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The Harms and Side Effects of an Ambiguous Definition of 'Startup'

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This article was machine-translated from Japanese by AI (Claude). It may contain errors. Read the original Japanese article.

Partly because of national policy, "startups" are getting attention, and with budgets attached, the "number of startups" is starting to be set as a KPI by public bodies and others.

I personally support increasing the number of startups, but what we need to be careful about is the definition of the word startup.

As with anything, when the definition of a word wobbles, policies wobble too, and budgets stop being used appropriately. So I think it would be good to ask once more, "What kind of entrepreneurship were we trying to support?", and to define "startup" firmly.

Background: why the definition has become unstable

Until a little while ago, I think "startup = a company that grows rapidly in a short period" was the common understanding.

But as startups have drawn more attention, "startup = entrepreneurship in general" has taken hold, and I think the use of the word is spreading to include founding "small businesses," which originally had a different meaning.

If we adopt the definition "startup = entrepreneurship in general," it would also include "opening a contract software development shop," "opening a local restaurant," "opening a cram school," and "launching a one-person consulting firm." Yet looking at the contents of the Startup Development Five-Year Plan and the like, these do not appear to be specifically targeted.

I think a certain degree of freedom is fine for the general use of a word, but when thinking about policies and support measures, it is important to narrow down the target and support it appropriately. For that, we need to be conscious of the definition of the word.

The harms of an ambiguous definition

Ambiguity and confusion in the word make policies and measures wobble

The Startup Development Five-Year Plan the government has put out seems to me to have been made with "startups" in mind as high-risk, high-return, rapidly growing companies.

In fact, if "startup = starting a business" were the case, the Small and Medium Enterprise Agency should simply be able to handle it as an extension of what it has always done. It is presumably because that is not the case that various ministries and agencies are involved in pushing it forward.

However, in subsidy screenings, move-in screenings for facilities, and the like, if the reviewers go in with the understanding of "startup = entrepreneurship in general," they will readily select not high-risk, high-return projects but ones that are small as businesses yet highly certain (for example, ones where research and development is already well advanced). That is because those have a higher success rate, and there is no incentive to go out of one's way to choose high-risk ones.

If that happens, support becomes thick for those who are outside the form of entrepreneurship the nation originally wanted to increase, and conversely resources do not reach those who are inside it. Worse still, high-risk startups end up losing out by the amount of time they spent on applying.

Are university-originated ventures "startups"?

As an example of where such confusion can arise, let me take "university-originated ventures."

As in an article I wrote earlier, most of the businesses called university-originated ventures are so-called small and medium enterprises that have not reached 100 million yen in sales. Consulting firms and contract-work companies run by faculty and staff are also included in the definition of "university-originated venture".

It is true that technological strength contributes to beating competitors, but whether the market that technology can win in is large is a separate question. If you use it to do contract work for large companies, you are only creating a subcontractor.

Of course, "commercializing university technology" has significance, and I have no intention of denying it. But the current situation is that producing large numbers of university-originated ventures on the current trajectory is unlikely to lead to the promotion of high-growth startups.

Yet with the definition "startup = entrepreneurship in general," it would mean supporting all university-originated ventures and attaching budgets for that purpose.

With an ambiguous definition, those on the front lines take the path of least resistance

That is not all. If the definition is not properly set and only a numerical goal drops down to the front lines, those on the front lines often shift the definition of the word, and expansive interpretations of the word startup become rampant.

For example, within the range of what I have heard, there are cases where a "startup support" budget was secured, but not enough high-growth startups could be found in the region, so small businesses are supported and counted as startups.

That results in the budget and people originally meant to produce startups being used for something else.

In fact, because of various changes in the environment, we are moving toward a situation where small businesses are easier to start and more likely to succeed with certainty, so I think that pushing "support for entrepreneurship in general" creates a pull toward promoting entrepreneurship through small businesses rather than startups.

If that happens, people who were going to do a startup flow toward small businesses. Then the original purpose of the policy would no longer be achieved.

I think such movements are not carried out with malicious intent; the main reasons are probably simply that the definition of the word startup is ambiguous, and that as stakeholders increase, their understandings of the word often differ.

Is there a route to increase startups after first increasing the number of businesses started?

There is also the opinion, "Even so, as the number of founders increases, they will take on something big in a different field when they start a second or third company. So first, let's increase the number of businesses started." Personally, though, I am somewhat skeptical about this.

Small-business founders rarely become startup founders

Research on serial entrepreneurs suggests that successful entrepreneurs are less likely to change the industry they take on and less likely to have innovation impact. In Japan too, I notice that IT serial entrepreneurs who have achieved a certain degree of success often stay in the IT industry.

There is also a survey showing that, in the United States too, many small-business owners do not aim to scale up in the first place.

When asked at startup, most owners report no desire to grow big nor to innovate along any observable dimension. In other words, plumbers and attorneys start their businesses expecting to remain small for the foreseeable future and hardly expect to innovate by developing new products or services, or even to enter new markets with existing products or services.

What Do Small Businesses Do? by Erik Hurst, Benjamin W. Pugsley :: SSRN

I cannot say anything definitive, but however much small businesses are promoted as an entry point to entrepreneurship, the next venture will probably also tend strongly to be a similar business in the same industry, so I suspect it will not easily lead to startups.

That said, there are several startups that, as a way of exploring opportunities for a high-growth startup, deliberately set aside a period (with some time limit) to do contract development. Those with such a strategic intent may be fine.

However, I don't think I see many examples of people who ran a contract IT software development or staffing business and then said, "All right, next is a high-growth startup." This is, of course, only my personal impression.

Rather, I am concerned that, as the number of small-business-oriented people around them grows, I am even seeing a movement of people who had been taking on startups thinking "small business is better after all" and returning to low-risk, low-return entrepreneurship.

We should also take into account the opportunity cost in time of going through a small business

Moreover, once someone starts a business, even if it fails, most people keep working hard in that field for about 5 years.

Furthermore, if it succeeds, they stay in that field for even longer. During that time, it becomes hard for the founder to turn to other high-growth business fields. Considering such losses of time too, my point is that if we want to increase rapidly growing startups, we should not increase entrepreneurship in general, but should increase it by aiming straight at rapidly growing startups without detours, I think.

Conclusion

As the stakeholders related to entrepreneurship and startups increase, discrepancies in understanding are more likely to arise. That is exactly why, I feel, unless the definition of the word is made clear, achieving the goal is becoming gradually harder.

If the definition of the word startup keeps being expanded in interpretation bit by bit like this, it will become "startup = entrepreneurship in general," and as a result "startup promotion" will become "promotion of emerging companies," and eventually "promotion of creating small and medium enterprises." While I strongly agree that this itself has significance, I am concerned that support measures contrary to aiming for decacorns will be implemented in various forms, and that the budget and time that should have been used will go to something else.

Also, entrepreneurship itself that leads to individual happiness is meaningful from an individual's perspective, and I think there are cases where the nation needs to support the pursuit of individual happiness.

On the other hand, if the purpose is for the country as a whole to create industries and employment, it must make clear what kind of entrepreneurship it will support, rather than supporting entrepreneurship in general across the board. Especially the scarcer founders are, the more important it is which kind of entrepreneurship those founders and aspiring founders are led to look toward.

That is why I think we should once again define the word startup clearly and allocate resources properly.

For example, I think we need to prepare a different term such as "high-growth startup," and clarify the policy-level definition (accepting some omissions and exceptions) as something like "a company that takes in equity-type funding and has handed, or plans to hand, a certain percentage or more of its shares to VCs and the like."