Vijay Anand | The Startup Guy.

If You are a Startup, Who’s That?

Posted on: March 23, 2008

I figure that in an ecosystem, there are three types of corporations – according to scale. There are the startups, there are the SMEs and then there are the Multi-National Corporations. There are also the government bodies, but let’s stick to the private sector and these are the three categories we have. Each of them are categorized into their respective slot because of their size, their headcount, the revenue they generate and the size of the market they possess.

It’s quite important to remember the revenue and market size, because technically a product-centric company is much smaller in size compared to its service-centric counterpart. I’d guesstimate the headcount to be roughly 1/10th of a service-focused company (although initially the core team would more or less be the same), and the revenue and the market they possess will be what will propel them into the big league (graduating them to the next step). Case in Point: Skype was a less than 30 people team (27 if I am correct) till they had 6 million users and a year before they were acquired. Another example would be the team behind Craigslist. I have written about this before, so will stay away from it for now.

Coming back to the question, this is my dilemma. I have someone who is a two member team, bootstrapping and whipping out a prototype and calling themselves a startup. Then I have a seven year old company with 24 clients, about 250,000$ in annual revenue and about 30 employees calling themselves a startup. Do you see the problem here?

To start with I am terribly confused and my only reaction is a prolonged “Okayyy.” The second issue is in the definition. It’s almost the same reaction I’d give if a grown up shows up in pampers and claims to be five years old. Yep, you get the idea.

Lets start from the beginning. A Startup usually has three different phases.

There is the ideation phase, where you conceptualize something based on the market assessment, need and demand, and put down a concept note. Phase one is over.

The second phase is the validation phase, where you build a prototype and throw it out into the open and see how people react. You might do the pilot run within a few circles of “beta testers”, get their feedback, incorporate it and voila the first prototype is done. If you can get a trial customer onboard during this phase, there’s nothing like it and its much recommended. With that, phase two is out of the window. This is the time to start working on a business plan, but I would assume that this would have no costings regarding scalability it, since you wouldn’t honestly know. Start with the costing of a pilot and use the “concept note” as the first draft to work from.

Phase three is the market traction stage where you want to go out, and cash-in on that demand that you assessed in step one. If your second phase was taking too long, there is a good chance that this window had already closed. In that case, its gonna be too bad for you, because you “might” have to go back to the drawing board. The other option is to call it quits because you cant even think of a need/demand which exists long enough for it to get developed, let alone holding the market position for long. But yep, the sensible option is to go back to the drawing board and think of a pain point that is going to be there for some more time.

Assume you cross that step, you move into the market traction stage, get clients, grow your business, incentivize your team properly, bring up your company and team out of “bootstrapping” mode, and start plotting your roadmap towards scalability. This is where your business plan gets complete – I mean the business plan which actually reflects what your company does. After that is done, is when you sit down with a Venture Capitalist. Until such time, you have no business wasting his/her time. Quite frankly, its too early to be wasting anybody’s time.

Who are they?
The three phases of a startup can and should be covered in 18 months. Unless you are a company that is doing something which is as disruptive as the Nokia Morph, you are out of excuses here. In 18 months just about anyone can tell you whether this is going somewhere or not. If it has taken longer than that and you are playing a serious game of Khokho between the poles of the last two phases, it is a possibility that you might not make it and it might be better to call it quits and start again. Just a thought that you might want to keep in mind.

The Stages of a Startup

Why Now?
Now why am I stirring up this issue when the whole world ..er country seems to be okay with it. The issue is that depending on which stage you are in, the needs of the company varies. The kind of ecosystem that the team needs around it are very different and when everyone calls themselves a startup, it becomes a nightmare to plan and co-ordinate. Let me give you an example. The very case of our Startup Talent Program. Depending on which phase of the startup you are at, the needs vary. If its for the concept stage or for the prototype stage, you need thinkers and hands on programmers who can really push the limits of things. You certainly don’t want freshers in the camp then. But when you are scaling out and customer care and bug-fixing and issues start coming up, then the team that you get in could be managed with a smart candidate who can be quickly trained on the job. I am sure you see the difference. The same goes for the mentors, the auditors, the accountants, the lawyers, and for every element of the team as to how they need to step up.

The Rules of the Game:
With this in mind, here are some hints to figure out your positioning:

  • If you are more than 18-24 months old, I am sorry, but you are not a startup anymore. You are either an SME (Small and Medium Enterprise) or you are a startup on its deathbed. I hope its the former.
  • If you have received funding, you are not a startup anymore. You are poised and set for growth, and thats the mandate and lifeblood of the SME crowd. Go live up to your calling!
  • If you are breaking even, have clients, and have atleast one product out in the market, you are not a startup anymore. You are an SME. Figure out how to diversify and sink your nails deeper into that market and this is the ideal time to bring in strategic advisors.
  • If you have started to define your roles by using all the corporate titles like CEO, CFO, COO, CTO etc, then there’s a good chance that you are already an SME. If you aren’t chuck those fancy titles out of the window and get back to work. It’s enough to know what you are responsible for when you are a startup. Defer your pleasures for when it comes with the monetary returns.
  • If you have atleast one additional member join the senior management team, to get structure in place and to grow the company. Yep, you are definitely out of the Startup phase and out into the SME phase.

It is very important to do this self-assessment, because I am coming across a lot of companies that are sorta in a rut. And that sensation takes over only when you don’t know where you belong. It’s nice to be an SME and still stick around with the startup crowd and feel happy about your performance, because you are quite honestly competing with kid who barely knows how to walk, when you should be racing with cheetahs. Going back to the rule of Alcoholics Anonymous, the first step to recovery is to acknowledge it, and it all begins with the thought of “Who you are, Where you are and where you need to be right now?”

So tell me, What are you? A startup or an SME? Drop me a note if you need help figuring that out.

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Coming Up Next:

Startup Plan
How do you plan your strategy and roadmap depending on the potential and exit options of your startup?

Credit: Startup Cycle from BeyondVC

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8 Responses to "If You are a Startup, Who’s That?"

I think startups get labeled by perception. So I say they elude a precise definition. What looks like an early stage startup to a VC could be a full blown company for the founder or vice versa. VC having seen more mature ventures, uses a relative, stage/revenue based, slotting criteria. For the founder, it is the aggregation – of the risks he took, sacrifices he made and the quantum of effort that had gone in to get this far – that weighs in as a metric.

Does a label really matter? Look at this contrast. Facebook loses a million $$ a day, but is valued at $15 billion (Microsoft paid $240 MM for a 1.6% stake). Wipro is valued at just under $14 billion even as it earns $840 MM a year. How do you label these? Is Facebook a startup just because it has negative cash flows while boasting of 60 million users? Then Wipro should be a “micro something” because it is valued a tad lower and has just a few hundred customers! What matters in the end is earnings and cash flows – but that went for a toss here! Conclusion : Labels hardly matter.

Now take those startup examples you gave (a) two member bootstrapping team hacking away at a prototype and (b) the seven year old, 24 member strong team with $250 K in revenues – both labeling themselves as startups. Here maturity levels get assessed by whether they aim too high or too low, than by vintage. Each feel they’ve a long way to go. The former feels that because he is still scraping alpha; the latter feels so perhaps because he aims still higher – in seven years he just has managed $250 K in revenue while Google notched up $ 1 billion in as many years.

We can’t obviously dictate the club to which they go.

I dont agree that facebook is really worth 15billion$. The dollar itself is falling, so $15bn probably means a lot more now as well, but i dont think Microsoft’s valuation was built on market value. It was built on opportunity and it justifies their take.

Google is an anomaly. It will probably be another decade before we see another such company.

Do we really want to measure everyday things to anomalies?

I had already written on facebook and their ridiculous valuation before at https://vijaysblog.wordpress.com/2007/10/27/the-hoopla-on-facebooks-valuation/

Just wondering…rather than a ‘prolonged Okayyy’, wouldn’t it serve them better, if you directly tell them what they are really are. Using your AA example, an alcoholic doesn’t really understand he is an alcoholic until people around him tell him he needs help.

Santosh,

Oh before the meeting is over, I make sure that I tell them. That’s just how it starts.

Vijay,

That is well written and a timely article for us. We are actually 7 years old but have reinvented ourselves 2 years ago and hence we are a re born or re generated start up. But you are right, as founders we have operated in a start up mode thus far but are moving out of that mode into SME and hopefully bigger.

Madhu,

Actually you are not reborn, you are just going through the normal cycle of a company and are just doing it right. If you look at the sketch drawing that I had put in the end as an intro to an upcoming post, you’ll see that every startup will enjoy its burst in growth, slowdown and re-emerge. You are in that re-emerging phase. Good luck with everything Madhu.

thanks dear, great post

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