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When does a start-up stop being a start-up?

Mesh Alloys, Sendy founder and CEO. [File, Standard]

What comes to mind when you hear of a start-up?

Do you picture a business that is just starting out? You might be right.

You might also imagine an enterprise that is employing technology in almost all its processes. Or one that is out there crowdfunding every now and then.

Yet not every business that is starting out is considered a start-up. And a start-up should not be mistaken as a micro, small or medium enterprise either.

Others have been at it for years scaling and raising funds for further expansion and still prefer being called start-ups. 

For example, after almost a decade of operation, Sendy, which services over 10,000 businesses is now in Kenya, Uganda, Cote d’Ivoire, and Nigeria, still refers to itself as a start-up.

“We’re still a start-up, it’s still early days for us. Very early,” said Sendy co-founder and CEO Mesh Alloys in a previous interview with Enterprise on the logistics firm’s operations. 

The firm has lofty plans for scaling across Africa, having positioned itself as a pan-African start-up facilitating trade for thousands of businesses across the region through its fulfilment infrastructure.

“We want to do to Africa what Alibaba has done for China. This is a two-decade goal. We are just in year seven in four countries. It’s still day one,” said Alloys in a recent Twitter post. 

So what is exactly a start-up?

Simon Gichuru, the founder of Nailab, a start-up accelerator and incubator hub, explains that there is a difference between a small and medium enterprise (SME) and a start-up.

Even when one can come from the other. He explains that a start-up is not necessarily a new business even when it may start as new just like an SME or any other business outfit. 

Growth potential 

What makes a business known as a start-up is its potential to grow and scale. An SME on the other hand is a small or medium business which can scale as well but has its limit.

“An SME is a small-medium business. It can scale but it will require a lot of time and capital. A good example is a hotel. You need to put up the building, allocation, and equipment,” explains Gichuru.

“A start-up on the other hand can start as an SME but its main goal is exponential growth.”

“Both are good businesses so you choose which one you want to run,” he adds. 

Mr Gichuru gives an example of Airbnb as a good example of a start-up in the hospitality sector, playing the same role as that hotel which operates as an SME.

As a businessperson or entrepreneur then, one needs to make the decision whether to run a start-up or an SME.

“Make a decision. Are you going to become an SME or a start-up? Are you going to become an SME from a start-up or are you a start-up that is stuck and you are just going to build an SME?” he posed.

Tech factor

In this digital age, technology seems to be the most ideal way of turning an SME into a start-up. This has been seen in the majority of businesses that have moved from offline or renting huge office spaces to online.

They are the ‘disruptors’ of how things are done.

For example, as Mr Gichuru puts it, one can operate a gym as a start-up and the other as an SME. An SME gym means you buy the equipment, employ a trainer and develop a membership structure.

The challenge with this, your gym can only hold so much. If you can accommodate 1,000 members in a month or 500, that is the much you can earn.

As such, the only way to scale up your business is to open another gym or expand where you are. This is capital-intensive and may scare investors.

However, as a startup, you can develop workout plans which you can sell, do videos, and share the same on your social media pages. This is without owning a gym. You can do your videos by renting space in that SME gym.

Disruption 

This nature of business, which appears to have limitless potential to grow, is what attracts funders to start-ups.

“That is why start-ups need money. It is about scale and exponential growth,” continues Gichuru.

This kind of business disruption is what has been witnessed as well in the transport sector leading to a boom in ride-hailing companies.

Instead of ordering your taxi by whistling outside the hotel or giving a thumbs up to attract attention, you can do it just on the phone.

Such provides safety, saves one the hustle if they are perhaps too inebriated on a Friday night to whistle properly and also offers competitive prices compared to haggling with a traditional offline taxi driver.

Fundraising 

Bolt, is a ride-hailing company operating in 400 cities across 45 countries such a business. It recently raised $709 million in funding.

Kenneth Micah, Bolt Regional Manager East Africa, explained why this funding is important when it comes to scaling. 

“This is how markets grow; you have to scale. Remember that we have to disrupt offline public transportation and encourage the use of ride-hailing,” he says. 

“We want to digitise public transportation as much as possible so that you have little incentive to use a private car for whatever reason you would have needed a private car for.”

He says even the investors who are putting in their money, do have a return in mind. Even as the business is being scaled, Micah says, Bolt is very frugal.

“We have learnt to make the most out of every investment,” he says.

“We invest it in markets that will give us the best arrow eye. We hold off investments let us say at certain off-peak seasons or low seasons and invest when we know when we can get a bigger acceleration.”

Mr Micah says sometimes this seed raising is mainly to give an extra acceleration and not necessarily to bootstrap or to fund an unsustainable ecosystem.

“We have a sustainable ecosystem.”

“The fundraising is really to give us an acceleration to an already growing and sustainable ecosystem. You know you would not put your money into something that is not growing. And neither do investors,” adds Micah. 

A case for not listing 

It should be noted however considering startups still have some novelty in them, by the way they operate, particularly due to changing technology that keeps making these companies new, some may argue that start-ups should not be listed companies.

This is by virtue that listed firms have cemented their growth in the market. A write-up by eu-startups.com titled When is a startup no longer a startup? discusses this view.

It discusses that a comprehensive definition of a startup cannot be just any fledging business enterprise. It should be focused on growth and scale.

It adds that scale is measured in terms of revenue, number of employees and valuation.

It also extends to the age of the business for example one can categorise a business that is more than five years old as no longer a startup.

“Yet these metrics can still vary depending on who is looking. Some venture capitals would still consider lower revenue figures, employee count or higher valuation,” reads the article. “If your company has also become public and is listed in stock exchange, then it is safe to say that you are no longer a startup.”

However, listing may not be a strong metric considering this is a source of funding(through buying and selling of shares) as it is for startups who fundraise through venture capital, private equity or seed capital.