You’re starting a business. Does that mean it’s a startup? And when is it no longer a startup? The answer will often depend on whom you ask.
Defining a small business can be tricky. The U.S. Small Business Administration defines small businesses based on size for federal contracting purposes, and even then, it varies by industry.
But when it comes to startups—a subset of small business—it’s even harder to pin down a consistent definition. There are a couple of common approaches to defining a startup and they usually fall into one of two categories:
- Approach to business
- Time in business
Approach to Business
The word “startup” is often associated with new businesses that aim to disrupt an industry or offer a truly unique product. In addition, the term is often associated with risky businesses with a potential for high growth. Many tech companies consider themselves startups in the early days, but the term isn’t limited exclusively to businesses in the high tech space.
Eric Ries, the creator of the Lean Startup methodology defines it this way: “A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.” He goes on to add, “To open up a new business that is an exact clone of an existing business, all the way down to the business model, pricing, target customer, and specific product may, under many circumstances, be an attractive economic investment. But it is not a startup, because its success depends only on decent execution—so much so that this success can be modeled with high accuracy.”
One problem with this approach is that there is no single definition of what makes a business truly unique. And the reality is that most small businesses are risky, especially in the early years. According to the Congressional Research Service, “business startups create many new jobs, but have a more limited effect on net job creation over time because fewer than half of all startups remain in business after five years.”
Time in Business
Many business owners often consider their business’s startups in the first few years, even if they don’t have a truly unique product, service, or business model. For them, the risk is real. They are taking a risk that their venture won’t pan out at all, and that makes them feel like they are creating a startup, even if someone else would view it as just another small business.
One problem with this approach is that it isn’t always clear when the business moves from startup to small business. Is it when it achieves profitability? Or when it survives the one or two year mark?
Ultimately, there is no official definition of a startup that everyone agrees upon. Both of these approaches, however, have one thing in common: the business owner considers the business in its early stages, and it still has a significant way to go before reaching its potential.
Financing a Startup to the Next Stage
Entrepreneurs often want to know where and how to get financing or funding for their startup.
If you’re defining your business as a young business, understand that traditional lenders, such as banks or credit unions, often consider businesses that have been in business for two years or less to be startups. They may be hesitant to make loans to these young businesses, and as a result these firms have a hard time getting loans and other forms of financing.
Instead, these young businesses may need to consider online lenders, microloans, or even personal loans to get the financing they need. Strong revenues and/or strong personal credit scores will often be key to finding financing.
On the other hand, business owners who define their ventures as startups by their approach to business may find more success looking for alternative sources of funding. Crowdfunding, angel funding, venture capital, or private investors may be a better bet. These types of funding are not as dependent on credit scores or revenues, Instead they are viewed as providing significant financial opportunity for investors. The business owner must persuade investors that they are likely to succeed even in the face of significant risk.
No Longer a Startup
How can you determine, then whether your small business is no longer a startup? There are a couple of indications that your business can move beyond the startup label:
- It has survived its first year. According to the SBA, an average of one out of five businesses (78.6%) does not make it that far. In at least one instance, the SBA defines a startup as a business that is less than one year old.
- It is profitable. Among non-employer firms (those with no outside employees), the majority are either unprofitable or breaking even.
- It is hiring employees. Eighty percent of small businesses in America have no employees beyond the owner.
None of these alone indicate a business is no longer a startup, but when a business achieves at least a couple of these milestones, it likely has a better chance of success.