When I started in the business world, startups were rare and considered very risky. Startup development was complicated, expensive, and required a lot of capital and planning. As a result, most companies grew very slowly — in many industries, it took decades to gain a foothold or reasonable market share.
Since then, the startup world has exploded. Fast forward to today, and startup culture is celebrated as a primary way of providing innovative products or services, solving problems, creating wealth, building a career, and driving the economy. Because of the availability of technology, experience, and capital, virtually anyone can create a business plan and start a company.
Let’s take a step back, and expand upon the definition of a startup and startup development, review its key stages, and discuss how long a startup is a startup.
What Is A Startup?
A startup is typically defined as a new business created to solve a problem for a specific customer segment. The term ‘startup’ refers to any type of entrepreneurial venture that is built to scale quickly.
In the last decade, I have worked with hundreds of startups as an advisor, investor, board member, and sales strategist. Like all businesses, startups go through phases of growth that can be defined and evaluated for effectiveness.
One of my mentors in the startup world is David Skok, General Partner at Matrix Partners and an early member of the Board of Directors at HubSpot. According to David, startups can be defined by the following three stages:
- Finding the right product-market fit.
- Create a repeatable, profitable and scalable sales model.
- Scale up the business.
I name the stages differently, however the same general categories apply.
Stages of a Startup
- Ideation and business formation.
- Proof of concept.
- Scaling the business.
Entrepreneurs start companies for different reasons, some want to make a lot of money, others want to solve a business problem, and some just want to work for themselves and not for a boss. Regardless of the entrepreneur’s intent, most companies follow a very similar process of scale going through the following stages.
1. Ideation and business formation.
This is considered the first step for an early-stage startup. During this stage, the founding team develops an idea and builds a concise business plan to explain the program.
Creating a Successful Startup in 2022
- Name of Company
- Website URL or Domain
- Incorporation Date
Now go through the following questions to solidify your initial business goals:
- Are you working on this business full time? If not, why not?
- Do you have specific domain knowledge that would give you a competitive advantage to build this company?
- Why do you want to start this company? Consider the following questions: What problem are you looking to solve? Why do you want to solve this problem now? Have you thought through the personal and professional implications of becoming an entrepreneur?
- What kind of company do you want to build?
- What are the goals of the company over the next 12-24 months?
- Do you have a co-founder? What is their role?
- Do you have a concise business plan that outlines the structure and future growth of your business? Check out this post for step-by-step instructions on crafting a business plan.
- Have you identified three advisors you can meet with periodically that can help you scale?
- How will you know when you have proven the concept of the company to meet the defined goals? How will you measure success?
- Do you have access to capital to work on the company full-time?
The purpose of this stage is to define what you are going to do and the company's competitive advantage, refine the basic assumptions and begin to acquire customers. Picking the original startup team, building a website, and selling and delivering your product or service rarely works out in real life the way you think it will in your business plan.
This stage is where the company proves there is a market for the product or service that the company produces, that they can compete in said market, and earn money to execute.
2. Proof of concept.
The next phase is the proof of concept or gaining traction phase. This is when a company starts to refine its initial idea and create a predictable, sustainable business.
The proof of concept stage typically includes making necessary improvements to the product and filling out the product line. From within the company, this is also when many startups are looking to grow their sales and marketing teams, pick an ideal customer persona based on their improved product, and define a corporate culture that will provide a sustainable advantage.
This stage also typically includes a seed round of funding between $1-$2 million to fund that growth. The goal of this phase is to get a good foundation for showing that the company can execute its business plan and is getting closer to growing and retaining a solid customer base.
3. Scaling the business.
The final phase of a startup is the proving the business model or scale-up stage. This is where a startup company will take the core group of entrepreneurs, add additional capital, and transition to growing the company at scale.
Depending on the business, that could entail opening additional offices, adding additional offerings to the product line, and building a development team. During this startup phase, there should be enough data to clearly articulate a competitive advantage and showcase how to leverage that advantage to an even broader customer base.
This phase typically includes a Series A investment round led by a Venture Capital company that gives guidance and support to help the company grow into an established, sustainable entity.
Regardless of what phase your startup is at in development, you might be wondering how long your startup will continue to be considered a startup — let’s discuss this below.
How long are businesses considered a startup?
The question of how long a startup is considered a startup has been asked since the dawn of startups.
As nice as it would be, there is no set answer, but some have attempted to provide solutions to this question, like Alex Wilhelm at TechCrunch, who came up with the 50-100-500 rule. Wilhelm says that your business is no longer considered a startup if:
- You have a $50 million revenue run rate (forward 12 months),
- 100 or more employees,
- Your business is worth more than $500 million, on paper or otherwise.
Others refer to things like product-market fit, growth, and general mindset of the company.
As most startups are looking to disrupt the market with a product or service that uniquely solves customer issues, success isn’t always guaranteed. However, once your product has space in the market and consistently drives sales, your business is validated by the need for what you offer, and you’re no longer trying to fit into the market.
Essentially, you’ve achieved product-market fit and you’re no longer just starting up.
Suppose your business has successfully grown based only on your business’ definition of scale (like significant revenue generation, more employees, multiple funding rounds, expansion, etc.). In that case, you may no longer be a startup, as you’ve aligned with the above definition of a startup: an entrepreneurial venture that is built to scale.
Another critical factor to consider when classifying your business is your mindset after a certain period.
The startup mindset of striving for quick growth for your business shifts to strategies that will help you sustain growth over time (like customer retention and loyalty) is a sign that your business mindset is changing.
Adopting standard business practices like creating specific departments with designated individuals as most startups don’t always have the capital, or even time, to do such things.
Over To You
All-in-all, developing a startup can be difficult. If you're hoping to begin the process, HubSpot for Startups has helpful resources for startup founders as they navigate growing their companies. Check out the Startup Growth Playbook to learn how we grew HubSpot from a startup to a public company.