You’ve decided to start a small business. Does this mean that it’s a startup? When will it no longer be a startup? The answer will often vary depending on whom you ask. Defining your small business can be tricky. In South Africa, a small business is defined as a business with between eleven to fifty employees with a maximum turnover varying depending on the industry.
However, when it comes to startups, which is a subset of small business, it becomes even more challenging to pin down a consistent definition. There are a few conventional approaches when attempting to define a startup, but usually, they fall under two main categories:
Approach to business
Time in business
Approach to business.
The term “startup” is commonly associated with new businesses whose core aim is to disrupt or transform an industry or offer a unique product or service. In addition to this, the term is often associated with risky businesses, or those with a higher risk appetite, which have potential for high growth. Many tech enterprises consider themselves to be startups in their early days of business. However, the term is actually not exclusive to companies in the tech arena.
The author of the Lean Startup Methodology, Eric Ries, defines a startup as: “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 modelled with high accuracy.”
However, there is one issue to this approach and that’s there is no singular definition of what makes a business truly unique. The reality is that most small businesses are risky and even more so in their earlier years.
With that being said, while many small businesses tend to not survive past the two-year mark, the reality is that they create additional job opportunities to support both their industry and the local economy.
Time in business.
Most business owners commonly consider their businesses to be startups during the first few years of their business life cycles, regardless of whether they don’t have a unique product, service or business model. For these business owners, the risks are real. They are taking a chance that their venture might not work out at all, and that often makes them feel as if they’re creating a startup, even though others might view it as another small business.
The issue with this approach is that it isn’t always clear when a business moves from the startup phase to small business. Does this happen when the business achieves profitability? Or once it surpasses the two-year mark?
In a nutshell, there is no official definition of a startup that everyone agrees upon. However, both of these approaches share one common trait, the business owner considers the potential of his/her venture in the early stages of the life cycle, even though it still has a significant way to go before genuinely reaching said potential.
Financing your startup to the next stage.
Small business owners commonly want to know where and how to obtain funding or financing for their startups. If you define your business as a growing business, you need to consider that traditional lenders such as banks, or credit unions commonly consider businesses which have been in operation for two years or less to be startups. Thus, they might be hesitant to approve loans to these young businesses, and as a result, often, these firms have a challenging time securing loans and other forms of financing.
Growing businesses of this nature do have the option of approaching online lenders, micro-loan lenders or perhaps even personal loans to secure the funding they need. It must be noted that substantial revenues and/or strong individual credit scores are often the key to obtaining the required financing.
On the opposite end of the spectrum, business owners who define their ventures as startups via their approach to business might find more success by seeking out alternative sources of funding. Alternate funding includes crowdfunding, angel investor funding, venture capital, or private investors. All of these might be a better bet for the business owner defining his/her venture as a startup. Often, these options are not as stringent when it comes to credit scores or revenues. Instead, these businesses are viewed as potential and significant financial opportunities for the lenders, albeit risky. However, the business owner will need to persuade investors that they are likely to succeed even in the face of an unfavourable business environment or economy, such as the Coronavirus pandemic.
With all this information, you’re probably still wondering, how you can determine whether your small business is no longer a startup? That’s okay, here are a few indications that your business can indeed move beyond the label of a startup:
It has survived its first year.
It is profitable.
It is hiring employees.
None of these factors alone indicate whether a business is no longer a startup, however, when a business achieves at a couple of these milestones, it is more likely to have a better chance at success having now entered its next stage of business operations.