Ever wondered what an ‘incubator’, ‘angel investor’ or ‘minimum viable product’ is? We explain 10 commonly used startup terms.
These days, it seems that everyone is jumping aboard the startup bandwagon. You have a prime minister who is keen to talk about Australia being an “innovation nation”, huge multinationals who call themselves “lean” and marketing firms who now claim they’re “agile”.
What many people might not realise, however, is that most startup terms are more than just hollow verbiage, and actually refer to specific business practices or software development methodologies.
If you’re thinking of starting a digital or tech-focused business, or already run one, it’s worth knowing the difference between – for instance – and accelerator and an incubator program or an angel investor and a venture capitalist.
To help decipher the jargon, BIT spoke to Pollenizer’s chief startup scientist Phil Morle, who recently organised a series of information sessions aimed at helping former Ford auto workers in Geelong launch their own startups.
1. Startup or new small business?
While the term ‘startup’ is sometimes used interchangeably with ‘new small business’, there’s actually a very important distinction between the two terms.
On the one hand, in Australia, there are quite strict legal definitions about what constitutes a small business. For example, the Australian Securities and Investments Commission generally describes a small business as having annual revenues of less than $25 million, fewer than 50 employees and consolidated gross assets of less than $12.5 million.
Meanwhile, the term ‘startup’ typically refers to a venture that uses technology to deliver its main product or service, has a business model started with the intent of scaling up rapidly, and often is built using the lean business methodology.
It’s important to note that a business is still a startup after it grows past the point where it’s a small business (Uber is a good example), and likewise not all new small businesses are technology enabled or aim to scale rapidly.
“The distinction is usually that startups want to make something bigger than ourselves, while small business is about making money doing what you love to do,” Morle said.
Morle adds that if you like baking cupcakes, you might open a small business that sells cupcakes to earn your salary, without necessarily wanting to scale that business and put a cupcake shop on every street corner.
“A startup generally has an ambitious vision and wants to make something bigger than what they themselves could do. [The growth is] potentially exponential, and probably a bit more risky because of that.
“That said, I personally think there are a lot of benefits of thinking like a startup even if you are just opening a cupcake shop, and startup methodologies can be a great way of running a small business.”
2. Minimum Viable Product
A common startup term is Minimum Viable Product or MVP, which aims to remove the risks from a startup as quickly as possible.
“The way you do that is you get very, very disciplined about what are the minimum things the product needs in order to do to give the value to the end customer. That’s what you make, and you get it out to market as soon as possible so you can see if it’s the valuable product you think it is,” Morle said.
According to Morle, the alternative to quickly developing an MVP is to potentially spend months or years and large sums of money developing a product that has a lot of features you customers potentially don’t want. He cautions that this is an incredibly risky thing to do.
“Many entrepreneurs take another view, that their product will only be valuable when it’s got 10,000 features and it’s a very big product. What that means is they could be working for years on a product before anyone gets a look at it. The risk is it’s something the customer doesn’t want.
“If they focus on building a minimum product instead, they’re at least getting something out to their customers. But it has to be viable, it has to be valuable and it still has to be delightful.”
Another way of describing a ‘minimum valuable product’ is a ‘minimum valuable product’ – a product that has the minimum number of features to be valuable to your customer.
“One of the big misunderstandings about minimum viable products is that it’s okay if it’s a bit rubbish. It’s not – it has to be a great product with less features. And the features that are there have to work together to present the value to the customer.”
Once you have your MVP ready, the idea is to keep continuously improving it based on feedback from your users or customers.
This is a process known as iteration, which stands in opposition to traditional project planning.
“Traditional project planning has the illusion that there’s a known end state that’s perfect and doesn’t need to change. Modern development processes are iterative. That is, they go round and round in a circle, getting stronger each time you make the journey of the circle,” Morle said.
“And then as you go around the circle, you look for the problems and fixing them as you go instead of dealing with the whole project in one go.”
4. Lean startup methodology
When the process of creating a minimum viable product and iterating it is used to manage a business, the result is known as the ‘lean startup’ methodology, from the 2011 Eric Ries book of the same name – although, as Morle explains, ‘lean’ methodology has been in use for far longer.
“The lean methodology is something that has developed over the past century. Its genesis goes all the way back to lean manufacturing, which is something that Toyota developed. They describe the purpose of lean as removing waste in the process,” he said.
“So it’s lean because there isn’t waste, it’s not lean because it’s cheap, as many people assume.
“The way Toyota used the lean way is they watched their production line after the war, saw where there were inefficiencies. They stopped the production line when they saw an inefficiency, fixed it, and then started the production line again.”
In the case of Toyota, their auto plants ran smoother each time they went through process of finding and fixing an inefficiency. Phrased differently, they got more efficient with each iteration.
The lean startup methodology is based on the same principle, except instead of tracking inefficiencies in an auto plant, you’re instead going through a process of finding and fixing your business based on customer feedback.
“In lean startup, you release a minimum viable product, you measure what happens with that, and then you release the next version as quickly as you can and keep going until you learn as much as possible.
“So we’re very deliberately looking at all the elements that make that [business model] work, and every time you see something that doesn’t work or isn’t working well, we stop the production line and experiment with it until it’s working well, and then start it up again until everything is working well.”
5. Agile software development
While a business owner might use the lean startup method to continuously improve their business model, a similar method called agile can be used to develop their website, app or other software product.
“Lean and agile are very complementary. The simple answer about what the difference is that lean is what the people managing the business are doing, and agile is what the software developers are doing. The methods work well together because they’re both iterative,” Morle said.
Unlike the traditional approach to software development where you plan out every feature at the start of the project– known as the waterfall method – agile development allocates resources based on constant feedback from users.
“Instead of having a big software development Gantt chart, you have weekly sprints with discrete chunks of work, and you do that cycle every week,” Morle said.
“If your cycle is a week, then each week your agile software people are making a discrete bundle of work. One of the big ideas with agile is that you have a prioritised list. So all you’re doing each week is the top priority items, and you’re doing as many of those as you can.
“So how do you know what the top priority items are? That’s what the lean process delivers. The business people doing work with customers to find out the features they want the most, and those insights go into agile iterations, and they deliver the things the customers want the most.”
6. Incubator programs
Especially during the early stages of the process of creating a minimum viable product and iterating it, many startup entrepreneurs choose to enter a support program known as an incubator.
While the particulars vary from program to program, they typically provide mentoring and advice, along with office space and don’t have a fixed length of time they run for.
“There’s conflicting definitions. But for me, an idea in an incubator is like a sapling in a greenhouse. An incubator begins with an idea, and then transforms that idea into a business over time,” Morle said.
“Because of that, incubators are generally co-founders of a business rather than investors that come along later. And it’s a long innings. You’re not in and out. You founded the business and it’s worth $1, and you’re helping it to hopefully grow into a multi-million dollar business.”
While they are typically used to help grow an early-stage startup, Morle notes there are some incubator programs that are geared up later-stage startups.
“There is another definition of an incubator, and it’s similar, is sometimes people incubate after an accelerator program. What’s similar is that it’s a longer-term development process of the company. We’ve accelerated it, now let’s keep nurturing it until it gets to where it needs to be.”
7. Accelerator programs
In contrast to the longer-term, more open-ended support offered by incubator programs, accelerators programs run for a very discrete period of time, with a clearly defined beginning and end.
“Accelerators are generally three to six month programs. You have to have something coming into it, and then it accelerates you and there’s literally a step change improvement on the other end,” Morle said.
“Typically, the focus of an accelerator is to bring a whole bunch of resources the accelerator has available to it to make that acceleration occur.
“So for example Muru-D brings all of Telstra’s resources, takes the teams to Silicon Valley to meet all the investors that Telstra knows. That very quickly turns a $10,000 business into a million dollar business with a whole bunch of funding from America.”
Where incubators typically nurture early stage businesses, accelerators are often designed to get companies ready for outside investment.
“One way of looking at it is that there’s no involvement before entering an accelerator program, then there’s a furore of activity, hopefully the business becomes much more valuable than it was, and then the accelerator is out of the equation again.
“Accelerators are often your first investment, and then you often get your next wave of investors afterwards, and that’s your whole purpose of being there.”
During the early stages of their growth, most startups are entirely self-funded. This is known as bootstrapping (a play on the old phrase “pulling yourself up by your own bootstraps”).
“In the beginning, no-one will give you money. The first thing you need to do is to take the first bit yourself to show what’s possible, and show evidence about why other people should support you,” Morle said.
“Early on, there’s what’s jokingly referred to as ‘family, friends and fools money’, and that’s where your mum, your mortgage or your friends might give you a few thousand dollars to back you.”
9. Seed funding and angel investors
After releasing a minimum viable product, perhaps completing an incubator or accelerator, and iterating on your product and business plan, it’s time to look for investors. This early stage funding is known as seed funding, and is often provided through an angel investor.
“Seed funding is in the $10,000s or low $100,000s. That would come from the independent or angel investor community,” Morle said.
“Even the name is quite evocative – angel investors are individual investors who – even at the riskiest point – support a business. They do it knowing that it’s the riskiest point, but if it’s successful they’re also going to get the biggest return.
“So it’s basically the stage of investment where you’re the likeliest to lose your money, but if you don’t you’re likely to get the biggest return.”
10. Series A, series B and venture capital
Once you’re ready to scale up, it’s time to look for some serous funding. Morle notes that angel investors are usually priced out by this point, and venture capital firms step in.
“As you get up to high $100,000s or low millions, you get into what’s called ‘series A investment’. And it’s called that because it’s the first major capital raising of a company. That what you’d get from a formal venture capital fund or perhaps a big company like Telstra – the big end of town,” he said.
“VC funds are regulated structures that have qualified and highly experienced people managing them. Just as you would have a super fund manager, you would have startup specialist partnerships in a VC fund industrially investing in growth companies.
“And then usually the same funds do the ‘series B’ and ‘series C’, so as the companies that invested in the ‘series A’ get bigger and stronger, they invest more to retain their holding in the company and to make sure the company remains strong.
“As you go up through the rounds, you end up going to large equity funds and super funds, who have bigger and bigger pools of money.”