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It’s a short word packed with a ton of meaning. But what exactly is a startup? Like so many things in business, there’s no simple definition—nor lots of agreement.
For some, a startup is any business enterprise in its first five years. But for many others, it’s a young, innovative company aimed at disrupting established markets or creating entirely new ones. (Think the early days of Uber, Airbnb and Netflix.) And for yet others, it’s a great business idea being tested in the real world, with low odds of surviving even a few years.
In short, it’s all about coming up with something new in the hopes that customers, investors, banks, vendors and regulators will love it. And often, that means doing the hard work on a shoestring in the very early stages.
“It’s where you’re literally creating everything from the ground up,” said Matt Neff, who has created three startups in Indianapolis and has more than 35 years of experience as an entrepreneur and venture investor. “You’re buying the server. You’re creating the stationery. You’re setting up the accounts. You’re getting the telephones.”
According to Britannica Money, a startup is a business at the initial stages of its life, typically characterized by an innovative stance, a potential for rapid growth and external funding. Startups can appear in virtually any industry, and many seek to establish a repeatable and scalable model that addresses a particular gap in an existing market or creates a new one.
That usually means a company less than 5 years old with just a handful of employees and few if any products on the market. Funding is often modest and in the form of money from friends, family, grants and bank loans.
But startups in more regulated sectors, such as medical devices or utilities, will work many more years and will need to build a significant workforce before launching products and seeing a steady stream of revenue.
“You could see a company that is 10 years old, and you could still consider it a startup,” said Jason Davidson, assistant professor of management information systems at Butler University and a faculty member in the Entrepreneurship and Business Technology Department in Butler’s Lacy School of Business.
Across the business world, startups often have little in common. A young biotech company developing an artificial kidney, for example, bears almost no resemblance to a fledgling firm developing human resources tools. Both are trying to provide something new and valuable, but in terms of capital needed and regulatory hoops to jump through, it’s clear which has a longer time horizon and larger financial challenges ahead.
By the same token, some types of startups with minimal overhead and strong digital components can scale up quickly (Facebook, Uber and Google, for example), while other types with high overhead (automakers and drugmakers) tend to scale up more slowly.
Even seasoned entrepreneurs and business executives have different takes about exactly what constitutes a startup—or at least a successful one.
Sam Walton, founder of Walmart, defined a startup as a small business focused on efficiency, competitive prices and customer service. Jeff Bezos, founder of Amazon, said a startup is marked by innovation and customer satisfaction. Bill Gates, co-founder of Microsoft, said a startup is a new enterprise that tries to stand out by offering something distinct and is often agile and adaptable.
Even beyond that, some people use the word “startup” to mean less of a business phase and more of a mindset—fresh thinking, flat bureaucracy, constant reinventing—that even Fortune 500 companies strive to use.
“It’s all about putting yourself in a place where you can incubate ideas and actually allow a new idea to get to market,” said Vince Bertram, assistant professor in the University of Indianapolis’ School of Business.
One of the most prolific places to find startups in Indiana is in university laboratories and research centers. There, scientists and other innovators often spend years researching new products, technologies and devices. But would you call those research efforts startups? In many cases, those researchers lack seasoned business managers who can help them raise funds and identify market opportunities. It might be more accurate to call them “startup wannabes.”
At BioCrossroads, a nonprofit that has helped more than 500 life sciences startups and raised more than $600 million in market capital, officials consider a new technology just the beginning. To succeed, companies need several more key ingredients, said Emily Atkinson, the organization’s senior director of innovation.
“I would say a startup is a young company with a very promising, unique idea with the right team and the right capital to support it through important milestones,” said Atkinson, who holds a doctorate in anatomy and cell biology and formerly worked as a venture analyst for Indiana University Ventures.
An early-stage startup might have a proof-of-concept study done in an animal model, for example. But it might not have a CEO with business development experience.
“Typically, the chief scientific officer is a professor; that’s their day job,” Atkinson said. “The startup is not their day job. And so we’re wanting a dedicated team member that can help scale the business, go raise venture capital, things like that.”
Life sciences startups typically have one of the lowest success rates in the business world, she said. So high are the costs and the years of testing required that only about 1% of them will actually get a medical device or drug product to market.
Some fledgling companies, of course, do succeed and at some point are no longer considered startups. Some signs a company has reached that step include rapid expansion and acquisition, stable and predictable revenue, or growing profits. Or the company has filed to go public.
“Some leaders are eager to portray their companies as established, even when reality suggests otherwise,” Sean Peek, a senior analyst at Business.com, wrote last year.
He said companies should still consider themselves to be in startup territory if they are still testing markets, working on branding details and hiring integral employees.
But big or small, brand-new or a decade old, a startup is, by definition, a tough proposition—one of the hardest things to do successfully, veterans say.
“You’re essentially trying to disrupt someone’s existing business plan, and they’re not going to help you,” Neff said. “They’re going to throw up every barrier they can think of to stop you. It takes a lot of work and determination to keep going in the face of that.”•
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