It’s time to take the word ‘startup’ back from the VCs

What is a startup? Paul Graham has a deceptively simple answer in an remarkable essay posted earlier this month: It’s a tool for generating rapid growth.

From the point of view of venture capitalists and entrepreneurs, nothing else matters. If your company is growing exponentially, it’s an attractive investment, for a whole host of reasons. If it’s not growing exponentially, VCs won’t be interested — even if it’s profitable.

So Graham suggests to companies in Y Combinator, the incubator he founded, that they pick a weekly target: Say, 7 percent growth. Every week, that is their only goal. They either hit it, in which case they’ve done everything they need to for the week, or they don’t.

Picking such a single-minded, concrete target focuses the mind and helps founders optimize their startups the same way they’d optimize code, Graham writes.

But exponential growth has a kind of magic to it, in that most people don’t have a good intuitive sense of how powerful it can be. For example, 7 percent weekly growth, week after week, translates into 33.7x annual growth. Any company that can demonstrate 33-fold annual growth is going to be an attractive target for venture capital, whether that’s growth in revenues, members, or some other metric. It’s growth like that which made Instagram such an appealing investment target (and potent threat) for Facebook. And for companies like that, VC money is like rocket fuel.

But while Graham is one of the smartest people in the investment community, and his essay is an excellent rubric for young entrepreneurs to understand the rules of the game, his approach is not the only valid way to run a startup. Another smart investor and entrepreneur, Mark Suster, lays out an alternative viewpoint in his own post, arguing that startups need to stand for more than just growth.

Suster worries that Silicon Valley’s obsession with hypergrowth is making it elitist, causing investors and other observers to ignore and undervalue companies that take a bit longer to “percolate” before they deliver real value.

And as he points out, you don’t need a gigantic, Facebook-style IPO to be a success. His two startups were both acquired for amounts that, he says, might seem small in the overall scheme of things, but which made enormous differences to the lives of everyone on the two teams. In fact, Suster writes, 98 percent of the exits for VC-backed companies are for amounts under $100 million.

I’m with Suster, who writes:

I want the definition of startup back. To be used by anybody who is willing to take the risk to quit their corporate job and go out and try and build an innovative, disruptive, tech-enabled business that tries to change the way things work in the world.

It’s OK to build a company that stays small, has a few million dollars in revenue, and builds careers, bank accounts, and enriches client experiences.

So where’s the room for tremendous successes that don’t fit the VC patterns? For companies that haven’t hit “escape velocity” but which are still excellent businesses?

The short answer: Chin up. You don’t need venture capital to make a dent in the universe. In fact, the obsessive focus on the VC model can actually drive founders crazy.

When you start a company, you need to have some idea of what your goal is. For Y Combinator companies, that’s a weekly growth target. For your company, it might be financial independence. But it could be other things.

For my part, I’m interested in startups that are trying to change the world. Exponential growth is one kind of magic — but let’s not forget that it’s not the only kind.

Photo: Saturn V engine, courtesy NASA