Whether thinking about how to support the growth of startup ecosystems, or how to measure the economic impact startups can have, it is crucial to identify what exactly a ‘startup’ is. For the term to have any meaning, it must do more than identify all young businesses. In the context of a global economy being rapidly transformed by scalable, tech-led young companies, ‘startup’ should be used to identify the sorts of scalable businesses capable of affecting that change.

PRINCIPLES FOR IDENTIFYING STARTUPS

Standardising the definition of a startup would boost data collection efforts, make costing new startup focused programs more accurate, and would help in designing programs to suit the unique needs of rapidly scaling businesses.

A host of programs delivered at all levels of government seek to target startups, so there are already examples of definitions in legislation. The ‘startup stream’ of the Global Talent Employer Sponsored (GTES) program, for example, has been designed to target a select segment of the business community. Special rules for startups under the employee share scheme legislation and the angel investor tax rules also target startups.

Looking to set up a one-size-fits-all definition of a startup presents some risks. If the definition is too narrow, it may not be appropriate for a broad range of programs, leading to situational modifications of the definition and a reversion to a piecemeal approach. On the other hand, if a broad definition is adopted it may not serve the purpose of identifying the right category of businesses clearly enough.

Despite these concerns, there are some core principles that should be considered in any reasonable definition of a startup, which we outline here. Thresholds used for each principle may vary with particular use cases. In some circumstances a ‘young’ company might be under 10 years old, whereas for other purposes it might need to be under five years. But the principles themselves should remain.

The intention here is not to be overly prescriptive, but rather to provide a framework around which a workable definition might be built. The overall assessment will be inherently qualitative. In many cases, there will be outlier cases that should be considered startups even though they don’t meet all of these conditions. The most obvious example would be a startup that has grown very quickly, putting it outside the applicable definition of ‘small’. But its structure, growth strategy, use of technology, and age may make it clearly a startup in all other respects.

The basic principle is that a startup is a business that is young, small, high-growth, and using technology to address a large market.

A startup must be looking to solve a large, global problem with a sizeable market attached to it. Startups are ambitious and the fuel for their potential is stored in the size of the market they are aiming to address.

Young

Startups have been recently created and are looking to grow and expand rather than consolidate. Some rare exceptions might include a late pivot from an existing organisation, or the recent commercialisation of a product with a very long development and testing phase.

Small

Many large organisations still think of themselves as a startup and may satisfy some of the ‘startup’ principles outlined here. However most programs or legislation aimed at startups are probably not looking to include tech giants. For practical purposes, a limit on size in the definition of a startup helps define the scope and intention of the program as a whole.

High Growth

A key distinguisher between a startup and an SME is their intended growth rate. Much of the justification for support of startups is their potential to scale rapidly, increasing wealth and employment for the areas in which they operate in a very short timeframe and at a large scale. Growth of this kind need not have already happened, but to qualify as a startup the business model of the organisation should show the intention and ability to grow and expand at a rapid pace.

Uses Technology

To achieve scale and the growth levels we’d expect from a startup requires the use of technology. We would expect that central parts of the business model and/or products would have technological components. This may include deep technology and IP, or simply incorporating an innovative use of digital technology to unlock the potential for large-scale growth.

Addresses a Large Market

A startup must be looking to solve a large, global problem with a sizeable market attached to it. Startups are ambitious and the fuel for their potential is stored in the size of the market they are aiming to address.