product, they’re taking a real chance by going out on their own.
This idea is supported by the Congressional Research Service’s findings about the risk involved in starting a new business. A recent report indicated that “business startups create many new jobs, but have a more limited effect on net job creation over time because fewer than half of all startups remain in business after five years.” Considering a new venture as a startup is a legitimate position to take, but it begs the question of at what point they consider themselves well-established enough to no longer be called a new business, a startup, or anything else indicating their sense of courage combined with concern.
How they approach an industry
The more traditional characteristics associated with the term “startup” have to do with the way that a business is approaching the industry that they are in. They are either selling an existing product or service in an entirely new way or introducing a brand-new service or product that will be a game-changer for consumers, as well as for their competition. These businesses are taking a different type of chance, as they are betting that their product will take off and offer rich rewards.
Businesses that fall into this category are often tech companies but not always. According to Eric Ries, the creator of the Lean Startup methodology, “A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty. To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup, because its success depends only on decent execution—so much so that this success can be modeled with high accuracy.”
Does the terminology really matter?
Whether your use of the word “startup” refers to your business’ tenure or its goal of turning an industry on its head, in both cases the term indicates that it has a lot of runway ahead.
How to Finance a Startup
One of the most essential pieces of a new business’ survival is how and where it will get its financing from and calling yourself a startup can impact your options. Traditional lenders like credit unions or banks are notoriously risk-averse, and businesses with two years or less of operational history are unlikely to qualify for funding. If this describes your business you are more likely to find yourself eligible for a personal loan based on your credit score, or a loan or microloan from an online lender based on documented revenues.
By contrast, call yourself a startup and you’re likely to draw the attention of venture capitalists, private investors, angel funding or even crowdfunding from people who are eager to take a chance on a promising new idea. These alternative sources of funding are willing to take a risk, and much more interested in your vision and your market research then on your credit history or on actual sales.
Are You Well Established Enough?
Whether you’ve called yourself a startup because of the newness of your business or of your product, at some point you need to acknowledge that the name no longer fits. Here are a couple of milestones that indicate that you’ve bypassed that stage of your company’s history and have achieved a significant level of success:
- If your business has made it past the one-year anniversary of its opening, then you have accomplished what the Small Business Association says that many businesses do not. According to the agency, approximately one in five don’t survive that long.
- If you’ve reached the point where you’re making a profit, then you’ve surpassed most non-employer firms.
- If you’re no longer running the business yourself and you’ve started hiring employees, then you’re doing better than 80% of American small businesses.
If you have any questions about your business, please contact our office at (503) 224-5321. Isler Northwest LLC is a firm of business advisors and CPAs in Portland, Oregon. Our service goal at Isler Northwest is to earn our clients’ trust as their primary business and financial advisor.
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