Most of the most recognizable brands we know and love had their beginnings as humble startups. Jeff Bezos famously started selling books out of his garage back in 1995, before Amazon rapidly grew into the technology and ecommerce powerhouse which dominates global industry today. But what is a startup, really?
Way back in the mists of time, starting a business was hard and required a huge amount of capital to, say, open a factory, stock a shop, or purchase a fleet of vehicles.
Today, however, many of the barriers to starting your own company have melted away and it’s not unusual to find people making their first foray into the world of business from their living room, basement, or indeed their garage.
Thanks to digital technology, it has never been simpler to access products direct from wholesalers or even manufacturers and have them shipped directly to customers – reducing the amount of stock a fledgling business needs to invest in to get off the ground.
Another advantage of a startup regarding cost of entry, is that they often don’t even sell physical products, but rather focus on digital offerings, such as games, smartphone apps, or computer software which seeks to solve an existing pain point.
The term startup has been bandied around for years now and, more often than not, conjures up an image of trendy young people sitting around an open office space – MacBooks on their laps, sipping coffee and congratulating themselves on how hip and cool they are.
However, while stereotypes can be amusing, they do little to help us understand the mindsets and entrepreneurial spirit which drive the startup mentality.
The earliest startups can be traced back to the infant days of the internet and the Dotcom craze. Venture capitalists were eager to invest in Dotcom companies to try and get in on this exciting and lucrative new fad market.
However, this excitement was tempered by the fact that many of these companies went bust extremely quickly due to significant flaws in their business plans such as having little to no idea how to generate sustainable revenue.
(Image source: news.bbc.co.uk)
This led to the infamous Dotcom crash when the Nasdaq, which rose five-fold between 1995 and 2000, saw an almost 77 percent drop, resulting in a loss of billions of dollars. Only a relative handful of Dotcom companies survived the crash – Amazon and eBay being two of them. This is the problem with fad investment and has led to many similar booms and busts throughout our history.
Today, startups are born when a person or group of people see a problem and think, “Yeah, I/we can solve that and do it better than anyone has done before.” The business is born from a mentality which puts concerns of stability to one side and looks to achieve its goals quickly and grow the brand more rapidly than you would normally expect from a fledgling company.
Perhaps one of the best ways to answer, “what is a startup?” is to hear from one of the bright minds who was there at the beginning of the movement.
“Startup is a state of mind,” said Adora Cheung, Cofounder and CEO of Homejoy, way back in 2013, when “startup” was still a new concept. “It’s when people join your company and are still making the explicit decision to forgo stability in exchange for the promise of tremendous growth and the excitement of making immediate impact.”
(Image source: statista.com)
The search for rapid growth is one of the defining characteristics of the startup mindset and the ultimate goal/dream of startup entrepreneurs is for their company to become a Unicorn.
Named for the rare and beautiful mythological creatures, a Unicorn is a privately held startup which has a current valuation exceeding one billion US dollars. According to CBInsights, as of Q1 2020, there are over 450 total global Unicorn companies, with a combined value of $1,378 billion.
You can see that the question “what is a startup?” doesn’t have a simple answer and, at this point, you may still be wondering what, apart from the open office, iMacs, and coffee, separates a startup from a small business venture. After all, on the surface they both appear to be the same thing. While they do possess similarities, startups and small business ventures have many differences which divide them.
Chief amongst these is the way the two types of business think about growth . Startups, compared to other small businesses, are designed for extremely rapid growth – usually through having a product or service which they can sell to a large market. Most businesses don’t need a huge market, they just need an audience and the ability to access it.
This is why most true startups are technology companies, with offerings such as Software as a Service (SaaS) platforms and the like, as these types of products are easy to distribute to a large market thanks to their digital nature.
It is the global nature of the modern business world which makes the rapid growth startups desire possible, as products can be bought and accessed no matter what time of day or night it is where the company is based. Thanks to modern translation tools, a startup’s representatives can even communicate effectively with customers – both current and prospective – all over the globe.
Funding is another key element when considering the difference between startups and small business ventures. Whereas a small business will usually get its funding through grants or loans from a bank or the government, a startup will normally rely on angel investors or venture capital firms for its financing.
Venture capital investors normally take a more active role in the companies they invest in, providing advice, connections, or even infrastructure to help the startup get off the ground. A small business venture will have to provide the bank with reports as to the progress of the company, but that’s usually the extent of the involvement.
In recent years, crowdfunding has become a popular way for entrepreneurs to get their startup off the ground. Crowdfunding platforms such as Kickstarter and Indiegogo allow business owners to seek funding directly from their intended customers.
This usually involves customers essentially pre-ordering the product and paying up front, which then gives the company the capital needed to put it into production. Obviously, there is a risk that the product will never materialize, so the pot is usually sweetened with extra incentives – additional products or add-ons which are added, usually for no extra cost, once certain funding thresholds are crossed.
Finally, a startup will usually have an exit strategy – and most venture capital investors will insist on one before they’ll even think about putting their hands in their pockets. An exit strategy may take the form of a steady revenue stream which allows the startup to pay off investors or sell off the company to a larger firm.
We see this all the time from tech giants such as Facebook which are constantly buying up smaller firms and incorporating them into their own offering. The goal of many startups is to achieve rapid growth and then sell the company on before starting a new project.
There many different types of startup, all with different offerings and goals. We could probably write a whole article listing all the different types, but some of the most common ones you’re likely to encounter include:
Automators – These startups are centred around a product and have a self-service customer acquisition strategy. They seek to take an existing manual process and, as the name suggests, automate it. They target existing markets by promising to reduce costs and increase productivity.
Social Transformers – These companies are focused around creating new ways for people to interact. These interactions can be at the enterprise level, such as with platforms like Slack or LinkedIn. Alternatively, they can be customer facing such as with Tinder or Facebook.
The biggest challenge for these startups is reaching a critical mass of signups to make the platform attractive to other potential users and often advertisers, too.
Integrators – Every company needs marketing and these startups seek to integrate themselves with another brand’s operations to help them generate leads and close them with internal sales representatives.
Companies like HubSpot look to create rapid monetization through subscriptions and usually operate in smaller markets than other startups. Integrators could also include SaaS companies that provide data analytics, finance, accounting, HR solutions, etc.
Challengers – Challenger startups seek to establish a replicable and scalable sales process and seek out high paying customers in large and fragmented markets. Think of brands such as Salesforce and Oracle, which are highly dependent on a (relatively) small number of deals which pay extremely well.
We’ve already touched on the way venture capital investors will take an active role in the companies they invest in and this is often in a mentoring capacity.
Think of the popular television show Dragon’s Den. Part of the reason the guests on the show are keen to get investment from the Dragons is because they know their companies will benefit from the extensive business knowledge the Dragons possess. Because the Dragons have a real stake in the company, they have plenty of incentive to help make it a success.
Mentored startups grow roughly 3.5 times faster than their unmentored rivals and generate seven times more money. Startup entrepreneurs are constantly being pulled in a million directions, and the assistance of a skilled and experienced mentor can help them focus and invest their time in the areas which need it most.
Simply put – having a mentor in their corner gives a startup entrepreneur a significantly higher probability of success than those which do not.
The most famous hotbed of tech startups is the monumentally successful home of Facebook, Apple, Alphabet (Google), Netflix, and more – Silicon Valley. This global centre of high technology has inspired a kind of arms race of startup ecosystems around the globe, which are all working hard to try and replicate the San Francisco Bay Area’s success.
Movies such as The Social Network, which presents a dramatized account of the events that led to the creation and success of Facebook, have further cemented the aspirational nature of startups in the public consciousness.
However, not all startups are destined to reach the giddy heights of Mark Zuckerberg’s social media titan. In fact, more than 90 percent of startups are destined to fail – mainly through self-destruction rather than any other reason.
Of those which do survive, most will have several instances along the way where they come within touching distance of failure and will only emerge thanks to a combination of skill and luck.
There is no exact formula for startup success, but the people involved obviously play a role. You need to have the right mix of business and technical knowhow that’s appropriate for the market you’re attempting to penetrate.
For example, having a technical cofounder on board is essential for an enterprise startup, but less instrumental for a customer-facing business. Enterprise products usually require a higher degree of technical expertise than others and having the right cofounder on board can increase your chances of success by as much as 230 percent.
However, a technical leadership in a customer facing company can actually have a detrimental effect on your chances of success, with startups founded by non-technical teams performing 31 percent better than customer facing startups with technically minded founder/s.
The reason for this is likely because a leader with a pure technology background may not be used to working in a customer-facing role and miss some of the key components of customer service/experience.
Startups have become incredibly important from an economic perspective and when it comes to driving the kind of technological innovation the modern customer expects and demands.
Startups don’t just benefit economies because they make money and create employment, however, but often because they help spawn entirely new markets, like the social network boom, started by brands such as Bebo and MySpace and sent into the stratosphere by Facebook.
A certain amount of failure is baked into the DNA of startups and this is a crucial component of what makes them so important in terms of invention. Without failure, startups would have no foundation on which to build their successes and we wouldn’t have many of the exciting and innovative products, services, and platforms we have come to enjoy and even take for granted today.
When he was trying to create the world’s first lightbulb, Thomas Edison famously stated, “I have not failed. I've just found 10,000 ways that won't work,” a sentence which perfectly encapsulates the startup state of mind.
Yeah – it’s just a structural thing, I think. Just need to chop and change things around so we move from the more general at the top – key definitions etc. – to the more particular further down. Unicorns can be mentioned in this section. Just need to answer that “what is a startup” question early on. Define a startup.
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