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Startups are businesses that want to disrupt industries and change the world—and do it all at scale. Startup founders dream of giving society something it needs but hasn’t created yet—generating eye-popping valuations that lead to an initial public offering (IPO) and an astronomical return on investment.
Startups are young companies founded to develop a unique product or service, bring it to market and make it irresistible and irreplaceable for customers.
Rooted in innovation, a startup aims to remedy deficiencies of existing products or create entirely new categories of goods and services, disrupting entrenched ways of thinking and doing business for entire industries. That’s why many startups are known within their respective industries as “disruptors.”
You may be most familiar with startups in Big Tech—think Facebook, Amazon, Apple, Netflix, Google, collectively known as FAANG stocks—but even companies like WeWork, Peloton and Beyond Meat are considered startups.
On a high level, a startup works like any other company. A group of employees work together to create a product that customers will buy. What distinguishes a startup from other businesses, though, is the way a startup goes about doing that.
Regular companies duplicate what’s been done before. A prospective restaurant owner may franchise an existing restaurant. That is, they work from an existing template of how a business should work.
A startup aims to create an entirely new template. In the food industry, that may mean offering meal kits, like Blue Apron or Dinnerly, to provide the same thing as restaurants—a meal prepared by a chef—but with convenience and choice that sit-down places can’t match. In turn, this delivers a scale individual restaurants can’t touch: tens of millions of potential customers, instead of thousands.
There’s another key factor that distinguishes startups from other companies: speed and growth. Startups aim to build on ideas very quickly. They often do this through a process called iteration in which they continuously improve products through feedback and usage data. Oftentimes, a startup will begin with a basic skeleton of a product called a minimal viable product (MVP) that it will test and revise until it’s ready to go to market.
While they’re enhancing their products, startups are also generally looking to rapidly expand their customer bases. This helps them establish increasingly larger market shares, which in turn lets them raise more money that then lets them grow their products and audience even more.
All of this rapid growth and innovation is typically, implicitly or explicitly, in the service of an ultimate goal: going public. When a company opens itself up to public investment, it creates an opportunity for early investors to cash out and reap their rewards, a concept in startup parlance that is known as an “exit.”
Startups generally raise money via several rounds of funding:
It’s worth noting that the initial stages of startup funding are limited to those with especially large pockets, people called accredited investors, because the Securities Exchange Commission (SEC) believes that their high incomes and net worths help shield them from potential loss.
While everyone wants the more than 200,000% return Peter Thiel saw on his investment into a little startup called Facebook, the vast majority—about 90%—of startups fail, according to a report authored by UC Berkeley and Stanford researchers. This means early stage investors have a very real possibility of seeing 0% returns on their investment.
While many startups will ultimately fail, not all do. For a startup to succeed, many stars must align and crucial questions be answered.
If a startup is able to answer all of these questions, it may stand a shot at becoming part of the 10% of early stage companies to survive.
Unfortunately, startup investing isn’t widely available to the masses.
To gain access to the most desirable early stage startups, or the venture capital funds that have the best shot at Thiel-level returns, you must be an accredited investor. In simple terms, this means you have an annual income of at least $200,000 or a net worth, not including your primary residence, of at least $1 million. You also may be able to claim accredited investor status, regardless of income or net worth, if you work as a registered investment adviser.
If you don’t fit any of those bills, you aren’t out of options, though. Crowdfunding sites like WeFunder or Seedinvest allow anyone to put down a small sum in exchange for a piece of a startup. Seedinvest boasts pre-vetted opportunities and an investment minimum of $500—50 times lower than the typical check expected from accredited investors looking to get into the startup investing game.
A startup (or start-up) is a company typically in the early stages of its development. These entrepreneurial ventures are typically started by 1-3 founders who focus on capitalizing upon a perceived market demand by developing a viable product, service, or platform.
During the early stages of launching, startups are usually self-funded by members of the founding team (aka the startup owners) — though 66% of startups secure venture capital funds through an investor or take out a loan to help fund their new business.
That’s technically-speaking. But founders know defining a startup is SO much more complex than that. It’s not that a founder possesses unusual innate ability or is part of a highly skilled elite group (some are) but they must have some intellectual or artistic technique to contribute or they wouldn’t be crazy enough to create a startup in the first place.
Startup vs Small Business: One feature that most people seem to agree on for the definition of a startup is a focus on growth. Small businesses may be happy staying small businesses forever, but a startup doesn’t want to stay small.
“To me a startup is any company that has a goal to grow and scale, usually quickly and usually using technology to do so,” Ian Wright, founder of Merchant Machine, tells Startups.com.
“All startups by their very nature will start out being small businesses, but not all small businesses are startups. The difference with startups is that it’s their goal to no longer be a startup at some point in the future, while many small business owners are more than happy for their small businesses to remain small businesses.”
Sometimes the best way to figure out a simple definition of a big concept is to think about how you’d explain it to a child. Jochem Wijnands, the Founder of a startup that was acquired by Apple in 2014 and TRVL.com explains the definition of startup this way to his eight-year-old son:
“A startup is a modern version of an inventor. It experiences a problem and then tries to solve it with ingenuity. A successful startup typically wants to solve a problem and make the world a better place.”
Stephanie Caudle, the Founder of Black Girl Group, agrees.
“A startup is a company that solves a problem,” Stephanie says. “If your company isn’t solving a problem, your company is simply an idea.”
A job is often just a job, when you’re working for someone else. But when you’re the startup owner and running it? It’s much, much more.
“In my experience, a startup is a job you cannot quit, that does not pay, and which you cannot live without,” Sacha Nitsetska, Founder and CEO of Mentorforward, tells Startups.com.
“Ideally, it is also an organization that is doing something that has never been done before, and that has the potential to change the world. Growth numbers and the rest are just an output from the above with some good execution, right tactics and great advisors added in just the right amounts.”
One of the hallmarks of a startup is the willingness to push boundaries and conduct lots of experiments. Xiao Wang, the Co-Founder and CEO of Boundless, believes that those questions and experiments are essential if a company is going to claim that startup definition.
“A startup is a company that has more questions about its business model and sustainability than answers,” Xiao says.
“It does not yet know how it will operate at scale, both to its customers and its employees. The focus is on experimentation — continuously testing, iterating, and learning. This is independent of number of employees, revenues, or whether or not it’s publicly traded.”
Some businesses launch with a product/market fit link already built into their business plan. A bagel bakery in Brooklyn, for example, probably already has a pretty good idea of who their market is and what they’re looking for.
But a startup, Joshua Feinberg — Chief Thought Leader, Vice President, and Co-Founder of SP Home Run Inc. — believes, is still searching for that magical slot they can slip into.
“A startup is a company that’s searching for product/market fit: trying to identify its ideal customers, which products and services those ideal customers purchase, at what price points, and how frequently they make those purchases,” Joshua says.
“Besides raising capital when needed, startup founders spend a lot of time tracking and trying to improve a handful of core metrics including average customer lifetime value (LTV), cost of customer acquisition (COCA), and average sales cycle length.”
Nate Masterson, the Marketing Director of Maple Holistics, thinks the definition of a startup starts with the goal of fill a gap in the market.
“Technically speaking, a startup is defined as any newly formed and fast-growing company or new business that aims to fulfill the needs or a gap in a relevant marketplace,” Nate says.
While many people associated “startup” with “young people,” young founders actually aren’t an essential element to the definition of startup. Take it from Mark Winokur, Founder and CEO of Workforce First Aid and Safety.
“The amazing thing about the term “startup” is that it really has no defined boundaries,” Mark says.
“Sure, certain characteristics come to mind when the word is brought up – millennial, tech, major funding, etc. But in reality, a startup can fall under that umbrella or be very far outside of it.
“For instance, I’m a 70-year-old entrepreneur with a startup in a very traditional industry,” Mark continues.
“I’m not sure there are many boxes that you can lump startups into. Founders come in all ages, from all backgrounds, while companies can still be considered startups for quite awhile after founding with no hard and fast rule as to when you stop being a startup (maybe when you stop innovating?).
I do believe there is a common thread connecting most startups, though: a mission or goal to disrupt, change, or enhance, the traditional mindset of whatever industry they’re in.”
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