What is a startup?

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Startups, fundamentally, are about creating technological innovation. PayPal co-founder Peter Thiel put it best in Zero to One: he defined startups as creators of vertical innovation and not horizontal innovation. Examples of once-startups include YouTube, Facebook, and Alibaba.

Vertical innovation refers to new technology that has not been created before. A startup aims to create a monopoly in a niche market, and then expand to new markets. Meanwhile, horizontal innovation (also called globalization) is about bringing existing technology to places that don’t have it.

Steve Blank, author of Four Steps to the Epiphany, put it another way: “A startup is a temporary organization used to search for a repeatable and scalable business model.” When a business model is repeatable, it means you can reapply the same practices repeatedly to create predictable results, be it revenue or user growth. Scalable businesses possess these traits:

• Global ambition matched by internal processes that allow a business to grow quickly.
• Raising of external capital from angel investors, venture capital funds, or private equity firms to fulfill demand and grow the business.
• Invention of technology to help people do things in more effective and efficient ways than existing products.

Once a startup finds a repeatable and scalable business model, it ceases to be a startup.

Y Combinator founder Paul Graham has a similar definition as Blank, though he puts it much more simply in his essay: “A startup is a company designed to grow fast.”

Unlike Thiel, Graham doesn’t think technology is essential to startups. Only one thing matters: growth. “Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of exit.’ The only essential thing is growth,” he adds.

Eric Ries, author of The Lean Startup, says that “a startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.” Startups make products that cater to a niche in ways that haven’t been done before. This makes startups unpredictable, because a new product may not resonate among its apparent users and may require constant adjustments before it gets there.

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.

Startups are typically confused with small businesses, otherwise known as small and medium enterprises (SMEs). But the two are not the same. SMEs typically generate revenue early on and embark on a path of slow and steady growth. They are more focused on providing a livelihood for the business owner.

Startups, on the other hand, tend to raise a lot of venture capital early in their lives as they’re focused on grabbing market share rather than having a healthy bottom line. Successful startups will reach “escape velocity” where they become global. Their ability to scale then allows them to quickly expand grow revenue.

What makes one startup more successful than others? Thiel boils it down to seven factors:

1. Engineering: does the startup have breakthrough technology instead of incremental improvements?
2. Timing: is the startup entering the market at the right time?
3. Monopoly: is the startup poised to capture a big share of a small market, after which it can expand to bigger markets?
4. People: does the startup have the right team?
5. Distribution: does the startup have the right strategy to deliver products to customers?
6. Durability: will the startup’s market position be defensible 10 to 20 years from now?
7. Secret: does the startup possess counter-intuitive knowledge that others ignore or don’t know about?