So, What Exactly is a Start-up?

Entrepreneur. Venture capital. Pre and post-money valuations. Stock options. IPO. Acquisitions. And of course the ubiquitous “Startup”. All of these terms have captured the imagination of the current generation and have become part of the everyday lexicon of the GenLibbers. Given the ease with which it rolls off various tongues, it is perhaps naïve to even ask the question : What exactly is a startup?

But to put high-tech entrepreneurship in context and in perspective, it is important to get an understanding of what is a startup. So, let’s start by asking: Is the corner video store a startup? And what about the newly opened grocery store down the road? Is every small business synonymous with a startup?

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Fundamentally, a startup is an engine for wealth creation. Startups are crucial engines of growth of a country’s economy by creating wealth in society and by generating jobs. A startup is the first step in the road to building a new company; the size and the rate of growth that the company achieves are important elements in determining whether the “startup” is indeed a startup.

Typically, a startup will grow at supernormal rates while adding tremendous value to itself. To be able to achieve such levels of growth and to generate such value requires the infusion of significant outside funding. This outside funding is typically provided by venture capitalists who invest in high risk/ high return ventures.

In the heart of startup land, namely Silicon Valley where the bulk of US VC investments go, from inception to IPO (which some say refers to Instant Porsche Owner status of the entrepreneur!) can be as short as 12 months while market valuations can be in the hundreds of millions of dollars. However, in India, entrepreneurs have to wait for at least 3 to 5 years before they can go public. But increasingly, more and more companies in India (including “startups”!) are turning to venture capital in order to help fund the supernormal growth plans.

Additionally, startups need to be team driven if they are to successfully manage growth. A fast growing company needs different skills and expertise and no individual can alone hope to manage growth. The corner video store is typically run by a single entrepreneur. However, if the corner video store has plans to quickly become a national or even international franchise (like Blockbuster in the US) and made the appropriate efforts to do so, we could term the corner video store a startup.

On the other hand, someone who’s tired of routine corporate life and wants to be independent without the constraints of working for someone, and therefore starts a small business cannot be said to be running a startup. This person is in the income substitution business i.e. is substituting his / her income from a salaried job by being independent. S/he doesn’t want to get into the complexities of growing a business. These businesses are typically small in size and have small growth rates.

Do you have the appetite for high achievement and a willingness to take risks? In spite of knowing that the chances that an idea for a high tech business to eventually become a successful company that goes public is as low as 6 in a million! Or are you better off in your job or income-substitution business?

This article was originally published in VentureKatalyst, India’s first e-zine aimed at entrepreneurs, started by Sanjay Anandaram.

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