What is a startup? Esther Gons from the Dutch Startup Studio NEXT.Amsterdam wondered how easily Austrians use the term “startup” for every kind of new business. In this guest article, she explains how NEXT.amsterdam defines a startup and why it is important to use this term precisely.
Startups are everywhere, they are disrupting, new, fast and moving quickly. Rapid technological development and digitalisation have changed the world we operate in. ‘The global reset’ I often call it. Tech startups have seized the opportunity due to lower barriers to entry and started to look for ways to help people in this new world. Changing the business models of long existing companies along with it. Both corporates and investors have taken an interest in this development and are looking for ways to profit from it.
What is a Startup?
As a seasoned startup mentor and investor, who is also helping corporates with innovation within their company, I have seen all sides of the coin. With the sudden interest in startups and innovation, the core importance of why the term startup is there in the first place is often overlooked. When I ask people: “Do you know what a startup is?” – the answers vary from ‘a young business’, ‘a business under 5 years old’ to ‘a business that does tech’ or is ‘doing something new’. Now, when Steve Blank first wrote about startups he described it as follows:
A startup is a temporary organisation designed to search for a repeatable and scalable business model.
Although both repeatable and scalable are important elements of this definition, the most important part here is the word search.
Startups are actively searching for a business model that works. Everything they do is focused on that specific goal. This precisely is why they are different from a starting business, even if that business includes software. A starting business, say a new hair salon, has a proven business model. This means that you have to invest in execution on that proven model in order to grow profits. In the lean startup methodology, there is a clear distinction between the search phase and the scale phase. Only when a startup has found a business model that it has proven to work, the startup is ready to scale. The uncertainty in the searching phase is also the reason why the lean startup methodology came into being in the first place.
The first step
While startups are searching, and starting businesses are getting ready to execute on scaling, corporates are very effectively executing on their core business. They have taken scaling and optimized on this. All of their core mechanics and processes are optimized on executing towards growth. So much so that it is not always obvious anymore. For such a company it is much harder to do innovation from within. What do you do with a new product that has been invented outside if all you have to judge is success by its ROI? How do you keep track of a new innovation if you ask them to predict the next 5 years in a business plan? A startup cannot come up with these predictions since it doesn’t really know yet. How to accommodate searching with all of the existing execute governance? The first step towards being able to innovate is to understand this difference between searching and executing. Because the biggest risk of failure for startups in a corporate environment is premature scaling.
As an investor or a corporate innovator investing in new projects, it is important to realize that this difference in mechanics will also need a different approach and a different process of reviewing progress. Understanding the difference between a startup and a starting business is an important one. It will help both the portfolio and the way you can add value to a startup. Searching requires a rhythm of creating, testing and learning. It needs to invest in proving their value to their customers. Before the startup has proven that it is ready to scale, there is no point in investing in marketing and sales or push for ROI. Investing in a startup before the scale phase needs a different approach and involves a much higher risk than investing when a startup has moved from the search to the scale phase and is thus ready to execute on growth.
Esther Gons is the co-author of the book The Corporate Startup; how established companies can build successful innovation ecosystems and founder of the startup studio NEXT.amsterdam. NEXT.Amsterdam invests in and supports startups by providing dedicated mentor teams and a structured framework in their search for a working business model. Additionally, she is an innovation strategist, visual changemaker, international speaker, and has 20 years of experience as an entrepreneur and helped over 100 startups so far.