What Is a Startup Company?
As the term implies, ‘startup’ is not a permanent phase for any business — nor does it solely refer to companies in the tech sphere. It’s a vital, early stage of the business life cycle, and can refer to virtually any industry.
In general, startups tend to have few employees and fast growth potential. They provide products with widespread appeal that either don’t exist yet, or solve a problem better than the options currently available.
To quickly review, here are the main characteristics of a successful startup company:
- Problem solving
- Fast growing
A Brief History of Startups
Startups haven’t always been viewed in a positive light. Many people blame the events of the Great Depression for reckless startup investing, which led to legislation restricting the way unregulated companies could advertise for investors. Since then, startup funding has largely been provided through venture capital or “friends and family” investors (more on this in the next section!)
The modern-day popularity of startups has its roots in the dot-com boom of the late 1990s. Investing in small-scale businesses was extremely commonplace during the rise of the internet — which is also the reason many people associate startups with tech firms to this day.
- Startups are companies designed to grow rapidly and scale upward without geographical constraints. This is the primary differentiator between startups and other young businesses.
- Most startups’ expenses exceed their revenue, which is why so many of them require external financing. Without it, there would be no way for these companies to effectively develop and market their innovative products or services.
- Oftentimes startups are built around an exit strategy — they’re designed with the end goal of selling the company to a larger corporation.
- Many startup owners are “serial entrepreneurs.” They’ll come up with a startup’s initial idea, put in the work to get the ball rolling, then hand off the day-to-day responsibilities to someone else so they can focus on launching one of their other startup projects.
Types of Startups
Getting to know the type of startup you want to create will help you establish the market and growth potential available to you. There are six types of startups, all best suited for a different type of entrepreneur based on their abilities, goals, and wants.
Lifestyle startups are companies that are centered around the founder’s interests and passions. This kind of startup allows the founder(s) to participate in their favorite activities, and hopefully make money doing so. For example, a passionate guitarist that opens a music store or starts a business teaching music lessons; this would be considered a lifestyle startup.
Small Business Startups
A small business startup isn’t usually created with scalability in mind. These small startup companies are born out of a desire to start a business that will provide enough capital to be financially stable but not necessarily to grow tremendously. An example of a small business startup could be a small grocery store, salon, or restaurant.
A scalable startup is a growth-oriented company that takes an idea or concept and works to rapidly grow the business and achieve the highest profit as quickly possible (think Silicon Valley or New York startups). This type of startup requires thorough market research to identify exploitable market opportunities.
Social startups are created to make a difference or positive impact on the world around them. Unlike other types of startups, social entrepreneurship startups are not created to gain wealth; though it is possible to profit from this type of startup unless it is a nonprofit organization. They are created with the intention of using an idea to create positive change.
Large Company Startups
Growing a big business takes innovation and reimagining; this is how (and why) large company startups are born. Startups that are created by large companies in order to introduce a new product, or to reach a new audience, are backed by the support and capital of the big business. Any new business created by a large, existing company would be considered a large company startup.
Buyable startups are companies that are built with the intention of being acquired or bought in the future. Rather than grow or expand their business, these startups are created with the hopes of being acquired early on.
As mentioned previously, startups are typically funded by the startup owner’s friends and family, or by venture capital firms. These firms, which gained popularity in the 1970s, provide seed money from a group of investors and mitigate risk by pooling together to fund a variety of startups.
Continue reading to learn more about the various ways startups are funded.
For startups, bootstrapping means to build your company with no outside funding. Essentially, you invest your own savings or capital; utilizing the resources you already have to build your business from the ground up. Once your self-started business is established, your initial profits are then invested back into your business until you receive additional capital or your business grows substantially.
Friends and Family
Most startups rely on friends and family loans to get their business off the ground. Sourcing funding from close relationships isn’t typically as simple as asking the question over coffee; asking friends and family to invest in your business should be done with care. Four steps to respectfully source funding from friends and family: Present your case, propose clear repayment terms, share your backup plan, then create a written agreement.
The rise of crowdfunding has largely revolutionized the way startups are funded. Crowdfunding allows people from around the world to invest in companies using a tiered reward system that provides equity in return. Some niche crowdfunding sites are aimed solely toward startup funding, but even mainstream crowdsourcing platforms like Indiegogo offer equity-based financing opportunities. Some niche crowdfunding sites are aimed solely toward startup funding such as SeedInvest and CircleUp, but even mainstream crowdsourcing platforms like Indiegogo and WeFunder offer equity-based funding opportunities.
Venture Capital (VC) Firms
Venture capital (VC) firms invest in startups to gain profit as the company grows through funding phases such as Series A, B, C, and D. They typically will take an active role in the business, sit on the board of directors, or request to become part owner of the startup. Since venture capital investments are done in exchange for equity rather than debt, your startup will need to show promise of high-growth potential and innovation in order to secure this type of funding.
Similar to VC firms, an angel investor provides capital for startups in hopes of a high return on investment (ROI). Typically, angel investors are people with an excess of money to spend on risky investments. Many times these investors provide seed funding during the early stages of a startup that can be difficult to secure funding for.
Startup accelerators are programs that offer funding and resources such as mentorship to startups in their early stages. Once used by successful startups such as AirBnB and PillPack, these are fixed-term programs built to supply aspiring entrepreneurs with the information, community, and capital needed to create the startup of their dreams.
Startup incubators are community-based programs for entrepreneurs in the early stages of their startup’s lifespan that provide initial funding, mentorship, and training. Typically, startup incubators are housed in a collaborative space that encourages community building with a month-to-month lease that gives entrepreneurs access to a shared space and all the tools their program has to offer.
Unlike loans, startup grants provide capital for entrepreneurs that you don’t have to pay back. Most often startup grants are given either by the government or organization to startups that apply and meet the qualifications of the grant. Many startup grants are given with specific rules and regulations that dictate the way the money is spent; for example, if a grant is given to your startup to invest in developing new technology, it cannot be used for any other purpose.
Startup loans are funding that is paid back to the lender. These loans can be acquired by applying with a business lender such as a bank or another lending institution. However, there are requirements that you’ll need to fulfill in order to receive this type of funding such as creating a business plan and the proper documentation required by the lender.
The modern workplace is becoming less formal every day. “Casual Fridays” have morphed into “casual everyday” in many offices, a trend that originated in the startup sphere.
“Startup culture” is a bit of a catch-all term that’s often used to describe any company with a relaxed, fun and cooperative work atmosphere. The startup-culture mentality has expanded far beyond small Silicon Valley tech firms and into major corporations. Today, companies like Amazon and MasterCard offer their employees perks like casual dress codes, relaxing work environments, recreational activities, and more. Employers like these believe that the “cool office” trend actually leads to increased productivity, because employees are able to focus more on their work than adhering to formalities.
The next phase in the development of startup culture might be to make communication more casual. The email-centric communication structure of the dot-com days is being largely replaced by real-time collaborative intra-office messaging services like Slack, which more accurately represent the way we speak in casual conversation.
“What is a startup?” isn’t as simple a question as it may seem. The definition of a startup varies depending on who you ask, although there are some common characteristics that apply across the board.
Generally speaking, if a company lasts more than a few years, has more than a handful of employees, or is generating multi-millions in revenue, it’s probably grown past the startup phase.
If you want to know more about any aspect of startups, we have a wealth of information here at Startup Savant. Whether you’re looking for information on forming a specific business structure, details on business service providers to help your startup grow, ideas for branding and marketing your new business, or much much more, you’ll find it all here.
FAQ About Startup Companies
How do you define a startup?
A startup is a young company born out of a desire to solve a problem, fulfill a demand, or bring a unique product or service to market. Typically, startup companies are funded solely by their founders or, with the help of friends and family.
What are the types of startups?
There are six types of startups:
- Scalable startups that are built for rapid growth
- Large company startups that are built to innovate
- Social entrepreneurship startups that are create to positively impact the world
- Buyable startups that are built to be acquired
- Lifestyle startups that are centered around the founder’s passions
- Small business startups that are created to fulfill the needs of its founders
Startup vs small business: What is the difference?
The fundamental difference between a startup and a small business is longevity. Generally, while small businesses are focused on sustained growth; startups tend to focus on gross revenue and rapid growth since this is a temporary business model. Learn how to start a business or how to start a startup.
What is the lean startup?
A lean startup is a methodology that tests the viability of a startup company or product through experimentation and hypothesis testing. This method is based on gauging the interest of customers to produce a product or service with a market built-in.
What makes a startup successful?
There are a multitude of ways to make a successful startup but the foundational reasons startups succeed are: A usable and unique product or service, sufficient financial backing, and unrelenting dedication to making the success of the business. For more advice, check out our list of startup tips for success. For even more inspiration, check out these entrepreneur stories of startup success.
What makes a good startup founder?
Starting a business takes a great idea and an even greater entrepreneur to make it all happen. Great startup founders are passionate, adaptable, confident, and have an eye for detail.
How long are you considered a startup?
Your company is most likely still considered a startup if you have less than 100 employees and high growth potential that your business hasn’t quite achieved yet. Furthermore, startups typically still need some maneuvering to establish the right business model and products for their market.
How do you come up with startup ideas?
Coming up with the right startup idea can happen in a number of ways. Some entrepreneurs simply come up with a marketable solution to a problem, some see an opportunity to take advantage of an untapped market. If your idea isn’t coming to you as seamlessly, try using this business idea generator to inspire innovation or read our step-by-step guide on how to come up with startup ideas.
How do you value a startup company?
By their nature, startups are difficult to value accurately, especially during early stages. For newer, less established startups, value is typically determined by its future potential rather than its current earnings. Since, at this stage, these business ventures aren’t usually bringing in steady revenue or earnings.
Alternatively, established companies and enterprises are valued through a combination of earnings before interest, taxes, depreciation, and amortization (EBITDA). For newer startups that don’t have steady revenue, however, these metrics aren’t necessarily applicable.
How do you invest in startups?
There are several ways to invest in startups, from providing a friends and family loan to becoming an angel investor. However, unless you are an accredited investor, the easiest way to get financially involved in the startup ecosystem is to participate in a crowdfunding campaign on a platform such as IndieGoGo or SeedInvest. Visit our startup series to find startups looking for investors and ways to get involved in the startup ecosystem!
How do you start a startup?
To start a startup, there are a few steps you need to take. Naming your startup, incorporating your startup, fulfilling any legal requirements at the state and federal level, and getting a business bank account are a few of the most important steps to get started.
You can also choose your state from the list below to read our state-specific startup guides:
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
- Washington D.C.
- West Virginia