What's a startup?
Everybody talks about startups, but in my experience, meeting thousands of founders around the world, very few of them know what a startup is. They are building ordinary, maybe high-tech, companies.
How we got here
I love my job: talk to startup founders around the world, and find the ones that will likely become successful big companies. I focus my attention on a subset of those promising companies, those that have HQ in Silicon Valley and operate thanks to a distributed team. Investing in remote work strategies and realities with a distributed team is our investment theses at LombardStreet Ventures.
LombardStreet Ventures work in the pre-seed first and then seed market. We interview founders anywhere in the world with a clear view of how to get to dominate their market niche from Silicon Valley.
I rarely meet people in person, and for the last three years, all the talking has been held through a video conference. Don't get me wrong: I love meeting people in person whenever it is possible.
Silicon Valley, remote work, and the right founding team are three concepts that drive our discovery of the next big thing. At least half of the people I talk to don't live in the Valley, though. Sometimes they have a great product and are determined to execute their vision successfully. Most of the time, something is missing in their picture: a geographically limited market, a not big enough dream, a problem too specific to their community, and much more. After thousands of calls, I started thinking about what all these companies have in common, and my conclusion is that they don't grasp "what a startup is."
Sometimes we think it's obvious, but it's not. And the more you get far from Silicon Valley, and the more the misunderstanding becomes real. This fact is especially actual nowadays because startups are all the rage. Every nation thinks it can create successful startups in its own country, and that's a good thing. The wrong one is that they try to adapt the meaning to what a startup is in their country. Most of the time, they do that without a clear understanding of this phenomenon. How could they? How many senators did create a startup and sold it for $500M in their career?
A startup is a global company and a universal concept for the venture capitalists, and there's no such thing as a country-dependent definition.
For example, it's great that every government wants to nurture its startup ecosystem, but not every country has big enough markets that its startups can tackle. And when I say big markets, I mean in the billions.
Let's clear once and for all what a startup is so we can then talk about all the rest with this universal definition in mind.
A startup is a fast-growing young big company.
This kind of company aims to reach an impressive market share and substantial revenues in much lesser time than an ordinary company. And to get to that point quickly, it leverages on a) novel technologies that presumably will spread a lot eventually, b) venture capital funds' money.
In its essence, a startup is a fast-growing young big company. All the rest comes from the previous few concepts.
How big should be the potential market of a startup? "Billions of dollars" is recurring a lot in startups' life. To create a company so big, it's clear that the company must tackle problems that a lot of people have and provide them with precisely the same solution all around the world. If the country where the startup is born is too small or too slow or too complicated, that is not probably the best place to start gaining a market share. Prove to an investor that you can make it in the smallest and tightest country on Earth is not a useful metric.
The ideal for a startup is to tackle a large number of people since day one, all with shared habits, rules, government, and language. That brings us to three main clusters: the USA, India, and Cina. Europe is another attractive cluster, of course, but harder to conquer. There are shared rules among the members, but each nation has its president, language, and country-specific laws. Nonetheless, even if harder to get into, it's a vast market. Probably slower to scale, but valuable.
Another significant aspect that distinguishes a startup from an ordinary company is its competition.
A startup always has a global market, and that means global competition.
Your competitor list comes directly from your business proposition. A barbershop competes locally; there's no other way of getting your beard done. A translation service competes globally, even if the entrepreneur doesn't understand that already. Sooner or later, a new online service will pop up on the market, even in a different continent, and your local translation shop might risk going underwater overnight.
Most of you could say: "Well, not in my town. People know me, and they want to see me in person". Right. Then a pandemic event comes; suddenly, your customers cannot meet you anymore, and all of your certainties become less certain.
How can we avoid getting confused?
When we talk about startups, Silicon Valley always plays a central role. San Francisco undoubtedly leads the startup market. I think the best we can do to understand how things work in this business is to realize how Silicon Valley startups get created, raise capital, face the market, hire people, grow, get sold, and sometimes are reborn from their ashes.
Understanding how Silicon Valley startups work is crucial if you want to be part of the same game anywhere in the world. You can accept it or not, but San Francisco set the rules and define standard practices in that area.
If things work differently in your country, you should ask yourself why. You might be playing an exciting but very separate game. If you can't raise capital, there's always a reason—and you better understand what that reason is.
That is my goal here with "The Valley": help founders and first-time angel investors make it clear on the Silicon Valley way of doing things.
This article is just a start, and if you are curious, I have a lot to say on this topic.