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Defining a Startup - A Critical Analysis

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DOI: 10.2139/ssrn.3823361

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 Defining a startup- A critical Analysis

Prepared by:
Zaeem-Al Ehsan
Email-zaeemal-2016718366@iba.du.ac.bd
Phone: 01686097425
BBA, IBA-DU, Bangladesh
MSS in Economics, East West University, Bangladesh
 Defining a startup- a critical analysis

The word “startup” has become a buzzword in contemporary policies and public debate.
Promoting entrepreneurship in the form of startups is a policy activity being given high priority all
over the world. Every year, a whopping 100 million startups begin1 their operations worldwide
and hence have a profound impact on the economy they are operating in. Wennekers & Thurik
(1999), Carree & Thurik (2003) and Fritsch & Mueller (2004) state that startups have a direct
impact on new employment and new production, and direct contributions to in-migration and
increased regional productivity2. This direct impact can be realized in the Australian
government’s goal to accelerate growth in their technology startup sector since they project that it
could contribute 4% of GDP by 2033 and directly employ 540,000 people3. Additionally, Fritsch
& Mueller (2004) find that startups cause incumbent firms to behave more efficiently and increase
competition and innovation in the market4. Hence, there lies a dire need for governments to foster
the growth and fruition of startups since it directly correlates to economic growth.

This salient need to support startups highlights the question – “what constitutes a startup?” . In
order to reach out to and help these budding entrepreneurs, governments have to distinguish a
startup from a small business and therefore there needs to be an operational definition of it. While
Small and Medium Enterprises (SME) are categorized based on their annual revenue5, number of
employees6 and value of fixed assets7 (less buildings and land), there is a lack of literature on
outlining what a startup is. The message these studies convey is generally the same, they tend to
employ different, often ad hoc, approaches to the definition and measurement of key concepts and
relationships. The inconsistency among the studies in the literature creates a generalizability
problem and weakens their external validity. This diminishes the impact of the message regarding
startups on policy-makers. Therefore, it is imperative to establish a widely accepted definition of

1
http://www.moyak.com/papers/business-startups-entrepreneurs.html
2
Audretsch, D. B., & Acs, Z. J. (1994). New-firm startups, technology, and macroeconomic fluctuations. Small
Business Economics, 6(6), 439–449. doi:10.1007/bf01064858
3
PwC (2013). The startup economy-How to support tech startups and accelerate Australian innovation
4
Audretsch, D. B., & Acs, Z. J. (1994). New-firm startups, technology, and macroeconomic fluctuations. Small
Business Economics, 6(6), 439–449. doi:10.1007/bf01064858
5
https://www.thebalancesmb.com/sme-small-to-medium-enterprise-definition-2947962
6
https://www.bb.org.bd/sme/smepolicye.pdf
7
https://www.bb.org.bd/sme/smepolicye.pdf
startups. This paper attempts to do that. First, an analysis of the various definitions of start-ups
used by researchers has been done. Second, this paper identifies 4 overlapping variables used to
define a startup – age of incorporation, innovation, risk/uncertainty, growth. Within these,
innovation has been identified as a key differentiator of a startup, growth and risk as being
outcome variables and the age of incorporation being the cut-off point of a startup.

Startups have been a keen field of interest for researchers and policy makers for decades.
However, the definitions employed by them have adjusted with the course of time. Earlier
researchers have categorized a startup solely based on the newness of their legal existence
(Freeman et al (1983); Hannan and Freeman et al (1989)). Virtually all studies prior to the 2000s
(Appendix A) use “new” as the main discriminator. To Keeble (1976), for example, this means
“the creation of an entirely new enterprise which did not formerly exist as an organization”. For
Gudgin (1978), a new firm is one “which began production for the first time”. “New” by these
definitions includes every newly created firm in a given time period except the ones created by
changes in name, ownership, location, or legal status. The operationalization of the “new”
criterion necessarily requires knowledge of the start-up date. That is commonly considered to be
the date of a firm’s registration as a legal entity. This approach should be used since registration
records are readily accessible.8 Hence, a cut-off point has been devised for the respective
countries based on the age of incorporation in order to disqualify firms from being categorized as
a startup (Table 2: Cut-off point based on age of incorporation).

While past literature (Appendix A) fixated on the “newness” of a startup, contemporary scholarly
papers (Appendix B) show a growing consensus of classifying a startup as being innovative due
to the increasingly complex requirements of both domestic and foreign markets9 and is reflected
in the change in definitions used by researchers ( Krejci et al (2015) ;Cho and McLean (2009);
UNAM (2013)).These researchers identify that innovation is highly related to growth (UNAM
(2013); Krejci et. al.(2015); Bessant & Tidd (2015); Kuczmarksi (2003)) since it generates
higher earnings as well as to risk/uncertainty (Cho and McLean (2009); Ries (2011); Boyer and
Blazy (2013); Hyytinen (2015); Samuelsson and Davidsson (2009)). This exodus of researchers

8
Luger, M. I., & Koo, J. (2005). Defining and Tracking Business Start-Ups. Small Business Economics, 24(1), 17–28.
doi:10.1007/s11187-005-8598-1
9
Purnima. Sandhu, M . Kaur, G. (2018). Role of ICT in the success of Start-up India International Journal of
Scientific Research Engineering & Technology (IJSRET), ISSN 2278 – 0882 Volume 7, Issue 2, February 2018
from defining a startup solely based on its “newness” reflects the dynamic needs of customers in
the current market10 and the necessity to be innovative. Taking into account this added variable,
this paper finds that startups are being categorized according to 4 overlapping variables- age of
incorporation, innovation, growth and risk/uncertainty. This paper identifies “innovation” as
being the key differentiator of a startup and growth/risk being the following outcome of said
“innovation”.

The evolution of the definitions to include “innovation” as a variable lies in the fact that being
innovative was not always the most pressing issue for startups. A study by Smalibone (1990)
finds that according to 121 London startups, marketing themselves and financial control were the
most significant problem they faced11 . The nature of the current market demands that a startup
venture should attempt to introduce a product with a major advantage in the market’s early
years12 and in the latest technologies13. ICT-enabled innovation permits the innovator to scale up
quickly. ICT also allows innovators to conceive and exploit entirely new ideas. It also provides
the underlying infrastructure to create new value chain configurations, or to reconfigure those
already in existence.14

Conclusion

This paper reviewed existing literature regarding startups at an attempt to formulate an

operational definition for it. There is a lack of consensus about how to define startups, and a
pressing need to develop quantifiable metrics for distinguishing it since it is in the best interest of
governments to promote and support them. While this paper develops a cut-off point based on
the “age of incorporation”, it uncovers a more significant need for researchers to define and
measure “innovation” in more absolute, universal and quantifiable terms. There also needs to be

10
Purnima. Sandhu, M . Kaur, G. (2018). Role of ICT in the success of Start-up India International Journal of
Scientific Research Engineering & Technology (IJSRET), ISSN 2278 – 0882 Volume 7, Issue 2, February 2018

11
Smalibone, D. (1990). Success and Failure in New Business Start-Ups. International Small Business
Journal: Researching Entrepreneurship, 8(2), 34–47. doi:10.1177/026624269000800203
12
William T. Robinson. (1990) Product Innovation and Start-Up Business Market Share Performance. Management
Science 36(10):1279-1289. http://dx.doi.org/10.1287/mnsc.36.10.1279
13
Purnima. Sandhu, M . Kaur, G. (2018). Role of ICT in the success of Start-up India International Journal of
Scientific Research Engineering & Technology (IJSRET), ISSN 2278 – 0882 Volume 7, Issue 2, February 2018
14
Markides, C. C., & Anderson, J. (2006). Creativity is not enough: ICT‐enabled strategic innovation. European
Journal of Innovation Management, 9(2), 129–148. doi:10.1108/14601060610663532
a metric for assessing what level of high growth can be attributed to a startup’s innovative
nature.

Upon a thorough review of literature, this paper proposes the following definition of a startup-

“A startup is rapidly growing firm due to its innovation in terms of products/services and
processes through the aid of IT/ICT enabled services. The status of being a startup is contingent
on the age of incorporation (Table 2: Cut-off point based on age of incorporation) of the business
as per its country’s regulations”

Appendix A
Analysis of Past Literature (Prior to 2000s)

Age/ Risk/
References Innovation Growth Definition
Newness Uncertainty
A startup is the creation of an
entirely new enterprise which did
Keebel (1976) P
not formerly exist as an
organization1. (p.18)
A new firm which began production
Gudgin (1978) P
for the first time2 (p.18)
Freeman et al Startups are companies bound by
(1983) P P their liability of newness and
smallness3 (p.3)
A "start-up" is a newly born
Carter et al
P company, without previous history
(1996)
of operations4 (p. 153)
1. Luger, M. I., & Koo, J. (2005). Defining and Tracking Business Start-Ups. Small Business Economics, 24(1),
17–28. doi:10.1007/s11187-005-8598-1
2. Luger, M. I., & Koo, J. (2005). Defining and Tracking Business Start-Ups. Small Business Economics, 24(1), 17–
28. doi:10.1007/s11187-005-8598-1
3. Abatecola, Gianpaolo & Cafferata, Roberto & Poggesi, Sara. (2012). Arthur Stinchcombe's "liability of newness":
Contribution and impact of the construct. Journal of Management History. 18. 402-418.
10.1108/17511341211258747.
4. Carter, Nancy & Gartner, William & Reynolds, Paul. (1996). Exploring Start-Up Event Sequences. Journal of
Business Venturing. 11. 151-166. 10.1016/0883-9026(95)00129-8.

Appendix B
Analysis of contemporary literature

Cho and Temporary organizations that create

McLean P P innovative products and/or services
(2009) using high technology1, but this
 type of companies are also known
to be inserted in uncertain and risky
scenarios. (p.127)
A startup is defined as “a human
institution designed to create new
Ries (2011)
P P products and services under
conditions of extreme uncertainty”2(
p. 8).
A type of company with a
UNAM(2013)
high level of projection of growth
due to the intensive use of the
P P technology in its construction and
development, whose main objective
is to innovate in products or
services for its clients3 (p.72)
A startup is a new and temporary
company that has a business model
Krejci et al based on innovation and
P P P 8
(2015) technology . In addition, these types
of companies have a potential for
rapid growth and scalability. 4 (p.1)
India’s Ministry of Commerce and
Industry defines an entity being a
startup5 till up to five years from the
India’s
date of incorporation and those
Ministry of
working towards innovation,
Commerce P P
development, deployment, and
and
commercialisation of new products,
Industry(2016)
processes, or services driven by
technology or intellectual property

The European Start-Up Monitor

defines start-ups by three criteria6
European
(ESM, 2015):established for less
Startup
P P than 10 years; bring innovative
Monitor
technologies and/or new business
(2015)
models sales

Startups can be defined as newly

established, innovative companies
Anamaria
P P with a service life upto 2 years and
Diana (2017)
a maximum of 10 employees7
(p.57)
A startup that has been established
for no more than 60 months as well
Paoloni, P., & as having as an object social and
Modaffari, G. P P prevalent innovative products
(2018 and/or services with high
technological value, is considered
“innovative”8
Table 1: Analysis of Literature
1. Cho, Y. & McLean, G. (2009). Successful IT start-ups? HRD practices: Four cases in South Korea. Journal of
European Industrial Training, 33(2), 125-141.
2 Ries, E. (2011). The lean startup: how today's entrepreneurs use continuous innovation to create radically
successful businesses. New York: Crown Business.
3. Hernández, C., & González, D. (2017). Study of the Start-Up Ecosystem in Lima, Peru: Analysis of
Interorganizational Networks. Journal of Technology Management & Innovation, 12(1), 71–83. doi:10.4067/s0718-
27242017000100008
4. Krejci, M., Strielkowski, W. & Cabelkova, I. (2015). Factors that influence the success of small and medium
enterprises in ICT: A case study from the Czech Republic. Business: Theory and Practice, 16(2), 304-315.
5. Santisteban, J. Mauricio, D (2017). Systematic Literature Review of Critical Success Factors of Information
Technology Startups. Academy of Entrepreneurship Journal, Research Article: 2017 Vol: 23 Issue: 2
6. Ministry of Commerce and Industry (2016), The Gazette of India:Extraordinary
7. Steigertahl, L. Mauer, R. Say, J-B. (2018). European Start-Up Monitor, (n.d.). Retrieved from
http://startupmonitor.eu/EU-Startup-Monitor-2018-Report-WEB.pdf.
8. Herte, Anamaria Diana (2017): SMEs and Start-Ups. Importance and Support Policies in European Union and
Romania. Published in: Proceedings of the 8th Conference of Doctoral Students in Economic Sciences, December
2017, Oradea No. 5 (2 December 2017): pp. 56-60.
9. Paoloni, P., & Modaffari, G. (2018). Female-Owned Innovative Startups in Italy: Status Quo and Implications.
Administrative Sciences, 8(4), 66.

Cut-off point
Country Age
Italy <5 years
India <6 years
European countries( except Italy) <10 years
Table 2: Cut-off point based on age of incorporation

Bibliography

1. Audretsch, D. B., & Acs, Z. J. (1994). New-firm startups, technology, and macroeconomic
fluctuations. Small Business Economics, 6(6), 439–449. doi:10.1007/bf01064858
2. Cho, Y. & McLean, G. (2009). Successful IT start-ups? HRD practices: Four cases in
South Korea. Journal of European Industrial Training, 33(2), 125-141.

3. Herte, Anamaria Diana (2017): SMEs and Start-Ups. Importance and Support Policies in
European Union and Romania. Published in: Proceedings of the 8th Conference of
Doctoral Students in Economic Sciences, December 2017, Oradea No. 5 (2 December
2017): pp. 56-60.
 4. Hyytinen, A., Pajarinen, M., & Rouvinen, P. (2015). Does innovativeness reduce startup
survival rates? Journal of Business Venturing, 30(4), 564–
581. doi:10.1016/j.jbusvent.2014.10.001

5. Iakovleva, T., Kolvereid, L., & Stephan, U. (2011). Entrepreneurial intentions in

developing and developed countries. Education + Training, 53(5), 353–
370. doi:10.1108/00400911111147686
6. Khorshid, Rava (2019); Innovation in Startups: Drivers and Inhibitors
7. Krejci, M., Strielkowski, W. & Cabelkova, I. (2015). Factors that influence the success of
small and medium enterprises in ICT: A case study from the Czech Republic. Business:
Theory and Practice, 16(2), 304-315.
8. Luger, M. I., & Koo, J. (2005). Defining and Tracking Business Start-Ups. Small
Business Economics, 24(1), 17–28. doi:10.1007/s11187-005-8598-1

9. Ministry of Commerce and Industry (2016), The Gazette of India: Extraordinary

10. Paoloni, P., & Modaffari, G. (2018). Female-Owned Innovative Startups in Italy: Status
Quo and Implications. Administrative Sciences, 8(4), 66.

11. Smalibone, D. (1990). Success and Failure in New Business Start-Ups. International
Small Business Journal: Researching Entrepreneurship, 8(2), 34–
47. doi:10.1177/026624269000800203
12. Spiegel, O., Abbassi, P., Zylka, P., Schlagwein, D., Fischbach, K. & Schoder, D. (2015).
Business model development, founders? social capital and the success of early stage
internet start-ups: A mixed-method study. Information Systems Journal, 1-30.
13. Steigertahl, L. Mauer, R. Say, J-B. (2018). European Start-Up Monitor, (n.d.). Retrieved
from http://startupmonitor.eu/EU-Startup-Monitor-2018-Report-WEB.pdf.
14. Vivarelli, M; Krafft, J; Colombelli, A (2016). “ To Be Born Is Not Enough: The Key
Role of Innovative Startups”, IZA DP No. 9773
15. William T. Robinson, (1990) Product Innovation and Start-Up Business Market Share
Performance. Management Science

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