What is a startup?

This question is something that should be paid more attention than it is. Many "well-informed" people believe that startup is a blanket term that can be applied to any new business venture that starts out small. Does this mean that old businesses can never be called startups? Does this mean that a venture that starts out relatively larger than others is also not a startup?

The answer here, I think, is a resounding NO. The word startup should be used only to define companies of a specific kind, the kind that are born with the aim of becoming behemoths in their respective fields of operation. It is important to note that not all business owners want to make their businesses large. They may be happy deriving sustenance from their venture and enjoying life. Similarly, not all new businesses are capable of becoming really large players in their sectors. In order to become large businesses, they must satisfy two crucial criteria:

• Large Market:
  • Solve a problem that a lot of people face
  • Solve a problem that a few wealthy people face
• Scalable Solution:
• The solution solves the problem for all persons affected

These conditions are necessary, but not sufficient, for startups to become large businesses. There are so many other factors that can affect the success of a startup, such as competition, regulatory landscape, willingness to pay, etc. And this is exactly why 97% of all startups fail within 3 years. But the defining characteristic still remains the same - scope of growth in a large market.

In order to drive the point home, let's compare a mom-n-pop store and an e-commerce website such as Amazon. The mom-n-pop store sells supplies that almost everyone in the world wants, but they're limited by their physical presence. They can only hope to service a minuscule fraction of the total demand because customers will not drive long distances to buy toothpaste. So, their market is large, but their solution isn't scalable. Amazon, on the other hand, sells everything that a mom-n-pop store does, and then some, and it also has a distribution channel that can reach fairly remote areas of the world. That's why Amazon is a startup, and your mom-n-pop store is not. If the mom-n-pop store start selling on Amazon, or create their own website and build out their logistics to cater to a large audience, you could call it a startup then.

An example I often like to quote on the transformation of a traditional business into a startup is B&H Photo Video. It's an electronics store located in New York City. The store has been in operation since 1973, but is located only at a singe place. They've maintained an online presence since 2000, and that's when they became a startup.

Let's take a look at Walmart. Walmart is a large retail chain which has a presence in most US states, and sells an assortment of products to its customers. So, they do serve a large percentage of a large market. Is Walmart a startup? The short answer is NO. However, the long answer would be that Walmart was a startup in 1962, and since the internet wasn't invented until then, their choice of distribution channel was to build physical stores everywhere. An audacious and slow prospect, but probably the only way to do it for their time.

In 2000, when walmart.com was started, the traditional business was already too large to qualify as a startup. However, in the larger context of being a startup within a business, the e-commerce arm of the retail giant could have certainly made the cut.