Wednesday, October 03, 2012

(Technology) Startup = Growth (through Technology)

If you haven't already read Paul Graham's excellent essay Startup = Growth, please go away and do that now, then come back.

Ready? Good. When I read this essay, I was immediately reminded of Alex Payne's equally strong post from earlier this year, in which he asks the valid question, "What Is and Is Not A Technology Company?". The tl;dr version is that Alex argues for defining technology companies as follows:
You are a technology company if you are in the business of selling technology. That is to say, if your product – the thing you make money by selling – consists of applied scientific knowledge that solves concrete problems and enables other endeavors, you are a technology company.
Whether something is or is not a technology company is a useful question to answer. As Alex describes in some depth, there are a lot of new businesses that get plenty of coverage in TechCrunch, GigaOm, or Your Favorite Tech Startup Blog, but are not really technology startups. However, they are able to go constituencies like the public markets and say, "We use lots of software to run our business, that makes us a technology company, you should give us a multiple like a technology company would get." But we're starting to see how that turns out. There are similarly distorting effects when non-technology companies engage in hiring, compensation decisions, etc, as though they were in fact technology companies.

Riffing on the ideas that Paul Graham put out, I want to offer a new definition for a technology startup. If we believe the premise that a startup is defined by growth, then it's a natural corollary that a technology startup is one in which the growth is driven by technology innovation and execution.

So what kinds of companies does this disqualify from being considered "technology startups"?
  • If your startup's growth is driven by marketing deals with big brands and celebrity endorsements, that's a marketing startup (ex: ShoeDazzle)
  • If your startup's growth is driven by a massive sales force, calling every local business in the US to get them to sign up, that's a sales startup (ex: Groupon)
  • If your startup provides a site or service that grows primarily through users interacting with each other, and bringing new users in, that's a social startup (ex: Instagram)
It's important to accept here that something can be a great startup with fabulous growth prospects without having to be a technology startup. As demonstrated in the case of Instagram, this kind of company can created massive amounts of value without necessarily being a technology startup. I have to wonder if part of why so many companies aspire to the label "technology startup" is that they feel any other kind of startup is a second-class citizen.

The reason I think this definition is most useful is that it can really get to the cultural difference between a technology startup and a non-technology startup. I think there are a lot of good startup ideas out there where you can choose whether to focus on sales, marketing, or technology as the primary means of growth.

This is how you can have a company that sells a technology product as their main means of business, but is actually a sales company. This would be a technology company under Alex's definition, but not mine. For example, many companies providing software as a service to small and medium businesses are not what I would consider technology startups, because the growth vector is a matter of hiring more salespeople to contact more SMBs, not a matter of making the software more complex or feature-rich.

This definition can also be useful in understanding how the focus of a company is a reflection of the founders. I've heard it said that a company can't be a technology startup if none of the founders can code; it seems like this shouldn't have to be true, though in practice a founder is most likely to push growth along the direction that they're most familiar with. A founder who is well-versed in technology is likely to look at growth problems and see how new technology will lead to that growth, whereas a founder with a sales or marketing background is more likely to focus on those functions as the path to growth. What's interesting here is that, for some businesses, it's equally likely that the business could be built either as a technology company, or as a sales company, or as a marketing company, but the way it actually gets built is a reflection of the founders' backgrounds.

Perhaps one of the most telling indicators of what function is a driver for a company's growth is their hiring strategy. Companies that I would call technology startups have a clear sense on the growth  impact of adding an additional engineer, and, as such, are always hiring for good engineers. Sales-focused startups have a similar hiring strategy when it comes to salespeople. But the company that goes months at a time without hiring engineers has not found a way to convert an additional engineer into incremental growth.

In the end, I hope this is a useful rule of thumb for anyone trying to decide if that startup they're thinking of joining really is a technology startup, or just a sales company that uses a lot of software to keep the lights on. I'd love to hear any and all comments on this idea.

1 comment:

Karan Joshi said...

It does make a lot of sense to me. Although, in the case of social startup, there might be an overlap between social and technology.For example, in the case of Instagram, their app is their primary product which in essence is an application. There growth will depend on making the app more attractive to new and existing users. Generally, it will take some technical enhancement to make the app more attractive..whereas a mob like Groupon has a lot more focus on deals and does not need to continuously improve the platform in order to grow.