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When is a startup no longer a startup?

by Christine Mortensen on June 8, 2016

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The "When is a startup no longer a startup?" question is a hotly debated one. Technically, a startup is a company that just doesn't have a scalable business model yet. They've found a solution to a problem, but not necessarily a specific market from which they can profit.

An excellent example of this is Twitter in its earlier years as a business, before they started incorporating ads into Twitter streams in 2010. Notably, they only started pulling in this kind of revenue after four years of “business.”

In everyday speak, though, there really isn’t an all-encompassing answer.

To get insight for their own post on this topic, Business Insider reached out to Adam D'Augelli, an associate at True Ventures, a San Francisco venture capital firm. D'Augelli said that a company is a startup until it can clearly target a product/market fit that allows them to economically scale.

“Until that happens, a company is exceptionally nimble—small engineering team hacking away trying to solve a problem,” says D’Augelli.

The biggest turning point for a startup is when it can consistently reach a 3X return on their cost of customer acquisition, as that is the point  when a company can realistically, and economically, scale.

For most businesses, reaching this point happens when they can clearly identify THEIR target market. After all, startups tend to want to please every and any customer—or different types of customers. This often results in their hacking away at a bunch of different solutions, as opposed to creating a targeted solution that satisfies only a specific segment of the market.  As a result, startup resources are often spread too thin, as they are trying to satisfy what Customer A needs and what Customer B wants.  

After all, when startup staff don’t clearly know/understand who they are working to satisfy, they won’t have the time and resources to improve services or to innovate. Startups like this consequently enter a cycle of growing revenue, and then burning revenue.

When startups are trapped in this cycle, they won’t—can’t—see exponential growth.

But when a company makes the difficult decision to pick which particular market they’ll focus on, employees will be able to focus their time and resources to help scale the business and on making “the customer” happy.

This decisive change also benefits the customers: Their experience through the sales journey becomes more positive, and customer satisfaction therefore improves.

All this added together leads to higher retention rates and a consistent 3X return on the cost of customer acquisition.

Indeed, the case studies speak for themselves. For one, this is exactly how Hubspot, a marketing automation company headquartered in Boston, was able to make the big jump from a startup to a scalable company.

In its earlier years, HubSpot was struggling to exponentially grow their revenue and drastically scale the company. But then, leadership decided to pick between two different markets they were engaging. It wasn’t an easy decision because both types of customers were bringing in a significant amount of revenue. But that’s the point. At such an early stage in a startup’s life, picking a market to focus on will always be a tough decision.  

HubSpot decided to target a market they referred to as “Mary Marketer”—a marketing manager in a company from 10 to 100 employees. HubSpot would focus on only those customers and nobody else. The entire company, meaning every employee (even engineers in mid-project), had to shift to that focus.

The strategy worked. HubSpot exploded. They were able to increase their customer retention rates dramatically. Their customers were happier. Their product was selling more efficiently. Their revenue grew exponentially.

At this point, HubSpot had sufficient resources to invest in scaling up the company without sacrificing profits. And so HubSpot turned the corner, going from a startup to a scalable company.

However, in my opinion, being a startup is also about company culture, employee interactions, casual work environments, and sincere customer service. And once the company starts to scale by using a workable business model, the company’s increasingly bureaucratic structure will result in processes that inherently makes it less startup-like.

Semantics

At the end of the day, it's a term that gets used differently in various situations. And I am certainly no exception to this inconsistency. I even occasionally refer to Sprk'd as a startup even though we're a service-based company with a clear business model and target market (we sometimes serve other startups and small businesses, so it's easy to get caught up in the lexicon of the industries we serve :) ).

What do you think? When is a startup no longer a startup in your mind? Let us know in the comments below.

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