The CORRECT Definition of a Startup - YouTube

So, there's this idea that's been showing  up in comments on our videos for some time  

now in a variety of different forms and  I'll give you one example - "I think the  

real startups and entrepreneurs are right out  there in the industrial area of every city.  

The MSMEs of India without any fundraise, extract  profits, week by week. They should be glorified,  

not some random service startups." And,  I've been seeing comments like this one  

on the channel for years now at this point, and  they raise a really interesting question - what  

even is a startup? What differentiates it from  say, an MSME, or alternatively a big company?  

When does a startup start and stop being a  startup? And, we've never really drawn that  

line here at Backstage with Millionaires, but  today I'm gonna try. coming up right after this.  

Okay, so the easiest line to draw here,  in my opinion, is the line between  

a startup and a company that has evolved out of  the startup title, and where we draw this line  

might actually surprise you because it's actually  a lot earlier than a lot of business and startup  

media seem to think it is, including Backstage  with Millionaires, we are guilty of this too.  

The editor-in-chief of TechCrunch, Alex Wilhelm,  popularized the 50/100/500 rule and according to  

this rule, if a startup has a $50 million revenue  run rate. or if it has 100 or more employees,  

or if it's worth more than $500 million, then a  startup needs to hang up their Startup Uniform  

and, realize that they're just another company  hunting for or actively avoiding an IPO. And,  

one interesting byproduct of this rule is that it  makes the term 'startup unicorn' a misnomer - if  

you're a startup, you can't be a unicorn, and  if you're a unicorn, you can't be a startup. Of  

course, Alex is just one voice here, he didn't  invent the term startup, it's been around since  

the 70s and started to gain traction here in India  in the early odds. For example, Deepinder Goyal,  

one of the co-founders of Zomato and a seasoned  entrepreneur, disagrees with Alex's definition. He  

said this in an interview with Melt - "Startup is  more about the culture of an organization rather  

than the state of an organization, like state is  like whether you are profitable, how old are you,  

all those things, I mean they don't really matter  as long as you're still a Day 0 in your head." So,  

for Deepinder, everything boils down to culture  - even if you have more than 100 employees,  

or your ARR is upwards of $50 million, or you're  valued at more than half a billion dollars,  

you're still a startup if you behave  and think like a startup. Now obviously,  

this is a pretty blurry line to be drawing  here, so I want to share another perspective,  

that of Vijay Shekhar Sharma. He said to  Quartz that, "A startup becomes a company  

when the founder doesn't know what's happening  - so, when teams take independent decisions  

without including the founding members." Sachin  Bhatia, co-founder of MakeMyTrip and TrulyMadly,  

said something similar - "When I don't know the  name of all the employees in my workplace, it's no  

longer a startup, it's a company then. So, these  rules are a little bit more well-defined, right?  

A company moves further and further away from that  startup category as the importance of the founder  

in day-to-day operations diminishes, but what does  the Government of India think about all of this?  

Well, there's actually a definition that  the Ministry of Commerce has established,  

to define which companies qualify as startups.  According to them, a company is considered a  

startup up to a period of 10 years from the  date of incorporation, if its annual turnover  

has not exceeded ₹100 crore, and if it's working  towards innovation, development, or improvement  

of products, processes, or services, or if it's  a scalable business model with a high potential  

of employment generation or wealth creation. And,  they also detail what isn't a startup - that's an  

entity formed by splitting up or reconstruction  of an existing business. So, to me, this feels a  

lot like the 50/100/500 rule but it's just the  Government of India's version of that, we have  

a 10-year limit, we have a turnover limit, and  we have an MO that differentiates startups from  

traditional businesses, and I think that this is  where we can begin to draw the line between MSMEs  

and startups. But, that line is a bit tricky to  draw because unlike the term 'startup unicorn'.  

the term 'MSME startup' isn't a misnomer -  you can actually be simultaneously a micro  

small and medium sized enterprise, and a startup  at the same time. Now, I should note here just  

to be completely clear that not all MSMEs are  startups, and not all startups are MSMEs. So,  

at the very least, I think that we can use this  Ministry of Commerce definition to map out what  

a non-startup MSME isn't - they're not working  towards innovation, development, or improvement  

of products, or processes, or services, and they  don't have a scalable business model with a high  

potential of employment generation or wealth  creation. So, now that we know what a non-startup  

MSME isn't, let's figure out what a non-startup  MSME is, and lucky for us, the Government of India  

has also defined this term and there's even an  MSME Act, so let's get into it - So, first of all  

whether you're considered a micro, or a small, or  a medium-sized enterprise, primarily comes down to  

how much you've invested in your enterprise. So,  in the case of a manufacturing enterprise, you're  

in the micro category if you've invested less than  ₹25 lakh into your production plant and machinery,  

small is 25 lakh to 5 crore, and medium is 5 crore  to 10 crore. Now, if you're not a manufacturing  

enterprise, let's say you're in services, for  example, then those numbers are going to change  

to 10 lakh or less invested into equipment for  a micro enterprise, ₹10 lakh to ₹2 crore for  

a small enterprise, and ₹2-5 crore for a medium  enterprise. So, basically the Venn diagram looks  

like this - on the left side in blue, we have  MSMEs that aren't startups because they aren't  

working towards innovation or they don't have  a scalable business model, they can employ a  

lot of people or generate a lot of wealth, and  then on the right side in red, we have startups  

that aren't MSMEs because they've invested more  than ₹5-10 crore depending on whether they're  

into manufacturing or services, and then in  the middle in magenta, we have the overlap  

of MSMEs and startups, where they've invested  less than ₹5-10 crore, but they are innovating,  

they are scalable, they're a startup MSME. Okay,  so now, we're really starting to flesh things out  

but I still think that there's something missing  and that is the line between MSMEs and startups,  

and I know that we just finished covering that  but I want to go outside of investment because  

I think that beyond financials, what it really  boils down to is a difference, like Deepinder  

said, in culture. Startups have this 'grow fast'  mentality that is their defining characteristic,  

it's why rocket ships are often used as a  symbol for startups, and the fuel for that  

rocket ship can be venture capital, or it can be  revenue in the case of a bootstrap startup. But,  

no matter what kind of fuel a rocket ship is  burning through, rapid growth needs to be achieved  

because VCs aren't going to fund a startup that  they feel isn't growing quickly enough. In the  

case of a bootstrap startup, well, you'll quickly  be overtaken by VC funded competition, if you're  

not growing fast enough. Now, I would say that if  we're comparing startups to rocket ships, then we  

can compare non-startup MSMEs to planes because  they don't have that 'grow fast' mentality,  

they're more common than rocket ships, they  are significantly safer than rocket ships,  

and that's because their fuel isn't as  combustible, and this might be where the  

metaphor starts to fall apart a little bit because  I know nothing about real life jet or rocket fuel  

but MSMEs are dependent upon revenue for their  growth, that's their jet fuel -how well their  

product or service sells, dictates how quickly  they're able to grow, and generally speaking,  

when it comes to non-startup MSMEs, that product  or service isn't something new, they're not  

defining categories, they're not revolutionizing,  or disrupting industries, they're not pioneering,  

they're just doing what countless other MSMEs  have done before them, and their success is  

largely defined by their stability. A healthy MSME  grows incrementally for an extended period of time  

and generates profits which can be used to  make the owner of the business more wealthy,  

or they can be set aside as a rainy day fund, or  they can be given to employees as a bonus. Now,  

startups on the other hand, are a completely  different breed of business, their takeoff is  

vertical, they are not aiming for the stratosphere  like a plane, they want to blast right through  

that and reach the stars, and to do that they  either need to find product/market, fit quickly,  

and then see a huge amount of market adoption, in  the case of a bootstrap startup, or alternatively,  

they combine that success in the market with  venture capital to move even more quickly. So,  

the success of a startup is not defined by steady  stable profitable growth that comes later on after  

they've left the startup category. A healthy  startup grows rapidly, but like a rocket ship,  

in a controlled manner. And, I think that this is  the part that a lot of startups miss, they build  

their rocket ship, they've got fuel in the tank,  but then they forget about a couple of screws,  

or one of the fins is loose, and they're not able  to reach the stars because they blow up. And,  

this happens for a variety of different reasons -  it can happen when there's a disagreement between  

founders, or when the investors stop funding  the company and it's completely dependent upon  

external capital not just for its growth but  it's actual survival, or when the competition  

is too stiff, or when they realize that there just  isn't enough demand for their product or service,  

no matter how many ads or cashbacks or discounts  they throw at the market. And, these are all  

problems that non-startup MSMEs don't really  have to worry about as much because they tend  

to have a well-defined, usually local customer  base, their source of growth is their revenue,  

which is probably going to be reliable outside  of a global catastrophe or an economic crisis,  

and because their ambitions are smaller, they  don't usually have to worry as much about  

competition because they're not trying to serve  an entire country or the world the way that a lot  

of startups do. A good comparison would be a bunch  of elephants at a watering hole - there might not  

be enough water to go around, but if you put that  same watering hole in front of a bunch of birds,  

they could spend years drinking from it, and  they'd still have plenty of water to go around.  

I'm gonna wrap this video up by coming full circle  with you guys - hot chips. In the video that we  

recently made about ONDC which you can watch up  here, we talked about a hypothetical MSME, an  

offline hot ship vendor who's set up his stall on  the side of the road, and he wants to go online.  

So, this hypothetical MSME has equipment probably  less than ₹10-25 lakh in value and his expenses  

are mainly going to be raw materials, the veggies  and fruits, that he's turning into chips, the oil  

that he's using to fry them, his kitchenware and  of course, his stove, his shop, which he may own  

or he may be renting, and that's about it. So. a  hot chip shop is a micro enterprise but this micro  

enterprise entrepreneur wants to turn his business  into a pan India brand and for that we can look at  

Beyond Snacks. This is a startup that was on the  first season of Shark Tank India and they make  

chips, specifically banana chips - they have  four flavors and you can find them on most of the  

major e-commerce websites like Amazon, Flipkart,  BigBasket, JioMart, and this is a startup. On the  

show, he valued his company at ₹20 crore and in  just one and a half years, his startup had turned  

140 metric tons of bananas into chips. So, that's  called production at scale, and this is the rapid  

growth mentality that I was talking about earlier.  Now, just to be clear, this isn't sponsored, we're  

not being paid by Beyond Snacks to say any of this  stuff, I just thought that it was a cool story  

and I like chips. So, Manas Madhu, the company's  founder, said that in the next two years  

the company wants to go across India, they want  to be a national startup valued at a hundred  

crore rupees. Now, the way that they're going to  be doing this is by focusing on their one core  

product, banana chips, which is a product that has  only really been exclusively focused on by MSME,  

small local vendors. But, Beyond Snacks is  thinking bigger - they want to be to banana chips  

what Lays is to potato chips, that's the  startup mentality coming into play here,  

they're not aiming for the stratosphere, they  don't want to be a local player in one state,  

they're aiming for the stars, they want to be  the national market leader in banana chips and  

for that they decided to raise funds. So, on Shark  Tank India, they were able to secure ₹50 lakh for  

2.5% of the company from Aman Gupta and Ashneer  Grover, and I'm curious to see what they're able  

to accomplish in the next two years with that  ₹5 million funding round. But, anyways guys,  

that's enough from my side, I'm gonna  wrap this one up, I'm curious to know if  

and when you start your own company, is it gonna  be a non-startup MSME or is it gonna be a startup,  

let me know what your thoughts are in a comment  down below, and I will see you in the next one.