What Is a Startup Business: Meaning, Types, and Funding
What is a startup? If you take a minute to reflect on this term (and on business in general), you might think of greed and other unpleasant things. While a business can certainly be greedy and put winning first, that’s more of an exception to the rule. Most of us want to earn a living without compromising our morals or hurting others to get ahead. For us, business is about creating a good product or service for customers.
According to Statista, ANT Group, ByteDance, and SpaceX are among the most valuable and successful companies worldwide as of April 2021. All of them have managed to develop profitable and scalable business models, and all of them are termed startups.
What Is a Startup Company?
It isn’t easy to formulate a startup definition due to its complexity. Generally speaking, the term “startup” refers to a young company founded by one person or several entrepreneurs. They have a business idea and want to develop unique products or services into the market, and initial funding comes from the startup founders, as well as their friends and families. Over time, those startups that show a lot of promise on the market will become interesting for investors, especially venture capitalists.
According to Steve Blank, one of the well-known serial entrepreneurs, the main goal of a startup is to find a repeatable and scalable business model.
Why Has the Number of Startups Increased in the Last Few Years?
The term “startup” is on everyone's lips. The majority of young people want to quit their jobs and launch their own startups. Even a basic understanding of creating a startup is enough to realize the risks involved. So why do they still want to take this road?
- Money is important. They aren't interested in climbing the corporate ladder in the traditional sense. Instead of getting stuck in boring jobs, they want to start their own businesses and pursue their dreams.
- Resources are readily available. It is much easier than ever to find all the necessary information and tools on the Internet.
- No need to run financial processes single-handedly. For example, you can use Finom, an innovative financial service for entrepreneurs in Europe. It combines banking, accounting, and financial management. You can choose between several plans. There is a special free Solo plan for small businesses and freelancers. If you live in Germany, you can create a Finom account even if your company is still in the registration process. Residents of Germany can also take advantage of accounting software integration.
How Does a Startup Grow?
A startup is a company with the ambition to grow nationally — and even internationally. Once a startup moves into the next stage, which is called a scale-up, it expands quickly and has a proven revenue model. The exponential growth of the company is typical for a scale-up, with the customer base, the workforce, and turnover increasing substantially for a number of years.
A startup goes through various growth stages. In each of them, it needs a different type of support from the ecosystem. Startup ecosystems consist of various organizations that include educational institutions, government agencies, investors, and incubators. They all work together to ensure stable growth and harmonious development for innovative startups.
What Are the Types of Startups?
The term “unicorn,” coined by venture capitalist Aleen Lee in 2013, refers to a startup that is worth over $1 billion. In the vast majority of cases, since the turn of the century, unicorns have been tech startups. During those times, a company reaching the point of $1 billion was rare. Hence, Lee chose the mythical animal to depict the rarity of such a venture.
Over time such startups as decacorns have appeared. These types of startups are successful new companies that are worth over $10 billion. And hectocorns are startups that have a combined value of more than $100 billion.
What Is the Difference Between Startups and Small Businesses?
If you open a corner grocery store or turn half of your house into a bed and breakfast, it doesn’t mean that you are running a startup. These kinds of companies are small businesses. So what are the differences between these two terms?
For startups, innovation is the main thing. They have to create something new or improve things that already exist. Small businesses aren’t usually unique. They can take advantage of ready-made decisions.
- Growth Rate
Any successful startup business grows very quickly, while small businesses aren’t growing at all, or they are doing it slowly.
- First Profit
The ultimate aim of small businesses is to generate revenue immediately. However, it could take months or years for a startup to become profitable.
- Failure Rate
According to AdvisorSmith, 32% of small businesses close within the first 3 years. However, that’s not bad compared to startups. According to Failory, 90% of them fail within the same period.
Small businesses don’t usually need any specific technologies. There are plenty of ready-made technological solutions for them in the marketing, accounting, and designing services. For startups, using or creating new technologies is a must.
How Are Startups Funded?
Most of the startups that you can think of wouldn’t exist if it wasn’t for venture capital. It is money provided by investors to startups that have the potential to reshape markets and experience huge growth. The money deployed by a venture capital firm usually comes from institutional investors, corporations, or wealthy individuals looking to make a lot of profit. However, experienced investors are very much prepared to lose their money. Venture capitalists offer their money in exchange for an equity share.
If you invest some of your own cash in early-stage companies, you are probably an angel investor. This type of investor refers to individuals looking to invest time, experience, and personal capital. They are often retired executives, CEOs, or people who have had successful companies. There aren’t other people that they need to check with in terms of their investments. Moreover, they don’t have high expectations in terms of how long it may take for them to get a return on investment.
These two types of investors invest in different stages of companies. The stages are called rounds: A round, B round, and C round. In each round, venture capitalists are typically looking for 20% or 30% equity in a company. Because they are investing large sums of money, they also expect to have a board seat, which gives them influence over the control of the company. Angel investors usually don’t take a board seat, and they don’t ask for control.
A Final Word
So what is a startup business? It is an innovative business with the DNA to scale up quickly and make a big impact. Starting a startup can be overwhelming, especially if it is your first time and you don’t know where to go or what to do. To stay motivated, you should remember that such companies are important for the economy and society.
Besides employment opportunities at the companies themselves, a single job at a startup also creates several indirect jobs at all levels of education. However, the newly created dynamic is the most important benefit. Startups encourage existing companies and sectors to innovate as well. They form partnerships to work on a better world, for example, in the field of digitalization and sustainability.