Startups

The Definition Of A Startup In 2018 (By The Numbers)

What is a startup? It’s a surprisingly hard question and everyone has a different answer.

A few years ago, I took a stab at a response myself, coming up with a somewhat-serious list of rules that set parameters around startup status. However, what I wrote down in 2014 was too strict (or the market has gone bonkers).

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Either way, what I originally scribbled down as dividing lines between startups and more mature companies needs to be revised. So let’s come up with a 2018-era definition of what a startup — a likely venture-backed, certainly high-growth young company — really is.

What The Heck A Startup Was

My 2014 definition of startup status was made up of three hard caps that triggered on revenue (dollar scale), employees (human scale), and valuation:

  1. A $50 million revenue run rate (forward 12 months).
  2. 100 or more employees.
  3. A valuation of more than $500 million.

Those rules are too strict. The definitions exclude a huge number of companies that are, in fact, startups. So let’s loosen them.

Revenue

  • Old ceiling. $50 million run rate, forward 12 months
  • New ceiling. $100 million ARR for software companies, and $100 million trailing top line for everyone else.

Saying that a company is no longer a startup when its next year’s revenue will come in over $50 million is shortsighted. Startups are notoriously bad at estimating their future performance and using a forward metric is imprecise.

So let’s do two things. First, we have to raise the cap. Modern VCs don’t expect quick investment liquidity, because the period in which a young company can do startup things—dramatic growth spend on a percentage-of-revenue basis, risky wagers, and toothsome experiments—is longer than it used to be.1

Second, we need to to solve the previous oddity of using a forward revenue number. That in hand, our new revenue ceiling for startup-status will be $100 million in annual recurring revenue (ARR) for software-as-a-service (SaaS) companies and $100 million in trailing top line for everyone else.

Both of these revenue metrics are high. That’s on purpose. Many companies will ease out of being a startup before they hit those marks. But they help us set a hard stop on startup status; cross this line and no matter how much you wave your hands about the market, your losses matter, and you should have a CFO with a path to the public markets inked.

Employees

  • Old ceiling. More than 100 employees.
  • New ceiling. More than 500 employees.

This one is harder to change intelligently, but is also important to raise. If we’re content with letting some companies cling to their startup name tag until $100 million in ARR, 100 employees won’t do.

So let’s create some more wiggle room in these, the latter days of the Unicorn Era, and give startups a full 500 employees of space. Again, we’re trying to create firmer, stronger, stickier metrics to establish startup status that we can use without having to worry about special cases.

We doubled our revenue red line, but are expanding our personnel maximum five-fold. Why? It’s mostly a factor of having set our employee maximum too low the first time. It should have been 250 or so; moving to 500 is more reasonable than it seems.

Adding some data to the point, this piece (the Crunchbase News team wrote it a few years ago under a different banner) notes that unicorns with valuations between $1 and $2.5 billion have about 600 employees. Keeping our cap at 500 means that our employee count figure will be slightly conservative if we set a valuation maximum of $2.5 billion.

Valuation

  • Old ceiling. Worth more than $500 million.
  • New ceiling. Worth more than $2.5 billion

You can see the problem with our prior valuation maximum for startups: it’s half the unicorn minimum.

The quality bar to become a unicorn has fallen. And that means that less mature and questionable companies are reaching the threshold.

This puts us into a conundrum. If we set our startup threshold at $1 billion of valuation or more, all unicorns will be precluded from startup status. That feels overly mean, given that we are allowing up to $100 million in ARR.2

The $1 billion mark has other problems. Lime and Bird, two of the world’s newest unicorns, are worth over $1 billion and over $2 billion, respectively. Both are certainly startups in terms of the immaturity of their business model, steepness of their growth rates, and (presumably) percent-of-operating-spend coming from external investors instead of revenue.

I raise those two as recent and essential examples of companies that meet our preceding revenue and employee rules, but would lose their startup tag if we set the valuation cap at $1 billion, or even $2 billion. With such a low valuation cap, calling them non-startups would be silly. So against the screaming of my gut, we’ll set our new “No Longer Startup If Taller Than This” ruler at $2.5 billion. If you are worth more than that, get it together and go public.

The Three Rules

Your startup is no longer a startup under the following metrics:

  1. $100 million in ARR if its a software company, or $100 million in trailing revenue otherwise.
  2. More than 500 employees.
  3. A valuation of $2.5 billion or greater.

And that’s it.

If we were too conservative the first time around, I’m worried we’re being too liberal today. But the market is so distorted at the moment by dollar inflows that we need to let some things not make sense for a while to help us get our minds around the market.

Things will eventually settle back down. When they do, we’ll tighten up our definitions.


  1. Don’t conflate venture capitalist hopes for venture capital expectations.