Recently, I was reading Crunchbase News’ analysis of the declining volume of M&A deals involving VC-backed companies, which are still technically referred to as startups.
This led me to ask myself: When we talk about startups, what do we really mean? Is a startup still a startup after it has acquired enough capital to buy another company for hundreds of millions of dollars?
This notion created a dissonance for me. I invest in startups for a living, and to me, the word startups evokes images of enthusiastic founders who are working hard to get an idea off the ground — not of corporations that have a huge market capitalization.
We are all aware of the tendency to call organizations startups because of the allure associated with that word. But being creative and innovative is different from being a startup.
Existing metrics to define a startup
Right now, various metrics can help us determine whether a startup is still a startup. One of them — proposed by Alex Wilhelm, editor-in-chief of TechCrunch+ and previously an editor at Crunchbase News — is labeled the 50-100-500 rule.
According to Wilhelm’s initial proposition, a company cannot be considered a startup if it generates revenue that exceeds $50 million, employs more than 100 people, and has a valuation of $500 million or more. In 2018, Wilhelm modified the rule. He stated that a startup ceases to be such after it reaches $100 million in revenue, has over 500 employees, or is valued at $2.5 billion or more.
Wilhelm himself says we’re too liberal with the definition today, and I agree. It is hard to approve a universal criteria.
Resilience as a key criteria
For me, a startup is an organization that is small, fragile and unstable. There is a founding team, which is often pivoting, raising funds and validating a product’s functionality or the most viable business model.
I’d say that a company ceases to be a startup when it no longer relies on external investments for its basic development processes. This doesn’t mean it can’t raise funding. It can, but those funds are not essential for its survival.
A company that is past its break-even point and that is generating revenue — which means it’s growing organically — is no longer a startup.
A company that is able to acquire other companies is significantly past this point. I perceive acquisitions as being the next stage, since, as opposed to revenue, they bring inorganic growth.
If a business has enough capital to acquire another company, it is undoubtedly NOT a startup, and likely, hasn’t been one for some time.
Why a clear definition is important
You can ask, “why bother with this discussion? There is no difference between calling a business a startup, an SME or something else.”
I believe language is important, and therefore, so is how we refer to companies.
By defining both newcomers who test hypotheses and relatively stable companies as startups, we complicate the lives of all — founders, investors, analytics, journalists.
This universal labeling of startups leads market players to have higher expectations, because they see really cool “startups” out there (even though they’re no longer so). As a result, those real startups that are in need of financing to be able to bring their disruptive ideas to life have fewer opportunities for growth.
Also, let’s not forget about LPs. The term “investments in startups” in fund mandates can have various interpretations; investments in stable companies with huge valuations (like OpenAI), as well as financing the early slideware-stage projects. Such vagueness undoubtedly complicates their selection process.
Mikhail Taver is a career investor with an expertise in deep tech and strategic consulting. He is the founder and managing partner of Delaware-based Taver Capital, an international venture capital fund focused on investing in global artificial intelligence companies.
Illustration: Dom Guzman
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