What is a startup?

Entrepreneurship and startups are frequent topics of discussion here on the Top MBA Connect blog as well as our social media feeds. But what is a startup exactly?

Contrary to popular belief, a startup is not a smaller version of a major corporation. A startup is a temporary organization working toward a business model that is scalable, repeatable and profitable. The startup lifecycle begins with a business model based on ideas and guesses, since there are no customers and very little customer knowledge.

Startups aren't one-size-fits all. Here is a run-down of the different types of startups.

Small Business Entrepreneurship

The most common small businesses are service-oriented: drycleaners, gas stations and mom and pop stores. A good salary for the owners and a profit are the benchmarks entrepreneurs set for small business success. Since small businesses usually have a few employees and a relatively low profit, they are rarely designed to overtake an industry or become $100 million businesses. In the US, the official definition of a small business is an independent business with less than 500 employees.

Small businesses make up the majority of startups in the United States. In 2009, there were 27.5 million small businesses comprising 99.9% of all US companies. According to the US Small Business Administration, almost half of the US workforce is employed at small businesses.

Scalable Startup

A scalable startup is one that starts with an innovative idea and creates a business model designed to turn the company into a profitable, high growth enterprise. Scalable startups succeed by either entering a large market and taking market share away from other companies or creating a market and growing it rapidly.

This type of startup is the most common among traditional technology entrepreneurs. Unlike small businesses which are everywhere, scalable startups tend to be concentrated in the world's technology hubs and only constitute a small percentage of entrepreneurial ventures.

Scalable startup entrepreneurs start their venture with the belief that their vision will change the world and make them lots of money. A scalable startup starts with the search for a repeatable and scalable business model. Outside venture capital in the tens of millions is usually required so that a startup can meet market demand and scale. Startup entrepreneurs need to sell investors on their vision in order to hire employees and acquire their first customers.

"Buyable" Startup

The goal of a "buyable" startup is to create a product (usually a mobile or web app) and then be sold to a larger company. Buyable startup entrepreneurs are usually happy to sell their company for $5 million to $50 million. "Buyable" startups are usually funded through the founders' credit cards along with small amounts of risk capital. Larger companies usually purchase buyable startups in order to acquire the talent as well as the business itself.

Internal Startup

aka Large Company Entrepreneurship

Internal startups are new business divisions created within large or well-established companies and operated at arm's length. Since large companies have finite life cycles, they need new products in order to grow. Most companies grow through variants on their core product (an approach referred to as sustaining innovation). Internal startups are formed through disruptive innovation, where new products are created for new markets, and therefore, new customers.

As you can imagine, the size and culture of large companies make disruptive innovation difficult, but there have been some successful internal startups. Target Corporation began as an internal startup within the Dayton Hudson department store chain. The P2P and communication application threedegrees was developed by an internal startup within Microsoft.

Social Entrepreneurship

Social entreprenship is used to build innovative non-profits worldwide. Unlike other types of entrepreneurship, social entrepreneurship is about finding solutions instead of making a profit.

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