The need for a common startup definition framework

Startups not only create jobs and contribute to the economic growth of a nation, but they also address some of the most challenging problems faced by the world. Therefore, to enable them further with targeted policy-making, it is crucial to create a common definition framework for startups

By Srivardhini K. Jha and Chintan Vaishnav

Published: Jul 7, 2023 10:15:10 AM IST

Updated: Jul 7, 2023 10:23:16 AM IST

If the world is to benefit from the ingenuity of startups and leverage them to power national and global economies, it is crucial to create a common definition framework for startups. Image: Shuttersstock

Startups have become synonymous with innovation, job creation and economic growth. Their role in disrupting the status quo, solving the most pressing societal challenges, and pushing the boundaries of human creativity and endeavour is undeniable. Yet, many countries do not formally define or recognise startups as a unique organisational form, and those that define them have vastly different definitions.

Some may argue why we must define them, but from a policy perspective, this is problematic because a lack of common definition hampers identification, intervention and interaction. If the world is to benefit from the ingenuity of startups and leverage them to power national and global economies, it is crucial to create a common definition framework for startups. Such an effort, especially in nations where market formation still requires policy, can facilitate targeted policy-making, increase resource mobility across countries, support collaborative action and allow for calibration. We elaborate on each of these below:

Targeted policy intervention:

Policymakers often struggle to create policies and regulations that are appropriate and effective for startups due to a lack of understanding of their unique characteristics. A definition would clarify this and distinguish startups from other organisational forms such as SMEs. It will also help isolate the various elements in the ecosystem that might be supporting or hindering startups, which can help governments formulate targeted policies that can create a supportive environment for startups.

Also read: 147 Indian companies likely to become unicorns in next 5 years

Resource mobility:

The power of a globalised world lies in the ability to access resources – knowledge, finance and human capital—from across the globe. If these resources are to flow freely across startup ecosystems, it requires a basic level of harmonisation that allows transacting parties across national boundaries to identify, evaluate and engage. Let's take the example of the flow of investments. When a country adopts a startup definition, they signal to the world that startups are an important constituent of their business ecosystem and will receive attention and support from the government. This can instil confidence in foreign inventors and attract investment into the startup ecosystem. Taking this a step further, if the country adopts a definition that aligns with the rest of the world, it further reduces the friction involved in cross-border transactions.

Collaborative action:

The world is on a countdown to meet the UN's sustainable development goals 2030 (SDGs). As this imperative gathers momentum, startups with their propensity to think radically and innovatively will play a central role in actualising the SDGs. They will partner with governments, large corporations, developmental organisations and other societal actors. Once again, being able to identify startups that are truly SDG-focused and project a global potential will create a powerful platform for collaboration. It can unleash the power of startups and their innovations to address some of the most challenging problems facing the world today through a collective effort.

Also read: Engineers To Founders: How IITs Are Fuelling The Startup Boom In India

Calibration:

A definitional framework will also lay the foundation to evolve a set of metrics to measure the success of startups and the maturity of ecosystems. Currently, no standard set of metrics is used to evaluate the performance and impact of startups and ecosystems. This makes it difficult to compare them across different regions and sectors. Arguably, this is one of the fundamental reasons why valuations are often so out of line with the value. With a common definition framework, investors know what kind of entity they are evaluating and countries/regions can calibrate the maturity of their startup ecosystems. This would make it easier to track progress, identify areas for improvement, and benchmark against global standards.

During its G20 presidency, India has embarked upon creating a consensus-based definition framework for startups. The framework is based on the existing definitions of startups across the G20 countries, the academic literature, and expert consultations. The key parameters that constitute the definitional framework of 'Startup' are—Legal entity, Age, Size, Scalability and Innovation (LASSI). The parameters together represent the key characteristics of startups—they are young, independent entities with the potential to scale on the back of innovation. The scalability and innovation dimensions distinguish startups from their closest cousins, the SMEs. Other dimensions distinguish them from large private corporations, public sector entities and NGOs.

Nations can choose to define these parameters as broadly/narrowly as they wish, giving them degrees of freedom to address their country's unique needs while adhering to a common framework. For instance, some countries define innovation narrowly as technological innovation, while others take a broader view to include technological, process and business model innovations. In a lighter vein, it can be a plain LASSI or a mango LASSI. This framework is India's contribution to harmonising startup ecosystems across the G20 world so that we can address our national and global priorities more effectively.

Prof Srivardhini K. Jha is an Associate Professor of Entrepreneurship at IIM Bangalore and Chair of the Foundations track under Startup20 Engagement Group under the G20 India Presidency.

Dr Chintan Vaishnav is Mission Director at Atal Innovation Mission and Chair of Startup20 Engagement Group under the G20 India Presidency

[This article has been published with permission from IIM Bangalore. www.iimb.ac.in Views expressed are personal.]