The term “startup” was originally coined in the early tech revolution in 1970s, referring to a new breed of small companies with astonishing growth potential. However, startup became a popular term in the 1990s and early 2000s business boom with brands like Microsoft or Apple scaling up at a faster pace than ever seen before. Below is a great illustration on just how fast brands like Google or Amazon scaled up compared to their competitors:
Despite of the relatively clear etymology of the term, there has never been a real consensus on how to define a startup. The first startup definitions stem from the first Venture Capitalists’ criteria to identify the companies with the best potential for the investor. Whereas now the search for the ultimate definition of “a good startup” is joined by accelerators, corporations and academia – all with their own viewpoints.
In this blog post we’re first breaking down the most commonly held key characteristics of a startup. (This is the stuff you’ll want to reference in your pitches and publications.) Second, we’re revealing the very definition we use to decide who gets to join the Hub and who does not. So, if you are thinking of joining, scroll down here for the tick boxes.
5 Key Characteristics of a Startup
1) Startups focus on growth
Startups are not like any other small companies in one crucial aspect: it is not enough for a startup to stay stagnant and generate steady income. Instead startup founders and teams aim for one thing, and one thing only: growth.
A startup is by definition a company that is designed to grow. However, what growth is and how it looks like depends on the phase the startup is at in the Startup Financing Cycle. In the first phases startups often lose money while growing their customer base, team and/or valuation, whereas in the later stages after breaking even growing revenue is the key.
A typical growth journey for a startup includes 4 main steps:
- At the beginning startups rely on initial capital acquired through for instance accelerators, crowdfunding, angel investors or even friends & family. In this initial phase, the startup is using the capital to build a sufficient product and hire a team to generate revenue.
- After investment, most startups hit the so-called Valley of Death. They are not making enough money to return the initial capital investment. In example Uber is still in this phase; it’s still growing but the company costs are far greater than its current revenue. Therefore Uber’s projected breakeven point is in 2021.
- Ideally, at some point the startup has generated enough revenue to return the initial investment and can shift their sights from generating “enough money to pay back” to “more money we could’ve ever think off”. At this phase, most startups foster increased pace of growth through strategic alliances, acquisitions or additional funding through Venture Capital or Crowdsourcing.
- Once a startup is on a solid growth trajectory, it will consider opening the company to the public with pre-IPO’s, IPO’s and further, secondary offerings.
2) Startup consists of more than 1 person
Let’s start with the obvious: you need a team to call your business “a startup”. As Startup Commons put it quite beautifully, “Entrepreneur is an individual, startup is an entrepreneurial team.” Moreover,according to the CB insights, the 3rd cited reason startups fail is that they did not hire right. You can start a business alone, but to grow you will need the right people on board – be them employees, freelancers or co-founders.
3) Startups cannot consist of more than 500 people
The true size of a startup team is a little more ambiguous: do you stop being a startup the moment your employee count exceeds 30? Or is 50 where to draw the line? To draw the line on 500, we’ve benchmarked Alex Wilhelm’s famous calculations. He argues for the cap of 500 based on Crunchbase’s publication from 2016 that most unicorns with $1 million to $2.5 billion valuations employ approximately 600 people. At the Hub some of the big players, yet still well below 500 employees, including for instance Labster (100+ hired), Naava (50+ hired) and Pleo (100+ hired).
4) Startups work with technology
Returning to the introduction of this blog post, the term startup itself was coined in the midst of end of century technological revolution. Today it is true that startups still tend to work with software. But more and more startup businesses also focus on solutions that have seemingly nothing or very little to do with technology.
These relatively “low-tech” startups are often next generation impact startups: for instance Planet Nusa that transforms fish nets into beautiful sportsware or Entis that introduced crickets into the Nordic food scene. Neither of these startups work directly in creating technological solutions – but definitely depend on newly emergent technologies to bring their concepts to life. Therefore it can be said that startups do work with tech, even though the product might not be technical in itself.
5) Startups are innovative
The basic rule of thumb is: Startups find new, scalable solutions to known problems. Be it a completely new product, service in a new place, monetization in a new form, or delivery in a new way, innovation in one of its forms is the key to startup success. So far we’ve seen at the Hub for instance startups creating plastic-like packaging out of wood, adding sensors to gym equipment to track your progress or even brining the first generation of drone deliveries to Denmark. Does not get more innovative than that
The Hub Startup Definition
At the Hub, we have our own criteria for screening the companies wanting to join the platform. This criteria is centered around 3 core themes: commitment, scalability & innovation
*This is the revised criteria updated 08/2019. . Exceptions to these guidelines can be made if other crucial conditions are met.
The company needs to exist as more than an idea, as a legally registered company. Therefore we expect the startups joining our platform to have:
- An organisational number: as proof of company registration
(in Sweden, a personal ID is enough)
- Registered company in each country they are applying in.
- A website as digital footprint for talent and investors to look up.
The company needs to showcase ambitions and abilities for growth. Therefore we accept companies that are:
- Likely to recruit: as opposed to one-person initiatives who are not likely to recruit.
- Likely to look for funding at some point: likely to scale 10x via external funding as originally planned by VCs when introducing the term in the 1970s.
New Innovations & Tech
As established in the prior, startups are usually new in the market and make use of technology:
- No more than 10 years of age: Startups are businesses at the beginning of their life.
- Showcase tech and/or innovation element: As discussed in key characteristics, not all startups have tech at their core. Examples of none-tech heavy startups who are welcome to join: Design, Consumer Goods, E-commerce and Digital Market Places with proven track records as well as scaleable impact startups.
As established in this blog post, startup definitions tend to be subjective and relative by nature: There is no one, objective fit to define for all.
It is, however, crucial for you and your startup to identify what is your innovative solution or your startup life cycle story and capitalize on it. There is a reason why pitch decks tend to have a format covering everything from the problem to the solution to the team composition – these topics are, after all, the things that help any investor to identify “a good startup”.