When does a Startup Stop being a Startup and Become a Normal Company?

A startup transitioning into a normal company is just like upgrading your phone’s operating software. It happens with the addition of some new features that go unnoticed by the general public who think it is still the same. In the last few years, the growth of the startup industry in India has been abnormally high with new businesses ranging from tech to biotech making a mark worldwide. In technical terms, a startup is defined by a small team of less than 100 young, energetic, innovative, and revolutionary individuals, company culture, casual work environment, employee interactions, and completely customer-oriented. The time span during which a startup is trying to uncover the market for its business idea/product and looking for a way to sell their products/services, it remains a startup. But, as soon as it finds a suitable product fit for the market, develops a working business model, and starts scaling, it no longer remains a startup and is a level up to the stature of any normal company.

You can also say that once a startup has successfully figured out a working monetisation plan,  it is no longer a startup and matures into a company. The founder of one of the most famous e-wallet platform Paytm, Mr. Vijay Shekhar Sharma shares his viewpoint on this question. He says that when the founder(s) of a startup is not aware of what is happening and the teams start taking independent decisions without consulting the founding committee, it is then that a startup becomes a company. Here, finding a working business model does not only mean ‘searching’, and ‘drafting.’ Developing a working business model also means validating that the business model is operating successfully and profitably. If your startup achieves the latter stage, it has successfully graduated into a normal company.

Once the business model of a startup starts working and the business scales, it automatically shifts to a more bureaucratic structure and areas of concern include company’s security, scalability, margins, customer support staff, and hiring high-grade talents. In addition to this, a startup has an exponential growth rate with the axis going vertically high (perpendicular). Whereas, in the case of a company, the growth rate is high too, but is a bit less steep. Therefore, when a startup’s growth comes down to a gentler slope, it is understood that it is no more a startup and has advanced to become a normal company. Hence, the above question - ‘when does a startup stop being a startup and become a normal company’? Can be answered through some qualitative and quantitative factors that have been explained below for a greater understanding.

Factors that Decide when a Startup transitions into a Company

1. Team Size:

Entry into normal company/corporate culture means that your company’s team size is expanding and has crossed the mark of 100 employees. With expansion and growth in the business, the scale of operation surges too, driving the need for new departments and new employees to handle the increased work pressure. Applying this theory to startups, we can say that when it can find a market for its products/services and can sell those, the startup starts growing and expanding, requiring specialised departments with experienced people to meet the supply and demand chain. And, when a startup can hire top talents with experience and pay a handsome salary it indicates that the company is earning steady profits and has now reached an equilibrium level of growth. This situation shows that a startup is now converting into a normal company as its recruiting capacity increases. Mr. Sachin Bhatia, the co-founder of the TrulyMadly dating app has in very simple terms said, that when an owner of a startup does not know the name of all its employees who are working in his organisation, his startup is no more a startup, but a company.

2. Growth and Development:

According to Dr. Bhavya Soni, a renowned startup mentor and an Assistant Professor of Entrepreneurship & Marketing, FMS at the University of Rajasthan, a startup stops being one as soon as it celebrates 10 years of incorporation or crosses the 100 crores turnover benchmark. But,  she also believes that any startup which stops searching, innovating, learning, and improving and concentrates only on selling, becomes a normal company. Alex Wilhelm, a writer at TechCrunch has created his own “50-100-500” rule to answer the question in the topic. According to his rule, if a startup registered a $50 million revenue run rate in the coming 12 months; it constitutes more than 100 employees; and has a net worth of $500 plus million, it is termed as a normal company and not a startup.

3. Business Model:  

As mentioned in the introduction, if the current business model is not showing results, the business is still in its startup phase. It remains so until they are able to find and decide on a business model that can work successfully in the long run.

4. Stages of Funding

A former Intel Director and a merger and acquisitions partner at Indian software industry Think Tank, iSpirit, Mr. Sanat Rao thinks startups are those companies that lack a scalable business model. Further, he states that when a company can raise seed or angel funding (primary level of funding) and has also successfully secured two rounds of a private equity investment or venture capital funding, it is no more a startup company as it has now found a scalable business model and is on its route to expansion and steady growth.

5. Startups getting into the business of acquisitions:

To grow big and create a more solid, and stronger brand reputation in the market, other businesses who are struggling to survive in the market are acquired by financially stable and growing companies. And, when startups enter into the business of acquiring other weaker businesses, they are seen as a normal company due to its independent financial standing and vision of expansion. Making acquisitions means you are looking to overtake your competitors and take their market share to build a huge market presence, which is not possible if your company is still a startup.

It is only about the argument on word choice whether a company is a startup or has graduated to a normal company. Even if a startup has raised loads of funding, but is experiencing exponential growth, it's the company’s choice that matters i.e. to be called a startup or a normal company. So, it's up to you and your business model to decide how you want your company categorised.

Also read:

Top 10 Things Every Business Owner Should Know & Do.
What Is the Best Advice for a Young, First-Time Start-Up CEO?
What are the Best Ways to Think of Ideas for a Startup?
What is the perfect startup team? Importance, Tips & more

FAQs

Q. How are investors seen as a value addition to startups?

Ans: There are several ways in which investors, especially Venture Capitalists (VCs) add value to startups, a few of which are stakeholder management, recruiting talents, raising funds, managing merger & acquisition activities, marketing, and overseeing organisational restructuring processes.

Q. What lures investors to invest in startups?

Ans: Despite the risks involved in startup investments, investors are attracted to such investment opportunities because of the startup’s low overhead capital requirements and its high upside growth potential.

Q. Give a brief on Startup India Hub.

Ans: The Startup India Hub is a one-stop destination to bring together all the stakeholders involved in the Startup ecosystem under one roof where they can interact with each other, share their knowledge and establish fruitful partnerships in a passionate environment.

Q. List the documents that a startup is required to furnish to get registered under the Startup India initiative?

Ans: A company wanting to be recognised as a startup under the Startup India initiative first has to make an online application on the Startup India mobile app or their website. After that you are required to submit your company’s registration or incorporation certificate and lastly explain in brief the nature of your startup business and how innovation, development/improvement of products/services or processes are a part of your startup, or how scalable is your startup concerning employment generation and wealth creation.

Q. Will a startup company that does not have a PAN card be allowed to register as a ‘Startup’?

Ans: Yes, a startup company that does not have a PAN card is allowed to register itself as a ‘Startup.’ But, such companies should provide a valid PAN card of the startup company during the time of registration as the company is considered as an artificial person in the eyes of the law, and hence taxable separately.

Q. Under the head “Funding Bodies”, which agencies and bodies are allowed to fund?

Ans: As per the legal notification, the bodies and agencies registered with SEBI are Angel Fund, Seed Funds, Alternate Investment Funds. And Venture Capital Funds are allowed to provide financial assistance to companies and fund them in return for a minimum of 20 percent equity in the company being funded.