While there is a certain stereotype associated with startups, usually consisting of creative college dropouts going AWOL to pursue a project for 16 hours a day, it’s important to recall that a startup is simply a company that is in its early stages of business.
We covered what startups are in a previous blogpost on startup crowdfunding. To recap, a startup is a company that brings a new, unique product or service to the market with the expectation that it will grow and gain momentum and revenue quickly. In simple terms, it is a “fledgling business enterprise.”
All the big-name tech companies like Apple, Google, Microsoft, and Amazon were all considered startups at one point. They didn’t amass their current success overnight. They all had to undergo the arduous work of development, funding, and implementation.
It took lots of time for these companies to become successful enough to be taken public by IPO and to reach the billion-dollar market capitalization range. IPO stands for initial public offering and is the process of creating shares, or stock, of a private corporation to be sold and traded to the public.
IPOing is only possible if many private startups/companies are extremely successful.
Market capitalization is “the total value of all a company's shares of stock.” You can calculate this by multiplying the number of outstanding stock of the company that was bought by how much the stock is being sold by. For example, if the company Blue Yonder sold its stock for $5 and three people bought the Blue Yonder stock, the market capitalization for Blue Yonder would be $15.
Though there is no handbook that explicitly states when a startup is considered or not considered a startup, there are widely acknowledged metrics that determine this. These standards are the 50-100-500 Rule, product-market fit, profitability, and bureaucratization.
The 50-100-500 Rule
If a startup achieves “scale,” it is no longer considered a startup. While scale differs from company to company, the 50-100-500 rule is a popularized standard of scale for startups. The 50-100-500 Rule was created by Alex Wilhelm, the senior editor at TechCrunch. The name is pretty telling of its concept. According to the rule, you are no longer a startup if:
- The enterprise’s revenue exceeds $50 million
- 100 or more employees are employed
- The enterprise is valued at $500 million or more
Product-Market Fit
Startups are created with the assumption that there is a product or service that a large group of people will want to buy. The product must surpass its prototype stage and be bought by the people to be successful. When a startup proves itself marketable - meaning that it is widely purchased and received well by the people - it has achieved product-market fit.
Profitability
When we measure profitability, we do not measure it in terms of revenue but in terms of the company’s net income or profit. Revenue is the total income generated by the sale of the product/service. Net income is a company’s total earnings (meaning the revenue of the product/service + investments + funding).
A startup has attained profitability if it reaches a successful net income. This means that the cost of production of the product/service is less than the revenue generated by the product, the startup is producing and selling its service as efficiently as possible (ex. Is the startup employing too many or too few employees? Is the product/service being delivered as efficiently as it can be?), and the company is seeing positive returns on its investments.
Bureaucratization
Bureaucratization is just a complex term for efficient organization, and it is a common practice that we don’t often notice. For example, the United States government doesn’t manage all of the country's issues and operations. Instead, bureaus are created to manage specific “parts” of the country. We have the Bureau of Indian Affairs, the Bureau of Labor Statistics, the Bureau of Land Management, the Bureau of Federal Investigation (the FBI!) - you get the point from here.
By bureaucratizing a startup, you are organizing the systems and processes of the startup in order to maintain uniformity and maximize efficiency. This means that you have multiple departments that manage different aspects of your startup, from finance, communication, marketing, etc. Formal communication is established and employees undertake their designated roles.
You are no longer a small group of individuals working with ideation. Your startup is working like a well-oiled machine.
If I’m Not a Startup, What Am I?
If you determine that your startup meets the four outlined metrics, your startup is probably no longer a startup. Now, you can adopt the title of being a SME (small or medium-sized enterprise) or an SMB (small or medium-sized business).
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