Thursday, January 14, 2016

What is a Startup?

Eric Ries, author of the Lean Startup, describes a startup as "a human institution designed to create a new product or service under conditions of extreme uncertainty." Steve Blank and Bob Dorf, Silicon Valley serial entrepreneurs, defines it as "an organization formed to search for a repeatable and scalable business model."

The emphasis on these definitions is that the startup offers something entirely new. By virtue of its novelty arises the uncertainty: potential customers may not, at the moment, know or feel that they need such a product or service. This is why startups are challenging.

Consider a group of entrepreneurs banding together to open a t-shirt printing business. Does this constitute a startup? It does not. T-shirt printing is a well-established business model. The entrepreneurs know what they are delivering, the customers know what they are getting. The success of the business boils down to sourcing, production, pricing, and marketing. The same argument goes for most food, retail, and trading businesses.

Now consider a group of entrepreneurs who open a web design business catering to foreign clients. Does this constitute a startup? Still it does not. That may have been the case ten years ago but that market has matured and the model has become fairly well known. The success of the business boils down to the skill, execution, pricing, and marketing.

How about a group of entrepreneurs who start a photo sharing service-and-restaurant promotion business? Is this a startup? Increasingly no. Customers now understand that service, the the technologies behind it are now widespread, and that market is being squeezed from both sides by traditional promotion companies and big services like Facebook and Google.

This is why startups are hard: coming up just that new product or service. Once the mainstream customers "get it", every mom-and-pop shop starts offering the service. Then it becomes a game for the company with the deepest pockets to win.

This is also why startups are so counter to our prevailing culture. Startups are about taking advantage of uncertainty. Startups are willing to forgo profitability in order to achieve growth, and with no guarantee that that customer base will translate to future pesos and dollars. Startups are willing to learn from their mistakes, but in order to do that, they have to make them first.

So far I've laid out ventures that aren't startups. Easy enough to be a contrarian and point out what doesn't work. So what are examples of some that are?

Aumeo developed and sells an adaptive sound filter that customizes the listening experience for every individual. HelloSign provides a framework for legally binding e-signatures using iPhone and Android with fingerprint scanners. Katsana provides behavioral analytics for drivers of transportation fleets.

Presented with these types of products and services, the typical response might be one of puzzlement. What importance could they possibly be? But consider: Aumeo could become a standard add-on for audio devices; HelloSign could become a standard for business documents; and Katsana could become a standard for fleet management.

The operative word being, of course, "could."