Startup billionaire Elon Musk with a flame thrower.

These Five Factors Differentiate A Startup From Other Companies

What makes a startup different from other company foundations? The question might sound trivial, but differentiating between startups and other types of companies is no simple matter. We explain the five most important differences.

Startup means a lot of things: The successors in a family company found a “startup” to develop new products. The “food startup” on the corner sells the latest Instagram creations. Corporations advertise their “startup culture” in job offers.

Startup as a term promises new and exciting products, a friendly work climate, speed and flexibility. The Munich-based sociologist Armin Nassehi once said:

“Startup means that you belong to a new societal class, namely the creatives, which means to those who by nature intrinsically reject exactly what they are doing, namely developing a business model.”

Does that mean startup founders are entrepreneurs disguised as creatives? Strictly speaking, “startup” has a different and very specific meaning. Just look at the corona bailout program for startups, which is only intended for a very specific kind of company. When we talk about the “Startup Nation Israel,” we’re not talking about the multitudes of fantastic fusion restaurants in Tel Aviv, but rather and most importantly about the many young software and hightech companies in the country. Munich Startup also particularly covers startup companies in a very distinct sense.

Startup or start-up?

Let’s start with the term itself: The only spelling in German listed by Duden is “Start-up.” However in recent years, “Startup” seems to have prevailed. “Start-up” is presumably meant to emphasize the origins in the English term “to start up.” And in English as well, you read “startup (company)” more often than “start-up (company),” for instance in the related Wikipedia article.

A search in Google Books Ngram Viewer shows how often “Startup” and “Start-up“ are used in German books. “Startup” could be found more often than “Start-up” for the first time in 2006. From 2013 to 2015, “Start-up” was a step ahead for a short while, but then had to finally admit its defeat.

Startup oder Start-up?

These five factors differentiate a startup from other companies:

1. Forever young

Let’s begin with the most obvious factor: Startups have something youthful about them. It’s not only in clichés that startup founders wear hoodie sweatshirts instead of suits and are more likely to be 30 than 50 years old. The startup icon Elon Musk makes a point of appearing youthful, smoked marijuana during an interview, sells and plays with flame throwers and argues with pretty much anyone on Twitter. The 49-year old sometimes seems like a cross between a college student, Bond villain and rock star, but most certainly not like a middle-aged man.

2. Lean and agile

The path from (business) customers’ demands to a finished product used to be relatively clear: On the customer side, there is a need for a product or service. A customer writes what they need in a customer specification and looks for a service provider who can deliver the desired product as cost effectively as possible.

But that is where some problems arise: The needs might change during the development process, which means the finished product is no longer required. Or the customer is not fully aware of which solutions are even possible. Or after years of development, it might turn out that the budget is by no means sufficient and that development is taking much longer than planned. Or, or, or…

Startups have their own methods and procedures to tackle these difficulties in the development process, and those methods set them apart from other kinds of companies. For one, you have the ‘lean startup’ model. The goal of this principle is to keep a company’s processes as lean as possible and to focus all work on the ultimate objective: developing a product for which there is a market. Instead of extensive considerations and tests, hypotheses are tested on the market as quickly and cost effectively as possible. This is how the team builds a prototype that just manages to function, their MVP or minimum viable product, with minimal effort. In cycles kept as short as possible, the prototype is adapted and constantly tested by customers. Should it turn out that there isn’t a sufficient market for the product, instead of being sentimental about it, the product is modified, sold on or abandoned – the main thing is to not waste any further resources. Fail fast.

Agile working moves along the same lines: Product development is put at the heart of a dynamic process. In short iterative loops, the team constantly reflects on their own work. There are several other differences when compared to classic product development: The agile method Scrum, for example, rejects hierarchical structures in the development process. Instead, all equal developers work together with a Product Owner, who represents the customer’s needs, and a Scrum Master, who makes sure the process is adhered to. The two agile experts Christian Kroemer and Tobias Hingerl provided more information about agile working and Scrum in an interview with Munich Startup a while back.

3. Open communication instead of closed doors

Both internally and externally, startups value openness, collaboration and interaction with others. Startup founders are used to constantly talking about their companies and products: in pitches for investors, during startup competitions, at networking events. While classic founders work on refining their products or are even worried about a competitor stealing their idea, startup founders seek constant interaction with others, because they know: Ideas are worthless, execution is everything. They would rather make good connections and be visible to the public for potential employees and customers than hide behind closed doors. Even the chief executives of unicorn companies such as Flixbus and Celonis could be found – when events were still being held before corona – constantly on the stages of small and large events.

4. Transformation as a permanent state

While classic companies usually have a difficult time dealing with transformation and change management, startups have turned constant transformation into a principle. It is common practice in a lean startup model to toss products that don’t work overboard or to make a pivot, which means making radical changes to a business model. And even former startups that have grown into giants are constantly transforming themselves: Zalando has developed, as Amazon previously, from a vendor into a platform vendor, and Google now runs the world’s most successful search engine just on the side. The way that young companies like Tesla have been pushing industry giants around in recent years shows how effectively and flexibly startups can deal with change – and how classic companies cannot.

5. Growth instead of profit

Representatives of the old economy never tire of accusing startups of simply burning other people’s money and not creating any value. And the accusations are often true: Startup companies don’t want to earn any money in the initial stages, but instead want to grow as fast as possible. That’s because startup founders know ideas are of little value and only their execution counts (see factor 3), you simply have to be faster and better than the rest. That applies most particularly to business models that count on the networking effect, in which case the value of a product increases with its number of users. That is true, for instance, for social networks, marketplace portals and much more. Whoever gets big first wins the whole pie, or in other words: It wouldn’t be a good idea to start a new Airbnb, eBay Classifieds or Facebook.

The primacy of growth is also backed by a cultural shift: The “businessmen of integrity” of the past counted on having an impeccable reputation. A founder keeps track of their debt, does sound business and doesn’t overdo it. A startup founder, in contrast, collects money from investors whose calculations very much account for the potential of making a total loss. Regardless of what you might think about that morally – a look at the most successful companies in recent decades proves that this model is an overwhelming success.