What Is A Startup?

In this post I define what a startup is in relation to what small businesses and lifestyle businesses are.

What Is A Startup?
Article by
Sylvester Mobley
Article Date
August 26, 2022
Category
Articles

I am an early-stage investor, so I often talk to new founders at the beginning of trying to figure out what they are building and how. At this stage, there are terms that early founders hear, like startup, lifestyle business, small business, venture backable, and many others that can be confusing. To make matters worse, there can be different definitions depending on where you look for answers. 

Why define startup at all? I have heard people say the word startup is just a label, and you don’t need to define it at all. Sure, there is some merit to that. However, the labels we use can impact whether we try to raise the correct type of capital, adopt the right model, and build the right team. Also, the people I hear saying it doesn’t matter usually understand the difference between the terms. 

I also want to acknowledge that sometimes when we use these terms, there can be a perception based on how we use them that something is better than something else. This pushes people to try to fit into a category that may not be a good fit for them. 

Some of the terms that I will define below, like startup, have evolved, which means providing a clear, universally accepted definition isn’t a clean and easy process. So, I will also give some context to explain how I came to some of the definitions that I use. I am providing definitions for the other terms that often come up because those definitions may help in understanding what a startup is and isn’t. 

Small business - Unfortunately, there isn’t a simple definition for this. The U.S. Small Business Administration (SBA) determines what is and isn’t a small business using revenue or number of employees by industry. For example, a marketing consulting company with less than $16.5 million in revenue is a small business. But, a computer systems design company with less than $30 million in revenue is also a small business. At the same time, the SBA uses the number of employees for other industries. For example, a wireless telecommunications carrier with less than 1,500 employees is a small business, and a music publisher with less than 750 employees is also a small business. 

This means the definition of a small business depends on the industry. This also means that some startups would be classified as small businesses while others may not, depending on how much revenue or how many employees they have. 

Lifestyle business - Lifestyle businesses usually start as small businesses like most other businesses. When they begin, they are set up to provide the business’s owner(s) with employment and income. Often, the business owner knows how much income they need or want to maintain a particular lifestyle and quality of life; reaching that income level becomes their goal. Based on lifestyle businesses' nature and setup, their growth tends to be slow and limited. After all, the goal for a lifestyle business isn’t for it to be a billion-dollar company; it’s to provide income. 

From a financing perspective, lifestyle businesses aren’t what’s called venture backable, which really just means it’s not the kind of business a venture capital fund would invest in. Lifestyle businesses aren’t venture backable because they grow slowly and are not intentionally started to grow into massive companies, which is what venture capitalists want. Because of this lifestyle businesses tend to use a combination of money from the owners, their friends and family, customer revenue, and small business loans to get started and grow. 

None of this means that a lifestyle company can’t make a lot of money or grow to be pretty big or valuable because they can. It just means the lifestyle business isn’t designed to grow to be as big as possible really fast.  

Startup - Like lifestyle businesses, startups generally start as small businesses. But unlike lifestyle businesses, startups are intentionally built to grow as large as possible as quickly as possible. The objective of a startup isn’t income for an owner. The purpose for a startup is to achieve scale and massive value and do it fast. Due to how much a startup needs to grow and how quickly, startups are initially financed through the founder’s money and the money they can raise from friends and family, they then move to raising money from angel investors. Finally, they raise capital from venture capitalists. At times, startups may utilize debt to finance operations but not to the same extent as a lifestyle business.  

I started in tech in 2001 and still remember how the word startup was used back then. I’ve also been in the space long enough to have seen how the meaning has changed and evolved. In the early 2000s, the word startup was mainly used to distinguish between a company built to grow really big, really fast, and therefore venture backable, and a lifestyle company that would grow at a much slower pace. People needed to draw this distinction so that everyone involved was clear about what was being built, how it should be built, and how it would be financed. However, over time the term began being applied to any new business. 

Not understanding what a startup is leads to entrepreneurs structuring their companies the wrong way and trying to raise the wrong type of capital.