Make No Little Plans – Defining the Scalable Startup | Hacker News Reader

Make No Little Plans – Defining the Scalable Startup

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52 pointsnathanh10 comments

Excellent points on what constitutes a "startup" as opposed to a "small business" but the approach, I think, too narrowly limits the idea of "startup" largely to the type of potentially industry-changing company that VCs will fund.

Among other distinctions that can comfortably be drawn within what I think are clearly "startup" companies are:

1. Founders who seek to make a pure technology play and sell to a larger company within a narrow window in the 7-figure range (up to $100M). The founders in this type of startup are not in it for the long haul and can potentially succeed without any form of VC funding (though they typically do not self-fund but rely on either friends/family or angels to give them needed capital). This is a bona fide startup, in my view, even though it may not scale quickly or at all by the time its technology is acquired.

2. Founders who seek to develop a new and innovative niche business that will not shake up an industry but will make for a good growth business yielding extraordinary returns (e.g., a player that succeeds in the virtualization space with a product that does not take on VMWare or the other large players but that works within the established environment to offer, e.g., low-cost, non-resource-intensive desktop virtualization solutions for the enterprise). This type of startup will tend to scale quickly but will never shake up an industry. It potentially could succeed with angel-level funding and bypass the VCs, though more likely it will need some form of VC funding. Typical exit: up to $300M via acquisition.

3. The type of industry-changing startup described by the author of this post. Typical goal here on exit: $400M and up but usually aiming at multi-B. This type of startup is invariably VC-funded and is indeed the "sweet spot" for tier-1 VC investments.

All of the above typically involve a founding team, normally small initial capital contributions by the founders themselves, a reliance on some form of technology or IP to define at least a key aspect of the business model, and an expectation of an extraordinary comparatively short-term return on the investment (typically 3-5 years).

This stands in contrast to the attributes of a typical small business, where the founders will often make more substantial initial capital contributions, will not tend to emphasize intellectual property rights, will fix their sights primarily on making immediate operating profits, and will typically have no expectation of any extraordinary return on investment in the short term (that is, will not aim for a near-term exit).

I think the above is a more useful way of distinguishing a "startup" from a "small business." That said, the post here is quite good and highlights very sharply the key attributes of what is perhaps the most important type of startup - the one that scales rapidly and seeks to conquer an industry.

Do you have some examples in mind for 1. pure technology play?

I ask because that may be where I'm headed - thanks!

In think any situation where, from an acquiring company's perspective, the decision becomes one of "build versus buy" fits the description of a pure technology play.

That makes sense, thanks; if you have an examples, I tend to find them very educational and helpful.

SO there's GOOG/YHOO/MSFT/AMZN/etc, but there's also places like IBM/EMC/HP/CISCO that are going around spending lots of cash.

So look at edge cases around Enterprise Solutions where new tech (or moore's law) lets us do things that were too expensive previously. Some previous examples:

Data Deduplication: Data Domain --> EMC, Diligent --> IBM Config Management/Provisioning: opsware --> HP, Rembo --> IBM

many thanks!

A recent example comes to mind - Etherpad

Thanks, are the details of the basis of that public now? Since the code was released open source, it doesn't seem to be a technology IP acquisition (even though they appeared to have unpublicized patents).

I got the impression that it was mainly to recruit the tech know-how of the founders - and that the amount was not in the range mentioned here, of up to $100M.

So it looks like the difference between a startup and a small business is that the priority one for startups is technology or new business model (innovation) and small businesses focus on the operational returns (optimization)

I wouldn't push any definition too far on this point because the lines tend to blur all too quickly.

I think what I reacted to in the original post was the assumption that, in the whole universe of startup activity, only companies going for broke with industry-changing ideas can be called startups. This would mean that the only startups worthy of the name are those funded by VCs and this simply is not the case.

In addition, even if you as a founder go for VC funding, you need to understand the potential range of exits realistically available to your company because this affects how hard you want to push for a high valuation, etc. (e.g., if you push for a $60M valuation in, say, a B round, and the VCs routinely expect a 10x return, then you had better be prepared to build a more "strategic" company and to take the risks associated with it if your realistic exit path at that point will be $600M given the expectations of the VCs - maybe better in such a case not to push for the ultimate valuation to give your company more flexibility in how much it needs to scale before shooting for an exit - there is a big difference between a startup shooting to be a niche-market player versus one that wants to shake up an entire industry, and this distinction affects how its strategic goals are defined, who will manage it, and many other issues - founders need to keep such distinctions in mind as part of their strategic thinking about their companies and not just blindly go for broke).

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