Redefining a Startup: an Investor’s Perspective
A lot has been said about startups, and words of wisdom from countless experts, entrepreneurs, and investors have collectively built dogmas accepted worldwide. Steve Blank and Eric Ries are two consistent contributors of that knowledge body over the past decade, and their joint definition of a startup could be stated as this:
A startup is a temporary organization in search of a scalable and repeatable business model, designed to deliver new products or services under conditions of extreme uncertainty
Blank’s words before the comma, Ries’ right after. Beautifully complementary definitions, self-explanatory, and polished to perfection. Yet…
I’ve been approached by thousands of entrepreneurs looking for funding, and I’ve preached that same complete definition in response. Strangely, their typical reply to my gospell always denoted a lack of understanding on what exactly the terms on that definition really meant. This is why I always felt the need of a definition that tells them how to assess themselves as a true startup or not, and also to help them visualize startups their right path through investor lenses.
I’m not aspiring to pivot the original concept, just flip that definition coin to reveal what could be engraved on the other side. And this is what I came up with:
A startup is an organisation intended to derisk and maximize the value of business assets in record time
Let’s break down the key concepts.
Startups aren’t necessarily a formal company. On the other hand, we often find independent teams inside big companies working with a startup mindset. Therefore, organisations comprise groups of friends / researchers / professionals, recently incorporated businesses, teams inside big companies, using part-time or full-time schedules towards a common goal: create a startup together around the same product or service, either inside a company, as a spin-off, or as a formal company.
No matter how uncertain the product/market fit or how innovative the business model, investors have a bias towards lower risk and against extreme uncertainty. Hence, the best startups combine gradual decrease in risk probabilities with a consistent increase in potential returns. Great startups derisk their success over time, and the best way to do that is grow, grow, and grow… In addition, many risk factors can be detected, acted upon, and minimized with careful planning. Legal protection, patent applications, commercial partnership agreements, NDAs + non-compete signed with big competitors, letters of intention from potencial buyers, anything that can make sure a startup gets future revenue or has a safe harbor when / after launching.
Maximize the value
There is no purpose in a startup that doesn’t aim to increase its value, and that purpose is less rich and noble in proportion of how much waste a startup generates. When one stands for maximizing the value of something, it means to reach the utmost value one can achieve – and not accepting less. Founders who maximize the value of their startup assets stretch their bones in a daily fight to extract everything they can from their team, technology, management, and results.
Any asset can be valuable in a startup, such as an innovative technology, a massive user base, a great founding team or a single approved patent. Even so, those assets are only attractive to investors and executives (as representatives of funds and enterprises) if they have a business application and provide competitive advantage to someone working the market – present or future. After all, if the startup’s business model proves not to be scalable and repeatable (or the management screws up), you can still liquidate those assets and get huge value in return…
That is a key aspect that armies of entrepreneurs forget or underestimate. Investors will only have their equity valued in 10x if founders are working hard to turn assets into business assets. Executives will only vouch for a startup that presents strategic features, technologies, customer base or teams that are usable in a turn-key fashion, or very close to turn-key. If startup S1 has less valuable assets than startup S2, but assets are more business-ready on the first, it may win the race.
Consider any kind of exit as a plan B, but as important as plan A: not ever needing an exit. Maximizing the value of business assets is mandatory on both scenarios.
Not much to explain here: a startup has to execute and grow as fast as it can, and much faster than its competitors. Be it swimming, racing, or whatever endeavor humans undertake to achieve greatness, record times are hardly broken (though some people struggle their whole lives to break those). It works the same for a startup: growing in record time means one is faster than all others.
Use it as a compass
How many entrepreneurs are able to fully abandon their biases, personal beliefs, and prejudices in favor of creating the best startup they can? Even though most startups are presented as potentially scalable and repeatable business models, that is frequently a premise and not a validation. In other words, entrepreneurs very often hammer their startup vision onto anything they see, because they believe they’re pursuing a scalable model – and not because it indeed is or will be. Unfortunately, Blank’s and Ries’ definitions allow that plausible mistake to happen and don’t hint on how to close that gap (not unless you look at all the methodologies / practices they’ve thoroughly described on their books and blogs).
My proposed definition serves as magnetic north to founders or corporate teams who wish to understand their potential return on investment. But most importantly – despite being funded or not, formal or informal – they can look at that compass, self-check if they’re off-course, and understand how much of a startup mindset they really have.
So if you’re running a startup, occasionally go through the checklist literally derived from the definition:
[ ] Are you actively working to derisk your startup?
[ ] Are you maximizing the value of your assets?
[ ] Are those assets business-oriented?
[ ] Are you doing all that as fast as you can?
[ ] Are you doing all that faster than similar startups?
[ ] Are all your actions, everyday, planned to answer “Yes” to all questions above?
Each negative answer to those questions screams “you’re not running a startup”. Are you? Then follow this recipe:
1. For every negative, ask the team “Why not?”
2. Write down the real reasons
3. Devise simple solutions to address each reason
4. Make it work.
I’ll tell you what: whenever your reason is “we don’t have enough money”, think of another reason. Every startup needs capital, but the best ones find alternatives that transpose those obstacles even without funding. And always remember… startups may not be your thing.
Getting it right, it’s like building a strategy SCRUM board. Believe me, it pays off and will make you a better founder everyday.