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What is a Startup?

Hint: It doesn't have to be tech, but it does require the ability to scale.

Generally, startup founders focus on high growth and have an exit strategy.

What is a "Startup"?

For this blog we'll use the definition found in The Startup Playbook;

A startup is a high-growth company that is scalable, focused on continuously growing, and one where the founders develop an exit strategy that results in either a sale of the company or an IPO.

This website focuses on creating and running this type of company and how to protect it legally from inception through exit. The assumption is that there will be a plan to scale quickly, hire a lot of people, raise money if necessary, and to ultimately exit one way or another.

This means that the founder(s) will need to pick an appropriate type of entity for that strategy along with the right jurisdiction for incorporation. Importantly, it also means that there will be investors judging the startup's structure and outside lawyers combing through its internal contracts.

Board meetings and term sheets generally aren't relevant to a small business that never plans to become c-corporations or seek outside capital.

Can My Idea be a Startup?

A startup is a company with a unique vision to either create an entirely new industry, or to disrupt an existing one by utilizing technology to offer better products and/or services.

Startups do not have to be tech based, although they do generally utilize technology to disrupt industries.

For example:

Henry Ford disrupted the horse-riding industry with the combustable engine;

Tesla disrupted the auto-industry started by Ford with electric vehicles;

Apple created a global information sharing industry with its personal computers;

Apple brought that industry to even more consumers with the iOS on iPhone;

Apple is disrupting the healthcare industry with personal ECGs on the iWatch;

Airbnb disrupted the hotel industry with short-term rentals;

Uber disrupted the taxi-cab industry with peer-to-peer driving service;

Square disrupted the POS industry (eliminating SO much paperwork, TG);

KIVA disrupted the poverty-cycle in developing countries with micro-lending;

SoFi is disrupting the student loan repayment industry;

Classy is a non-profit disrupting charitable fundraising;

This list is no where near exhaustive, but you get the picture. As you can see disruption can occur in both products and services. Disruption is mainly about doing things better than they're currently being done.

Sometimes, in this information age with the prevalence of health conscious consumers, transparency itself can be disruptive.

Take Jessica Alba's Honest Company which provides organic, chemical-free baby products. Or, LOLA, the first and only feminine care product line with 100% organic cotton that lists its ingredients (also, the first ever feminine care product company actually created by a woman).

These startups may never push other baby/feminine care products out of the market entirely in the same way that we stopped using horses to get around. However, they can still take a large piece of the market share—and it's a large market. If you look back at a the formula above for a startup: (i) high-growth; (ii) scalable; (iii) continuously growing (adding new products); and (iv) exit strategy; they're all there.

Although Alba is currently the face of the Honest Company, ultimately, she's built a brand that will go on with, or without her. If she decided to retire in 7 years and the company were acquired by Johnson & Johnson, it wouldn't affect sales. Likewise, Uber marches on without founder, Travis Kalanick.

Also, note that while a startup can have a charismatic founder, the product or service itself must be so great that another CEO can take over one day. Otherwise, an exit will not be possible.

Regardless of whether the original founders stay on after an M&A event or IPO, or whether more experienced managers are brought in, an exit is a necessary part of the process for a startup that has taken on outside funds to grow.

Creating a payday that represents a significant return for the investors, founders, and the team is part of what makes a startup in the first place.

Now you know what a "startup" is. Basically, think big, or go home.


Relevant reading:


Disclaimer: The information on this website is meant to be used for general educational purposes only. This information may not reflect the current law in your jurisdiction and should not be construed as legal or business advice or an advertisement for legal services. You should not act or refrain from acting on the basis of any information in this post or accessible through this website. If you have questions regarding your particular facts and circumstances, seek counsel from an experienced startup lawyer.



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