What is a Startup? The Historical Background

The Introduction

As I have mentioned in the previous article: no matter how much we do write on startups, one simple question still waits to be answered. This question is – of course – the basic one:

What is a startup? What is the actual definition of a startup?

I have stated that it’s not the easiest of things: to define a startup. I have also outlined some of the problems one can encounter defining a startup. Some of these were among the v. most serious there ever could be: as all the broad terms, this one is also susceptible to what’s best to call “the general problems with definition.”

This time, it’s not about the general problems, though – it’s more about the term’s specifics. In particular, it’s on the term’s origins. What was the first startup? How was it different? What is the term’s actual historical background?

You’ll find it out – here!

The Definition

As I have mentioned before, there’s no single definition of a startup. Instead, there’s a number of them, the differences between them being of these “big ones.” One of the most popular, though, goes as follows:

“A startup is an entrepreneurial venture which is typically a newly emerged, fast-growing business that aims to meet a marketplace need by developing or offering an innovative product, process or service. A startup is usually a company such as a small business, a partnership or an organization designed to rapidly develop scalable business model. Often, startup companies deploy technologies, such as Internet, e-commerce, computers, telecommunications, or robotics. These companies are generally involved in the design and implementation of the innovative processes of the development, validation and research for target markets. While start-ups do not all operate in technology realms, the term became internationally widespread during the dot-com bubble in the late 1990s, when a great number of Internet-based companies were founded.”

As I have also mentioned before, this definition – it’s source being Wikipedia – is not perfect: it is flawed. The reason is that while it’s extensive enough as to provide You with an idea of what to call a startup, what it doesn’t provide You are the tools You’d need to tell whether a problematic brand is or isn’t one. What it does provide You, though, besides the idea of what is a startup, is a little bit of historical background, which, in fact, all in all, happens to be one of its – the definition’s – most important components (if not the most important one.)

Let’s examine it a little bit closer, then!

The Dot-Com Bubble

As we can see, the origin of term “startup” has a lot to do with what is called “the dot-com bubble.”

The dot-com bubble (also known as “the dot-com boom,” “the tech bubble,” “the Internet bubble,” “the dot-com collapse,” and “the information tech bubble”) was the speculative bubble that took place during the late 90s and the beginning of 2000s. The reason for the name is the fact that the period was marked with the founding of numerous new Internet-based companies, often referred to as “dot-coms,” resulting in the subsequent – and rapid! – rise of their stock exchange value.

According to Wikipedia, “A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, individual speculation in stocks, and widely available venture capital created an environment in which many investors were willing to overlook traditional metrics, such as P/E ratio, in favor of basing confidence on technological advancements. By the end of the 1990s, the NASDAQ hit a price-to-earnings (P/E) ratio of 200, a truly astonishing plateau that dwarfed Japan’s peak P/E ratio of 80 a decade earlier.” Which means a boom – and one that has soon turned into a collapse. One of the biggest speculative collapses of all-times.

Due to this humongous rise, a lot of investors were pitched to a lot of companies. New companies started to pop up and go public with their IPOs (initial public offerings.) Their stock prices spiked momentarily, attracting more and more investors, whose bold investments did encourage even more companies to pop up in turn. The boom was so big that, in some cases, it was possible for these companies to increase their stock prices simply by adding an “e-” prefix – or a “.com” suffix – to their name.

It’s during this period that most of the now-successful startups were started. This is also when the term “startup” became so widespread and has gained its usual meaning: “A startup is,” as I have quoted, “an entrepreneurial venture which is typically a newly emerged, fast-growing business that aims to meet a marketplace need by developing or offering an innovative product, process or service.” Take note that this is the exact modus operandi of most dot-com bubble era companies. Thus, a dot-com bubble model of doing business so often does equal a startup model of doing business.

The First Startups

It would be a mistake, however, to associate the emergence of startups in general with the dot-com bubble. Although the dot-com bubble era is the time when the term became this popular, the first startups – the first actual startups – happen to be much, much older, dating back to the times after the Great Depression od 1920s/1930s, and some even to the times before it.

While it’s not possible to tell what is the exact beginning of “the startup era,” it’s safe to assume that it has a lot in common with the emergence of the Silicon Valley business ecosystem. Thus, it’s also safe to assume that the first startups are the Silicon Valley companies, like, for example, International Business Machines (better known as IBM.) IBM was founded in 1911. Since then, it has grown to become one of the biggest hardware, middleware, and software manufacturers in the world. (In fact, comprising of four consolidated major companies of its time, IBM was big even in 1911 – but let’s not delve too deep into the details here.) Even if it’s not the first actual startup – nor does it meet the aforementioned startup’s definition in all its aspects – it’s good to consider it one of the first.

Apple is another great example. One could also have mentioned Microsoft. Even better example is Google, which emergence have created a whole market niche for all the now-blooming SEO companies. Google was founded in 1998. The basis of its famous search engine was created in 1997, however, as a part of its founders, Brin and Page’s, Ph.D. course. Soon enough, the two have understood its full potential and decided to launch the company.

What makes Google a perfect example is the fact that it has started as an experiment and grew to become a leader in the market: just what every startup founder hopes for. Not only did it find its niche, it also did create one. There are entire companies dedicated to boosting one’s website’s visibility in the Google’s search engine by means of SEO (search engine optimization.) There are also companies dedicated to everything in-between online advertising to gathering data that profit from Google’s emergence.leader in the market: just what every startup founder hopes for. Not only did it find its niche, it also did create one. There are entire companies dedicated to boosting one’s website’s visibility in the Google’s search engine by means of SEO (search engine optimization.) There are also companies dedicated to everything in-between online advertising to gathering data that profit from Google’s emergence.

Although all these companies did profit from the dot-com bubble – and some, like Google, were also founded during the period – none of them is a dot-com business per se. All of them, however, are startups, proving that the definition of one is – in fact – wider than the definition of the dot-com bubble company.

The Conclusion

A lot can be said on the matter of startups. A lot has been written. Even more is going to be written in the future. The fact is that it’s impossible to cover the topic: there’s just too much in terms of the historical background there to describe it all. It is possible – though – to make things a bit clearer. And that’s what I’ve intended to do.

To sum it up: the dot-com bubble period is not the beginning of the startup era. However, it’s when the term has become so widespread, in part because most of this period’s businesses have operated on the actual startup business model. Some of them were startups, others can be mistaken for them, but what remains a fact is that it’s this period that has made the word so popular (and so widely associated with the Internet- and tech-based companies.)

Also: there was a lot of speculation on what I’ve called “the pre-startup era actual startups.” Some go as far as to call the British East India Company the first actual startup. While I wouldn’t go this far, it’s true that this model of business was there, present, for quite a long time. It’s also true – and let me end the speculation at that – that it’s the digitalization that allowed it to become so well-developed and widespread.