European startups: a name too Loose to really mean anything anymore

I spent the whole afternoon and evening yesterday evaluating a list of about 50 UK startups that will compete for the title of “European Tech Media Company of the Year” in a high-profile October event in London. Not that I haven’t been involved in similar processes before but the point that I want to highlight hereby is the absolute mental maze that we, the evaluators, got ourselves in for about 5 good hours. Amongst us some high profile investors, lawyers and execs in the entrepreneurial world.

The mind-boggling issue was to have on the list a mixture of early startups alongside companies trading for a large number of years as well as companies turning over the £100m per annum. To everyone’s amusement, a good number of companies dated back to 2000 – yes, almost ten years ago – and still no one in the room had a clue as to what was going on with their businesses because sales had not shown in the application, so still pre-revenue or bootstrapped to their eyebrows. Are we to still call them startups because they are either still unfunded, or showing very little footprint in their market?

when is a startup no longer a startup?

We can apply several measuring indicators:

(a) A startup can no longer be called a startup when their brand and footprint in the market is recognisable, they sell in several countries and – even if you don’t know if they are cashflow positive or even sell anything at all (Twitter), their brand has entered the popculture and our sometimes surprising Monarch may possibly have a subscription to it (would you follow the Queen on Twitter if she was to write her own tweets? I bet you would even if you abhor monarchy).

(b) A startup can still be a startup even when they get Angel money. Pre-revenue or with little sales to account for, half of their professional management are still in startup training and cannot be accountable for their entrepreneurial early days sins. Nowadays, by the time a VC gets involved, things are very different from “starting up”. Company founders are challenged to deliver businesses for a Series A investment round that pretty much have not only started the engines up but they left home and Mama a while (16 months) ago. You cannot call a company a startup when they have proper clients, have a PAYE payroll going, pay national insurance contributions, corporate taxes, rent office premises that cost over £25,000 a year and operate like a proper small limited company. It may trade in a risky market – in banking we call them emerging just not to freak asset managers out, but operationally they have the same dynamics and responsibilities of a SME.

Back at the World Bank we used to invest in project financing, a term that ended up meaning something very close to venture capital. Ask the EBRD (European Bank for Reconstruction and Developement) what happened to the Vienna-Budapest toll road project. Hundreds of millions awarded to 3 engineering companies to build a toll road between the two cities for the glory and the benefit of all drivers in the region. The toll road opens and NOBODY uses it. Not because it is badly done or the re-payment model has not worked before in other markets – mega successful in the UK, but because in Vienna, back in 1995 nobody cared about driving to Budapest and in Hungary Eastern European drivers could not afford toll roads.

This is exactly like investing a series A on a company – Spotify – seemingly poised to rule the world at Startrekkian valuations even though they merely have been trading since June 2009 (ehem, nothing like wiping out the Swedish/Luxemburg past, oo-keyyyy).

VCs, and challenge me if you want, invest in companies these days, not startups. They invest post-revenue and in markets where their company operate with high dosis of “sure-thing” ingredients. If you doubt this, do you honestly think for a crazy minute that Spotify would have raised that amount of wonga if there had not been a Pandora years before rocking every consumer’s music dream? Wake up and smell the decaf risk.

VCs can argue that “major” risks can jeopardise their investment, like the CEO and the rest of the bunch – young things and definitely no Steve Jobs – can go mad and mismanage the company; or the marketing strategy failing to generate more sales. These are realities that represent the day to day of SMEs and big multinationals. It is called running a business in the real world irrelevant of your size. Ask any CEO sacked – Porsche, anyone? (2009) or big FTSE company with a disastrous marketing campaign – BT and their “Dude, Where is my Internet wave for me to surf?” (2000). Risk – market, human capital, credit crises, IS business.

Leaving that heated argument aside, I can propose a safer, second line of thinking, that of the passing of time: is a startup really a startup after 2 years of trading? Because this is the point where many run out of money or patience waiting for (a) angels (b) miracles (c) the market (d) a job back in the industry.

Could we in the future start talking about startups with propriety?

How does one call an entrepreneur with a business plan looking for money? A hopeless romantic?

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Comments
2 Responses to “European startups: a name too Loose to really mean anything anymore”
  1. Marko Samastur says:

    Interesting post and I agree with most of it. Hopeless romantic does sound right, but in his defense I would say that often he doesn’t have much choice.

    Even though it is getting easier and easier to start an average web business, there are ideas where it may take more than just a couple of months to develop first version and you need some funding to get thing going.

    I can’t talk for parts of the world I am not familiar with, but judging by my observations I think one reason why so many companies want to fit into startup model is that non-VC funding options are often limited or non-existent.

    It’s hard for a small, new company to get a bank loan at all, let alone a favorable one regarding its size, interest rate and repayment plan.

    So what most of us with limited personal resources end up with is triple F funding of family, friend and fools and investment of free time. I don’t have a problem risking my money (or time), but I would not want to risk personal relationships on a business idea. I bet I am not alone with this view.

    VC investments can be like junk food. Entrepreneurs may know it is not good for them, but at least their hope doesn’t die today.

    On the other hand, I have no clue why a 100m per annum company wouldn’t rather go for IPO.

  2. Farhan Lalji says:

    Pre seed, seed, series A, Series B etc, could be a start up or not, it’s all relative.

    Like a lot of things, I use the term “compared to what?” to be the basis of labeling. If we’re talking Spotify and Apple, Spotify’s a start up. If we’re talking Spotify, and some unheard of music start up that’s got 3 guys working in their parents Garage, Spotify’s not really a start up, comparatively in that case.

    Depends on perspective and what you’re comparing it to.

    Great post.

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