Tipping Point of Start-Ups

Ping! A notification arrives in your Facebook account stating that your “friend’ has sent his message to TRAI saying that they should allow Free Basics in India. If you’re smart, you’ll choose to ignore it. If you’re smarter, you’ll realise that Facebook now has the incentive, power, and most importantly, money to invest in such ventures that monopolize the Internet Service Providing market. Take a moment and think back: Facebook was supposed to be a start-up! How is it that a company started in just the previous decade get to a valuation that runs in not millions but hundreds of billions of dollars, have 4 subsidiaries also with huge valuations, all in such a short period of time? Moreover, at what point do such companies cross over the mysterious border that delineates start-ups branded as minnows and strongly established companies that we think to rule the roost? In this two-part article, well try and demystify when exactly a startup can no longer be treated as one.

To begin with, let’s take a brief look at how a traditional start-up operates. The term start-up seems to have gained popularity with the shift of work culture towards the internet. Hence, some of the well-known companies that donned the start-up label back then are some of the leading tech giants at the moment However, one must not mistake start-ups to be tech-based alone; rather, anything that is created and led by few is a start-up. Recent start-ups that have managed to grab the attention of the masses include Uber, Whatsapp, Paypal, and of course, the social networking giant, Facebook They all started as an idea that built up into a major player that challenged the market norm. Hence, this eccentricity is something most start-ups bank on; the ability to make disruptive decisions, and change and adapt to the market’s needs, whilst still small.

What is it they do or have that traditional companies seem to lack? While it is true that they have been around only for a decade or so, they sustain their place at the forefront because of their innovativeness – hence, the reason why they’re widely regarded as “change agents”. They always experiment with their business models, make major, bold moves with much-appreciated alacrity and are surprisingly willing to change their core tenets to adapt to changing needs in the market – all of which traditional companies have tremendous difficulty in doing which may translate to bankruptcy for them. Some other tell-tale signs to look out for are the fact that they have not gone public with an IPO (Initial Public Offering), relatively low number of employees, and probably a relaxed atmosphere at the workplace with stretchable work timings. A sort of a transitional point is when their company hierarchy has so many levels that the CEO doesn’t know what’s happening at the ground level; or when faced with competition they just buy the other company (as when Facebook bought WhatsApp).

A buzzword that has been trending in Silicon Valley over the past few years has to be ‘Unicorn Company’ (UC). Much like their mythical counterpart, these companies are extremely rare and are supposedly harbingers of good fortune. Yet, what exactly constitutes a UC? Many do not agree on the exact definition of a UC. Nevertheless, it is commonly agreed upon that a UC is a software company whose valuation exceeds a billion dollars. Several common traits can be observed in UCs. Due to how recently these companies have been founded, most UCs still exhibit the characteristics of a typical start-up. They are largely based out of California and their founders are usually graduates of elite engineering institutes. They mostly cater to burgeoning fields such as e-commerce and enterprise software. It was approximated by TechCrunch in 2013 that 1 out of every 1538 software companies founded (or about 0.07 percent) eventually turn out to be UCs. It’s fitting, then, that California was historically known for the gold rush in the 1850’s, and a UC seems to be the gold everyone’s after. So, is there a method to the madness of founding one of these? An attempt is made to explain their success.

UCs are well known for visionary founders (think Elon Musk – trying to put the common man in space) with dreams that are truly disruptive. The clarity of objectives that the founder exhibits often cajoles VCs into a primary round of funding. Inspirational leadership leads to employees with rabid loyalty, who thrive under a work culture that is highly informal and exhibit zero latency in task execution.

Another trend worth noting in this respect is the fact that most UCs usually utilize algorithms that eliminate every bottleneck in their service delivery process. Facebook tries to utilize lesser data to deliver content that you might most likely want to read, while Netflix uses machine learning to develop content that might receive maximum viewership.

And finally, UCs are constantly experimenting with almost every aspect of their business. Flipkart’s first big billion sale, while implemented poorly, was an experiment that turned out to be a major sales and publicity success. The secret, it seems, is a risk – betting big and winning bigger.

Clearly, a UC has attributes of both the underdogs as well the big players. Perhaps studying them holds the key to understanding the ‘tipping point’ of companies, that point when they stop being ‘change agents’. Surely, the difference is not as subtle as it seems at first. Right? Maybe. In the next issue, we shall attempt to definitively underline the transition point between the phases.


By Vignesh, Abhinav, Sriram, Suriya, Arvindmani

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