As an early-stage investor, I often talk to founders who are still figuring out what they’re building and how. They have a ton of terms flying at them – startup, lifestyle business, small business, venture backable, and more. There can also be different definitions depending on where you look for answers and who you ask. The various terms and definitions can be confusing and overwhelming at times.
I understand this because I went through it as a founder myself. Some people dismiss the word startup as just a label. While labeling people can be problematic, labeling businesses can help founders to raise the right capital, adopt the best model, and build the most effective team.
Interestingly, the people who usually say the terms don’t matter often are the people who understand the differences between them.
Also, based on how we use these terms, you may get the impression that one thing is better than another without fully understanding their differences. That’s why some people chase venture capital when other, less glamorous types of funding would be more appropriate.
To make things more complicated, some terms like startup have evolved, meaning providing a clear, universally accepted definition is difficult. So, I’ll give some context and other definitions to help you understand how I came to the definition of a startup that I ultimately use.
Unfortunately, there isn’t a simple definition for this.
The U.S. Small Business Administration (SBA) defines small businesses by industry using revenue or the number of employees a company has.
For example, a marketing firm with less than $16.5 million in revenue is a small business, but so is a computer systems design company with less than $30 million in revenue. And a wireless telecommunications carrier with less than 1,500 employees is considered a small business, while a music publisher only needs less than 750 employees to be a small business.
What you need to know: Any business that meets the revenue or employee guidelines set by the Small Business Administration for that industry is a small business, and it could be a startup.
Lifestyle businesses usually start as small businesses, just like any other business. However, they are set up to provide the owner(s) with employment and income. Founders of these businesses figure out how much money they need to reach or maintain a particular lifestyle, and getting to that income level is typically the primary goal.
Based on their nature, setup, and operating models, the growth and scale of these businesses tend to be slow and limited.
What you need to know: If you simply want to build a business that makes enough money to meet your personal goals, you want to start a lifestyle business. While nothing says, a lifestyle business can’t make a lot of money or eventually become a large company, a lifestyle business is unlikely to receive venture capital. This point leads us to our next definition.
Simply put, VC firms want to invest in companies that will scale rapidly and become extremely valuable quickly. From a financing perspective, traditional small businesses like lifestyle businesses aren’t venture-backable because they aren’t structured to grow as large as fast as a VC would need them to.
What you need to know: The decision to build a company that is venture-backable or not must be an intentional decision and requires careful thought. What you need to do to succeed will look very different depending on your chosen path. If you believe you are building a venture-backable company, you must prove to investors that your company will scale extremely quickly. Otherwise, crowdfunding, bank loans, or bootstrapping are better options.
Now that we have these other terms defined for context, we can address startups. Founders intentionally build startups to grow as large as possible as quickly as possible.
Due to how much startups need to grow and how quickly, venture capital is usually the most appropriate path for funding. These founders typically begin with their own money and money from people close to them (friends and family). They then move on to angel investors and finally start raising capital from institutional investors (venture capitalists). I will acknowledge this is an oversimplification, and sometimes you will see startups using financing methods like loans, but it happens far less often than with lifestyle businesses.
In 2001, when I started in tech, people were far more likely to use startup, specifically when talking about a venture-backable company, than they are now. They drew this distinction so that everyone involved understood what they were building and how they were building and financing it.
Over time, people began to apply the term to any new business. This resulted in more people building lifestyle businesses and attempting to raise venture capital because they didn’t understand the difference.
What you need to know: There is no right or wrong between the different types of businesses, and one isn’t better than the other. Whether you build a startup or lifestyle business is based on your goals. The wrong decision is to try to build a company that doesn’t fit your goals, skillset, or experience. But, if you are building a startup, you need to build something that has the potential to achieve scale and massive value quickly, and you need to be able to prove that to investors.
With these definitions, you can determine whether approaching a VC firm is right for your business, regardless of what you want to call it.
Best of luck, and I look forward to seeing what you build!