When is a startup to be considered a startup?

Startups are important market players in terms of innovation in an industry. However, opinions differ as to when a company should be considered a startup and when it leaves a startup’s status. That’s why we came up with this blog post. Learn more about how Health-Trends defines a startup and classifies a startup on the SWISS DIGITAL HEALTH MAP.

The classification of companies into the category of startups is generally a vague thing. That is why we often receive inquiries from the digital health community about why we consider a certain company to be a startup. Or why a company is still on the map even though it is apparently no longer a startup. These inquiries, which often occur in combination with our SWISS DIGITAL HEALTH MAP, have motivated us to write this blog post. Below, we will elaborate on how Health-Trends defines a startup and what criteria we use to evaluate its startup status.

Focusing only on the year of incorporation is not enough

In practice, there is often the persistent opinion that a startup can be defined purely by the number of years after its founding. Thus, as soon as a startup has been on the market for more than 3 to 4 years, it is no longer a startup.

This view definitely falls too short. Why? For example, in the Swiss commercial register, the purpose of a limited liability company (in German: GmbH) can easily be changed. However, the year of incorporation remains the same, even after several changes to the same legal entity. Unless there would be a completely new formation and registration in the commercial register under a similar name. Then the year of incorporation would also be adjusted accordingly.

Therefore, if a startup is judged purely by the number of years since its incorporation, there is a risk that an “empty” legal entity shell without a solid corporate structure and business model will already be considered an established company. However, such an empty shell would not be economically viable in the long term. Other startup factors must, therefore, be sought and evaluated.

Startup definition according to Health-Trends

From a Health-Trends perspective, at least eight assessment factors are needed to evaluate a startup in terms of its status. But let’s first start with a general definition of the term “startup”. The following can be taken from the Gabler-Wirtschaftslexikon in this regard:

Startups are young, not-yet-established companies that are founded to realize an innovative business idea with little seed capital and usually rely on obtaining either venture capital or seed capital very early on to expand their business and strengthen their capital base. Due to the raising of external funds such as venture capital, the company is dependent on an exit, in the course of which the investors realize their investments.

This definition focuses primarily on the innovative business model’s aspects and the funding required to build this model. For our work (e.g. during a map-update), this definition is not sufficient. Thus, we need more in-depth factors to evaluate a startup’s status, as already mentioned above. Health-Trends focuses on eight factors:

As long as at least three-quarters of these factors are met, a company is categorized as a startup by Health-Trends. The combination of factors does not matter. Only the cumulative consideration of the factors is in focus. If less than three-quarters are met, we consider the company as an established company with well-established structures. If the latter is the case, the company in question will be removed from the SWISS DIGITAL HEALTH MAP.

Assessment factors in detail

At first glance, these factors may still seem somewhat abstract. Let’s, therefore, take a more detailed look at the individual factors:

Less than 10 years after incorporation
Although we have written above that we do not want to look only at the number of years after incorporation, it is still an important aspect. After 10 years at the latest, one can assume that a startup has built a sustainable business model. The decisive factor in this consideration is that no or only minimal changes to the purpose have been made in the commercial register during these 10 years. Therefore, a constant expansion of the business model can be assumed. If such fundamental changes in purpose are present, one must assume that a startup has made a complete reboot, so the time factor since incorporation must also be reassessed.

Less than CHF 10 million annual turnover
There are different opinions in the literature on the distinction between small and medium-sized enterprises concerning sales revenue. Health-Trends bases its startup definition on a target revenue size of less than or equal to CHF 10 million in combination with an employee size of less than or equal to 49 employees (also compare, for example, the SME definition of the Institut für Mittelstandsforschung (IfM) or the SWISS KMU Report).

Maximum of 49 employees
As with the size of sales, there are also clear views in the literature on the distinction between small and medium-sized companies regarding the number of employees. Health-Trends sets the limit here at a maximum of 49 employees.

Less than 5 management seats
There are no statements in the literature on the number of people on the management board. However, startups are characterized by a small and effective management team, which also shares the tasks entrepreneurially (often in organizational structures that are not yet well established). Health-Trends, therefore, assumes a critical size of a maximum of 5 people on the management board. As soon as this number is exceeded, one can assume that a company has broader and more established organizational structures and leaves the entrepreneurial discovery phase of a startup.

Solidified business model
The business model is probably one of the most important factors for evaluation. Startups in early phases typically change their business model several times. Established and successful companies, however, stick to their model for several years. From the outside, this point is difficult to assess as it depends on various success factors (e.g., USP and monetization of products and services, solid customer relationships and partnerships, etc.). Therefore, signs of a solid business model are primarily continuous solid growing sales figures, solid management structures or long-term customer relationships and partnerships.

No acquisition by other company
Actually a no-brainer, but still important for assessing a startup in terms of its status. Startups are independent structures from the point of view of Health-Trends. As soon as another company acquires a startup, it loses its independent startup status. However, spin-offs from companies or joint ventures between different companies are conceivable to a certain extent if this type of startup exists in the market as a legally independent entity without significant majority holdings (less than 25%) by these companies.

A maximum of 3 locations
Startups usually have a limited market focus (e.g. on a country or a common market economy) and try to achieve appropriate growth within a limited time. From the point of view of Health-Trends, it is obvious that a startup’s status is primarily associated with the fact that it only has a few offices (max. 2-3 offices distributed in one or more countries). For the SWISS DIGITAL HEALTH MAP, it is crucial that the main office is in Switzerland and the startup can therefore also be described as a Swiss company.

Founders with shares still present
Startups are often characterized by the fact that the founders are still on board and have at least a significant share of voting and share rights. This factor can often only be considered in combination with other factors mentioned above.

Attentive readers have now noticed that the amount of funding by capital providers is not one of the eight factors. From our point of view, funding is important for the sustainable economic success of a startup. However, it has only a secondary influence on a company’s status as a startup or an already well-established company. Thus, we do not include funding in our closer examination. Moreover, current figures on funding are also difficult to obtain, as startups often handle this information confidentially.

Updating data with help from the digital health community

Health-Trends maintains an extensive database on startups, which also carries the above eight factors. The information is primarily provided by the startups themselves when they apply for our map (see our startup onboarding survey). However, updating over time is time-consuming.

Therefore, Health-Trends relies on a mix of desk research, regular update requests and feedback from the digital health community. The latter is especially valuable, as we can keep the map as up-to-date as possible. And the community also benefits from a constantly updated SWISS DIGITAL HEALTH STARTUP MAP. The map helps to visualize innovations in digital health, break down silos in the healthcare sector, and establish overarching collaboration. This is the main mission of the map. And Health-Trends can make a valuable contribution to the further development of digital health in Switzerland thanks to your support.