When Is a Startup No Longer a Startup?
The main difference between a startup and a small business is that a startup is considered by many to be a stage of a business that is poised to outgrow that title. But, what is the standard of measurement that dictates when a startup is no longer considered a startup? Unfortunately, there isn’t one.
Perhaps the biggest roadblock to establishing a metric defining when a startup is no longer considered a startup is that the definition of a startup is still considered unresolved by many. The Merriam-Webster dictionary definition of startup (or “start-up”) is “a fledgling business enterprise.” However, even this definition is disputed by experts and commentators across startup sectors.
Startups, by their nature, are ever-evolving entities. Thus, it is especially difficult to define what a startup is and defining what is no longer a startup. However, there are some clues that help decipher whether a startup has outgrown its title and graduated into a new business stage.
These are some of the factors that can affect whether a startup is considered a startup:
Profitability and Revenue
It is often argued that profitability is a major factor in whether or not a startup should still be considered such. The 50-100-500 rule developed by Alex Wilhelm, writer for TechCrunch, supports this theory.
The 50-100-500 rule dictates that if your company has or is any of the following, it is no longer considered a startup:
- $50 million revenue run rate (forward 12 months)
- 100 or more employees
- Worth more than $500 million, on paper or otherwise.
This is a useful standard of measurement for many startup companies because once a startup company reaches a certain level of stable profit or revenue, the company feasibly would have passed what most would consider early growth stages. However, this rule doesn’t apply to all startups — specifically startups that experience immediate, high growth sooner than 12 months. So, while it is helpful to many, it doesn’t paint a full picture of what a company past the startup stage should look like.
While the definition of a startup is still highly disputed, many agree that startups are designed for growth or scalability. Paul Graham, founder of Y Combinator, states on his website that “The only essential thing is growth. Everything else we associate with startups follows from growth.” Growth may be an agreed-upon trait of a startup company, but it is also a possible factor for defining when a company graduates from being a startup.
However, like the many other aspects of startups, growth is not necessarily a tangible metric, and while growth can help define many startups’ transitions into a more long-term business model, it doesn’t apply to all startup companies.
One of the hallmarks of a startup is creating a product or service that offers a solution to a problem. The company then works to generate a large market for that product or service. This is very different from a small business such as a grocery store or florist that has an established market. During the startup stage, entrepreneurs are working towards securing or generating a wholly new market.
If a market isn’t attained as quickly as needed to sustain the business, startup entrepreneurs pivot their business model to meet consumer demands. As serial entrepreneur Steve Blank states in his What’s a Startup guide, “Your startup is essentially an organization built to search for a repeatable and scalable business model.” Meaning, regardless of whether the entrepreneur loves their original startup idea or not, the work isn’t done until a market is established.
Once their product has been finalized and the market for it established, it is possible the company will transition out of the startup stage. As with profitability, revenue, and growth, finding an adequate market does not necessarily mean a startup has moved out of the early growth stage.
In the initial stages of startup ownership, the mindset is strongly focused on growth, industry disruption, and scalability. With 90% of startups failing, entrepreneurs need a startup mindset in order for their company to survive. However, once the startup has outgrown the early stages and no longer requires the same laser focus on growth, it may be time to phase out the startup state of mind and start looking toward the long-term success of the business in a more tangible way.
There is no linear pathway from startup to established enterprise as startups continue to break the mold of what is expected to create even more successful, profitable companies. A few indicators of a company no longer being in the startup stage could be profitability and revenue, growth, market, and mindset. However, every startup company and founder is different which means the decision of whether your startup is still a startup depends entirely on your unique business model.