Over the past few months, one question that I have answered over and over again, is what is a startup? What exactly differentiates a startup from a Micro, Small and Medium Enterprises (MSME)? What makes a startup different from a small business per se? At CEO East Africa, we set out to explain this to anyone who may not be familiar with the concept.
But defining what a startup is, is not a straightforward task. There is no universally accepted definition of what a startup is. But there are some common characteristics in multiple definitions. Today, in the simplest of terms possible, I will attempt to answer this question.
As per the Oxford Dictionary, a startup is simply a newly established business. This is a very simplistic explanation, and it misses out on a lot of key contexts. Wikipedia goes further than this. (it should be noted that Wikipedia entries are entered by a team of contributors). As per the Wikipedia entry, a startup is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. Startups refer to new businesses that intend to grow large beyond the solo founder. In the beginning, startups face high uncertainty and have high rates of failure, but a minority of them do go on to be successful and influential.
The Wikipedia entry introduces two new things: seeking, developing and validating a scalable business model and also, facing high uncertainty and high rates of failure. These two offer more context into what a startup is. A scalable business model is one that can grow without a significant increase in expenses. As we continue in this article, I will explain this even more. But perhaps the best explanation of a startup was written by Paul Graham.
Paul Graham is Silicon Valley royalty. Born in 1964, Paul Graham founded Viaweb in 1996, a software that allowed its users to make their own internet stores. Whereas this may not sound like a very innovative undertaking in 2023, it was certainly mind-boggling two decades ago at a time when the majority of people were still asking, “What is the internet?” Viaweb became Yahoo! Store after it was acquired in a deal valued at $49.6m.
In 2005, Paul Graham co-founded Y Combinator, the influential startup accelerator that counts the likes of Airbnb, Coinbase, Quora, Instacart, Reddit, Stripe and Twitch among its alumni. In 2022, Numida became the first Ugandan startup to be accepted into Y Combinator. By January 2023, the combined net worth of all former Y Combinator startups was valued at over $600bn.
But Paul Graham also gained widespread acclaim for his articles about startups. In his September 2012 Startups= Growth article, Graham defined what a startup is and what sets it apart from a business. In this piece, Graham argued that a startup is a company that is designed to grow fast.
Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, take venture funding, or have some sort of exit. The only essential thing is growth”, wrote Paul Graham. For a company to grow fast(and essentially be termed a startup), it must have two things in its DNA:
- make a product that lots of people want, and
- reach and serve all those people
Let me offer a little bit of context on this with an example of Jimmy and Patrick. Jimmy and Patrick decide it is time to build a new company in the furniture business. Jimmy decides to build a workshop where they will make furniture and sell it. Patrick on the other hand decides to build an app that aggregates furniture workshops and links them with people looking to purchase/order furniture. Now, this is where our criteria come in.
Jimmy has built a furniture workshop, and it is a product that lots of people want. (Everyone will need furniture at some point), but having a furniture shop in a particular location means that Jimmy will not be able to reach and serve all those people that need it. If the furniture shop is located in Kisasi, the best case scenario is that he will reach and serve people in Kisaasi and in the neighbourhoods.
On the other hand, Patrick’s company fits the criteria for a startup. He is building a product that lots of people want(furniture) and has the ability to reach and serve all those people. Patrick can build an app, and then onboard people like Jimmy in different locations. Using this model, he can reach people in Kisasi, Gulu, Mbarara, Mbale or even Adjumani. And he can scale his product at a minimal cost.
Patrick can expand to Kenya and Tanzania using the same app that he built. The app can be used by 10 people, and the same app can be used by 1m people with minor tweaks. All he needs to do is onboard furniture workshops in different areas. Patrick will also not need to make the furniture himself. On the other hand, if Jimmy wants to grow his furniture worship to reach all people that need furniture, then he will have to invest in building workshops, raw materials and hiring carpenters which would cost him a fortune.
Related
A real-life example of this will be Airbnb and a hotel chain like Serena. Airbnb is comfortably the world’s largest hotel chain, without even building a single hotel. Airbnb can be found in every corner of the world, in countries where typical hotel chains have never set up operations. This is because Airbnb onboards homeowners all over the world to sign up on their platform. Simle. They can replicate this model from country to country within a few weeks or months.
A hotel chain like Serena will undertake a costly building process which limits their ability to reach all people seeking short-term accommodation all over the world.
Other than growth and the ability to scale, there are other hallmarks of startups. First of all, there is usually no certain business model. In the sense that, startups always refine their operations until they land on a particular business model. On the other hand, the business models of MSMEs are usually straightforward. If you start a furniture shop, you will wait for customers to buy/order the furniture from you at a higher price than you make them.
On the other hand, by starting an app that connects furniture shop owners to people looking to buy furniture, a variety of business models can be undertaken. One can charge a subscription from the furniture owners or charge a commission off each piece of furniture purchased on the app or charge furniture shop owners for advertising their wares. The reality for most startups is that the majority of their ideas are novel, hence have to figure things out on their own.
But to offer more insights about what a startup is, I decided to speak to the people who are involved in the Ugandan startup ecosystem to get their views. My first stop was at StartHub Africa. Founded by Matthias Mobius and Laura Althaus, StartHub has been active as a consultant for projects targeting startups and also helping startups to grow like Omni Gym, Klark IO etc in their Catalyzer program.
Matthias agrees with Paul Graham to a very large extent. “A startup is a company that has a hypothesis about why and how it can grow extremely fast., “he tells me. “Startups address very large markets. These can either be new or nascent markets or existing markets in which their solution helps to do things much better, faster, or cheaper through innovation and leveraging technology.” He adds.
Matthias’ view is shared by Stephen Obeli Someday, the founder of Kweli. shop. Kweli. shop is an e-commerce startup that makes it possible for upcountry households and businesses to acquire genuine electronics. “A startup is a relatively new business that is built around an innovative idea and has great potential to scale.
Stephen, however, reiterates the high degree of uncertainty part of startups. ” A startup operates under a high degree of uncertainty. I think uncertainty is by far the most difficult part of building a startup due to; limited resources, high costs of marketing new ideas in a highly conservative world, and disruptive regulations. ” He aptly summarises it with a single phrase, “When the first car was made, it was illegal to drive a car because there were no roads meant for cars”.
My final stop was Raymond Asiimwe. Raymond is not a startup founder, but he is the founder and Managing Partner of Bytelex Advocates, a leading law firm in Uganda and Rwanda that was one of the first ( and few) law firms in Uganda to focus on startups. Rymond agrees that the high-growth nature and salable business models separate startups from SMEs.
Raymond also notes that startups have an unusually long valley of death which he describes as the period between the commencement of operations and when the company starts to make revenue from sales. “This valley of death is usually caused by heavy investment in research and development, investment in accelerated growth and rapid scaling.” Ramond also notes the extreme conditions of uncertainty that the startups operate in, and this is because the startups are “often turning abstract ideas and problems into impactful and innovative products or services.”
In conclusion, based on the different views shared here, startups are high-growth and scalable businesses that operate under high uncertainty. A startup may or may not incorporate technology, but usually, it is a key enabler for its ability to scale. And ultimately, this is what separates startups from SMEs.