A Startup or Not A Startup: That is the Question
I noticed the term “Startup” gets thrown around too loosely these days. It’s hip to be working for a startup company, especially in tech. Consequently, this use of the word has been overloaded to encapsulate as many companies as possible so they all can feel included in this “cool kids club".
The Cool Kids Club
While it’s fun to take a cynical perspective on the topic, it’s probably more productive to take a pragmatic approach. The reason why the cool kids club may have too many members I propose, is because it’s very easy to define when a company is a startup, but very difficult to define when they are one no more. So it’s possible a company may simply just not realize they are no longer a startup and should stop calling themselves one and recognize it’s time to now get up and go over to sit at the adult's table.
Think about it.
No one would dispute a company incorporated for 3 months with two employees would be called a startup. But, is a company with two employees that has been in business for 5 years still a startup? Both only have two employees.
A company with 15 employees, $300k of annual revenue, and $200k of expenses is considered a startup. But, is a company with 15 employees, $20M of annual revenue, and $19M of expenses still a startup? Both are only generating only $100k in annual gross profit.
Doing My Homework
I recently had the privilege of being brought on as an advisor to work with the MAKE IT IN LA initiative out of LA Mayor Eric Garcetti’s office. The initiative's Chief Instigator, Z Holly, wanted to learn how contract manufacturers in LA were engaging with startups. Was this a healthy relationship in a burgeoning industry, or were there frictions in place that stifled the potential market? What resources do we need to put in place to ensure that startup customers and LA manufacturers can find each other and work together?
To answer these questions, I reached out to a wide variety of manufacturers in the Greater LA area across several industries: Textiles, Apparel, Food, Aerospace, Electronics, and Machining. I put together a list of questions to ask, then called the CEO’s or COO’s of a sample set of manufacturers in LA to interview them about their experiences and perspectives on the subject.
Part way through my first phone interview, I realized that the terms I used for my prior work in electronics manufacturing may not be the same as those used in apparel or food manufacturing. So, I took advantage of this opportunity and listed a few common industry terms and asked each person I interviewed to define, in their own words, what the term meant to them or how it was used in their industry.
Definition: startup [stahrt-uhp] (noun)
Because the study was specific to startups in manufacturing, the first word I asked them to define was “Startup”. What is a startup company? For the most part I received similar definitions across all industries. But, where I noticed the most discrepancy and variance in responses was to the question: “When is a company no longer a startup?”. This stumped a few people as they seemed to never have thought to ask this question.
In several cases, the interviewee used revenue milestones to mark the delineation - which make sense. However, I noticed the magnitude of this dollar amount varied greatly across industries. I heard revenue watermarks anywhere from $200k ARR to $1.5M ARR.
Similarly, some people used time as the demarcation, but again the range varied by quite a bit. Some said a company is no longer a startup after they have been in business for 18 months, others said 5 years.
The only consistent answer I heard across interviewees and industries was about stability. Most people said a company is no longer a startup (regardless of revenue or time in business) once their product is stable and they are placing repeat orders.
I liked this response. Each industry has different costs and lead times to get their products to market, so it makes sense I saw such a wide range of responses when people used these parameters to identify the transition point. But, across all goods industries, the goal of a company is to sell a product for some extended duration - which most often requires multiple manufacturing orders to fulfill. While placing repeat orders is by no means a sign of guaranteed stability or success, it does prove a company has hit a point where they have paying customers and more customers or repeat customers are on the way. This means the company is about to transition to a new phase of maturation, called sustainment.
Signs of Stability
Sustainment doesn’t occur until the tail end of a product’s lifecycle and requires a new set of skills and resources. It means things are changing less often; processes are getting more rigid; stakes are getting much higher; and other people’s needs are to be taken seriously. This sounds to me more like a responsible adult and less of a rebellious, leather jacket wearing, cool kid.