The declaration “Startup Nations Standard of Excellence” (1) in the framework of the preparation and implementation of the digitization strategy of Europe by 2030 emphasizes the decisive strengthening of the position of European startups as key allies of the planned digital transformation. Here arises the important issue of a definitive distinction between startup and more classic businesses, in order to be able to better target the EU support policy. This distinction seems to be most clear in relation to the area of e-commerce, but not only.
Although startup is a concept that has been widely known for a long time, there is still no single valid definition that would be globally applicable to all industries and markets. This is of course understandable as the concept is more of a qualitative nature and is not based on typical numerical criteria of business division. In practice, a startup can therefore be a micro, small or medium-sized business with this or that turnover and legal form. There are no clear distinctions here, so it is reasonable to ask what really distinguishes a startup from the more classic businesses.
In order to be able to differentiate between startup businesses (companies) and classic businesses (companies) and thus determine their defining characteristics in terms of e-commerce business, but not only, it is necessary to adopt specific comparison criteria. These should relate to the typical path of starting an online business, that is based on the key issues that anyone who wants to start selling e-commerce (and not only) must face.
The following issues can be considered as the most relevant ones, with specific questions that need to be answered:
- Innovation – How innovative is the business supposed to be?
- Importance of the user – What role are users expected to play in the business?
- Technology requirements – What technology do we need so we can get the business up and running?
- Need for capital – What funding do we need so we can start the business?
- Business model availability – Are we able to sell from the start?
- Potential to achieve profitability – How quickly are we able to achieve profitability?
The criterion of innovation
It seems obvious that startup businesses should differ from classic ones in the level of their innovativeness. It is expected from “modern” companies not to follow already trodden and tested paths, but to search and even create new ones. Hence, one of the most popular definitions of a startup as “a human institution created to build new products or services in conditions of extreme uncertainty” seems to be correct (2). This uncertainty is the result of innovative thinking, which is intended to go beyond standards (e.g., known and defined markets) and create new quality (and new markets).
In practice, however, the application of the innovation criterion to distinguish startups from classic businesses comes with a number of challenges. First, it is difficult to clearly define what level of innovation is necessary to speak of a startup and not a traditional business pursuing, for example, a differentiation strategy. Undoubtedly, every company can and should take action to optimize its offer and also to stand out from the competition. This may cause comparative difficulties. Second, there is the question of whether it is possible to objectively assess how startup innovation differs from classic and traditional innovation. And if so, who should make such an assessment. Third, the very notion of innovation provides a great deal of room for interpretation, which of course makes it even more difficult to define the scale of innovation that may already be the work of startups.
However, despite the aforementioned interpretation difficulties, it is correct to state that the defining feature of most traditional businesses is that they operate on the basis of known and proven market mechanisms. This applies, for example, as a rule to classic e-commerce businesses, i.e. online stores selling physical goods. If there is an element of innovation, it is usually in the form of differentiation and comes down to improving the existing offer, i.e. the quality of what is already recognized by users and customers on the market.
In the case of startups, on the other hand, we are talking about searching for a new way, about the desire to introduce a new quality to the market and about testing market mechanisms in confrontation with a new offer. This is undoubtedly a different type of innovation, which will not apply to all industries and types of activity. In the area of e-commerce these will be primarily projects that go beyond the standard understanding of e-commerce, such as system services and websites.
Here it is worth emphasizing that the concept of “new offer” should not be equated with “uniqueness” in the literal sense of the word. A startup is not just a business that comes up with something completely “new”, as such things are extremely rare. A startup is an enterprise that offers a specific group of customers a quality that they may perceive as innovative, i.e. different from anything they’ve ever encountered before. This does not mean, of course, that there are no similar solutions on the market. It only means that maybe other startups haven’t yet reached this particular group of recipients with their message. The “uniqueness” of a startup will therefore always be subjective and limited.
A consequence of the differences in the area of innovation is the different understanding of the user by traditional businesses and startups. In both cases, although the same division applies to the anonymous user (visits our sites), subscriber (signed up for a subscription list), registered user (created a user account) and customer (made a purchase), the assessment of the value of this user is usually different.
For classic e-commerce stores and websites a user is first and foremost a potential customer who can directly trigger a revenue generation process crucial for business profitability. The goal is to transform an anonymous user into a paying customer as quickly as possible, i.e. a user who makes a purchase (preferably as a registered user). Each user is an opportunity to sell one product or one service. Additionally, by offering a subscription list or newsletter, you can increase the chances of acquiring a returning customer. This is an example of the thinking and operating pattern of a typical e-commerce business, where direct sales are what matters most.
For a startup even an anonymous user can already be a huge value. It depends on what the business offers and how the business wants to generate revenue. Usually it is about indirect sales and here comes a very typical feature of many startups, for which the user is “only” a means to an end. In practice, this means the desire or necessity to collect as many users as possible, primarily registered users, so that they indirectly contribute to generating revenue. Very often, although it may be otherwise, the user does not become a paying customer, but is the foundation that stimulates sales. This is primarily the case with startups whose business model is to sell advertising space or to mediate between “buyers” and “sellers”. This is an example of a different kind of e-commerce. Then, for example, a subscription list (newsletter), if implemented, is a tool to maintain the user’s interest and thus the number of available buyers overall.
So while in classic businesses the user has primarily a qualitative value, i.e. each user can directly make purchases, for startups it is very often the number of available users that counts, as users are followed by real customers. Naturally, the better the quality of the collected user group, the greater the interest from other parties can also be.
A higher level of innovation and often the need to collect and maintain a large number of users are big technological challenges that startups have to face in the first place. The offer itself, e.g. a system service or a website, is very often based on non-standard solutions that require proprietary technological infrastructure. It must be remembered that in the case of web-based startups, this “new offer” is the very tool that gathers users. It has to be “innovative” or “unique” in the opinion of a given group of recipients, which usually involves non-standard functionality, and efficient in technological terms, especially if the business aims to serve a very large number of active users. This cannot be achieved with standard mechanisms such as on the basis of a classic hosting service.
In contrast to start-ups the technological needs of classic businesses are rather limited in the sense that technology is not the main offer, it is only a tool for realizing sales. There is no need to implement proprietary solutions, although it is possible to improve generally available solutions, e.g. functionality in an online store as part of a differentiation strategy. There is also no need to collect and maintain a very large number of users, so standard mechanisms are used. This group of businesses is dedicated to a wide range of SaaS solutions, which themselves can be examples of startups.
The capital criterion
It is the technological requirements that are a direct result of both the issue of the level of innovation and the importance of the user to the business that determine that the operation of a startup involves a much greater need for capital. This is the most recognizable difference between traditional and “modern” businesses.
The capital needs of a startup defined on the basis of the previously discussed criteria are directly proportional to the level of innovation and the number of users that must be guaranteed in order to have a chance of generating revenue.
In other words: We won’t be able to launch a startup without a lot of startup capital and we won’t be able to grow it without constant funding, which usually involves the need to attract external investors. In the case of a traditional business we immediately launch direct sales, which is supposed to finance itself, although some funding may be needed here as well, but certainly at a completely different level.
Business model criterion
The need to raise a lot of capital to launch a startup business is further determined by the issue of availability of the business model. In the case of classic businesses that rely on direct e-commerce sales from the very beginning, the business model stems from what is offered to potential customers. An online store that sells physical goods thus generates revenue with each product sold. A company that offers its specialized services receives payment with each service performed. This is possible from the first moment of launching the sale, although probably more in theory than in practice, when we still lack first-class users, i.e. those anonymously visiting our site. Generally, however, it is possible.
A startup doesn’t have such a precisely defined path of gaining income, because – according to the definition – it offers “new products or services in conditions of extreme uncertainty”. In this context it is often said that a startup is a venture that is just looking for its business model, in other words, a way to generate revenue. This assumes, of course, the possibility that a business model that meets the needs of a particular business may not be available.
In practice, however, this seems to be a not entirely valid assumption. Business models available on the market are used to the same extent by classic and “modern” businesses. The difference comes down to how narrowly or how broadly the concept of a business model is defined. The classic approach is based on the revenue generating mechanism itself (e.g. payment for goods or services), in a broader approach the mechanism is related to the innovation of the whole business (e.g. payment for goods personalized with a special online wizard).
Rather the search for a business model by startups should be understood as an attempt to monetize what has been created and is being offered in such a way as to get on the path to profitability sooner or later. Businesses experiment with how to sell their offerings and try to find that most appropriate way. Very often it comes down to a commission or advertising model. Certainly, however, the time to implement the right business model is many times longer than for classic businesses, so startups can be unprofitable even for several years after starting their business.
The last criterion is a direct consequence of business model and revenue generation challenges. This applies primarily to startup businesses, which are characterized by a kind of “financial contradiction”. On the one hand there are huge capital needs associated with the need to implement an appropriate level of innovation (the cost of a technological solution, the cost of acquiring and maintaining a large number of users), on the other hand the uncertainty of the business model means that you can not count on steady revenue over a long period of time.
With such conditions it is difficult to talk about the possibility of covering costs and generating profit and undoubtedly the defining feature of startups is much lower potential to achieve relatively quick profitability. The gap that exists between operating costs and revenue has to be filled with continuous external funding. Naturally, in the long run, it is possible to embark on a path of great financial success, many times higher than in the case of classic businesses, which, however, can exceed their individual break-even point relatively quickly.
The answer to the question of what defines startups and classic businesses especially in the e-commerce market is complex and requires consideration of many factors. A review of these most key differentiating criteria, namely innovation, user, technology, capital, business model and profitability, allows an attempt to define a startup business as the opposite of a traditional business.
In this understanding a startup (on the Web) will be an enterprise whose aim is to introduce to the market a new offer characterized by a high level of (subjectively perceived) innovation based on the use of appropriate technology (infrastructure, tool) aimed at a very large number of users, the maintenance of which is associated with large financial outlays and a large need for capital, which in turn, due to the lack of a proven business model and thus a way to generate steady income, reduces the potential for achieving rapid profitability and forces the search for external financing.
In contrast to startups classic businesses are based on proven market mechanisms and from the very beginning rely on e-commerce sales of more or less known products (goods, services, digital products) aiming to obtain direct sales from each potential customer, which is thus the foundation of a simple business model for faster profitability. Innovation is part of the differentiation strategy within standard technological solutions, which have relatively achievable costs to implement and maintain.