Does your new business come under a start-up? When is your business no longer a start-up? The feedback would vary from person to person.
Defining what a small business is could be tricky. According to the United States Small Business Administration, a small business can be said to be defined based on size for federal contracting purposes, of which, this definition still varies from one sector to another.
It’s even difficult to get a consistent definition of start-ups which is a subset of small business. However, there are two approaches to arriving at a concise definition. These are; duration in business and approach to business.
Duration In Business
Businesses are being considered as start-ups in their first few years, even if there is no unique product, business model, or any service insight. The risk at this level is real, here, they take a risk that their investment won’t grow to make them have a feeling that they are creating a start-up, even if the business is termed as a small business.
One demerit with this approach is that there is no clear distinction between the time the business moves from a start-up to becoming a small business. Besides, can one say it is when it breaks even or after surviving the first or second-year mark?
Approach To Business
Start-ups are usually used for new businesses aiming at offering a truly unique product or something to catch an industry by storm. Also, a start-up is used for risky business that has high growth potential. For example, several tech businesses refer to themselves as start-ups at their initial phase. However, this term is not only applicable to businesses in the tech sector.
The originator of the Lean Start-up methodology, Eric Ries defines a start-up as a human institution created to formulate new service business or product under extreme conditions of uncertainty.
Also, Ries added that establishing a new business that is patterned alongside an existing business in terms of pricing, customers, products, and business model may be an attractive business investment. However, this is not a start-up because its success is largely on how the business is run.
One major drawback of this approach is that there is no uniqueness in this business model. A report from Congressional Research Service says that start-ups create several new jobs but a limited impact on net job creation over a while since only a few of them survive the first five years after their establishment.
Therefore, there is no universally accepted definition for start-ups but both approaches discussed above have something in common. The creator of the business sees the business has been in its early and that it still has a significant role to achieve before attaining its potential.
Financing A Start-up
Business owners are always interested in knowing how and where to access funds for their start-ups. Businesses that are 2 years and below are often considered as start-ups by traditional lenders like credit unions and banks, so, they may be unwilling to release loans to them, and as a result, these businesses find it difficult to access loans and other forms of financing.
Besides, these firms may look up to online lenders, microloans, or even personal loans to get the necessary funding required. So, a strong personal credit score or revenue would determine the ease of accessing funding.
However, business owners who refer to themselves as start-ups may seek alternative sources of financing like venture capital, angel funding, crowdfunding, or even private investors. Here, the emphasis is not placed on credit scores or revenue but they are seen as offering a significant financial avenue to business owners.
The business owners must however be able to convince the investors of their success even in the face of risks.
When Is Your Business No Longer A Start-up
When is your business no longer a start-up? Several factors clearly define your business as no longer at the start-up level. Some of these indicators are;
Its level of profitability – Several of the businesses that do not employ from outside are either not making profits or breaking even.
If it has survived the first year – A report from the United States of America Small Business Administration states that one out of five businesses in the US does not make it past the first year and thereby, accounting for about 78.6%. So, the SBA in most cases refers to a start-up as a firm that is not up to a year in business.
Hiring employees – Your business is no longer a start-up if it hires people from outside to work for it. Over 80% of small businesses in the United States of America do not hire any employee outside the owner.
No one single indicator listed above shows that your business has left the start-up point but when a business fulfills two or more of these indicators, it has a higher success ratio.
Start-up Vs Growth
Growth is a determining factor when defining a start-up. The founder of Y Combinator, Paul Graham defines a start-up as a company established to grow fast. He said though many new businesses spring up yearly several of them do not qualify as start-ups. These firms focus on growth and this can only be achieved if the company produces what many people want and if the company reaches and serves all these people.
Also, a start-up can be used for a business that is tech-oriented with high growth potential. The initial struggle for start-ups especially regarding financing makes them unique because potential investors are in search of investment that would give a high return on investment (ROI) while keeping a tab on the risk.
Many people have tried to define what a start-up is regarding the number of employees, available funding, profit, or even revenue generated. However, Alex Wilhelm, TechCrunch writer, sets his 50-100-500 rule. According to him, any firm that meets any of the criteria is no longer a start-up;
- Generate $50 million revenue run rate
- Employs 100 or more employees
- It’s worth over $500 million
The setback with this rule is that the figures used are a bit arbitrary. For instance, Adam D’Augello, venture capitalist, puts the employee limit at 50 for a start-up. So, it is difficult accepting a particular number as the right one to use.