A startup company is an entrepreneurial venture in the initial stage of its operations. Startups are typically young businesses aiming to grow quickly and meet a marketplace need by developing or offering an innovative product, process or service. The difference between a startup and a small business is that a startup aims for fast growth into a large market.
Various characteristics used to define startups include:
- Size-defined, below a size threshold (employee, revenue): This definition could categorize a startup based on its size. I.e. above a certain threshold of size on a particular attribute, the startup would no longer be considered a startup.
- A cultural perspective: This definition would point towards the company being called a startup due to its philosophies and cultural qualities.
Evolution of a Startup
Startup companies can come in various forms and sizes. Some of the critical tasks are to build a co-founder team to secure key skills, know-how, financial resources, and other elements to conduct research on the target market.
Often but not always, a startup will begin by building a minimum viable product (MVP), a prototype, to validate, assess and develop the new ideas or business concepts. In addition, startups founders do research to deepen their understanding of the ideas, technologies or business concepts and their commercial potential.
A Shareholders' agreement (SHA) is often agreed early on to confirm the commitment, ownership and contributions of the founders and investors and to deal with the intellectual properties and assets that may be generated by the startup. Vesting schedules for equity are also setup for Founders, Co-founders and early employees.
A company may cease to be a startup as it passes various milestones, such as becoming publicly traded on the stock market in an initial public offering, or ceasing to exist as an independent entity via a merger or acquisition.
Startups frequently fail and cease to operate altogether, an outcome that is very likely for startups, given that they are developing disruptive innovations which may not function as expected and for which there may not be market demand, even when the product or service is finally developed. Many startups fail due to team issues or simply running out of funding.
Given that startups operate in high-risk sectors, it can also be hard to attract investors to support the product/service development or attract buyers. The size and maturity of the startup ecosystem where the startup is launched and where it grows have an effect on the volume and success of the startups.
The startup ecosystem consists of the individuals (entrepreneurs, venture capitalists, angel investors, mentors); institutions and organizations (top research universities and institutes, business schools and entrepreneurship programs operated by universities and colleges, non-profit entrepreneurship support organizations, government entrepreneurship programs and services, chamber of commerce) business incubators and business accelerators and top-performing entrepreneurial firms and startups. A region with all of these elements is considered to be a "strong" entrepreneurship ecosystem. Some of the most famous entrepreneurial ecosystems are Silicon Valley in California, where major computer, Internet firms and top universities such as Stanford University create a successful startup environment, Boston (where Massachusetts Institute of Technology is located) and Berlin, home of WISTA (a top research area), numerous creative industries, leading entrepreneurs and startup firms.
Investors are generally attracted to those new companies distinguished by their strong co-founding team, a balanced "risk/reward" profile (in which high risk due to the untested, disruptive innovations is balanced out by high potential returns) and "scalability" (the likelihood that a startup can expand its operations by serving more markets or more customers).
Attractive startups generally have lower costs (by "bootstrapping" - self-funding of startups by the founders), higher risk, and higher potential return on investment.
Successful startups are sometimes more scalable than an established business, in the sense that the startup has the potential to grow rapidly with a limited investment of capital, labor or land. Timing has often been the single most important factor for biggest startup successes, while at the same time, timing is, identified to be one of the hardest things to master by many serial entrepreneurs and investors.
Startups have several options for funding. Venture capital firms and angel investors may help startup companies begin operations, exchanging seed money for an equity stake in the firm. Venture capitalists and angel investors provide financing to a range of startups (a portfolio), with the expectation that a very small number of the startups will become viable and make money. In practice though, many startups are initially funded by the founders themselves using "bootstrapping", in which loans or monetary gifts from friends and family are combined with savings and credit card debt to finance the venture.
Factoring and venture debt is another option, though it is not unique to startups. Other funding opportunities include various forms of crowdfunding, for example equity crowdfunding, in which the startup seeks funding from a large number of individuals, typically by pitching their idea on the Internet and ICOs (Initial Coin Offerings).
Many startups are formed as a C corps (Inc's) in the US and 'Ltd' in the UK. Some startups are formed as LLCs. Characteristically, founders can be working on a project anywhere from days to years before incorporating as legal entities, in stark contrast to the commercial behavior of more established operations.
Co-founders are people involved in the initial launch of startup companies. Anyone can be a co-founder, and an existing company can also be a co-founder, but frequently co-founders are entrepreneurs, engineers, hackers, web developers, web designers and others involved in the ground level of a new, often high-tech, venture. There is no formal legal definition of what makes someone a co-founder, however, in the US the SEC considers co-founders to be 'promotors'. The divorce rate among startup co-founders is very high, a factor often disregarded until it is too late.
Stereotypically, startup founders have a more casual or offbeat attitude in their dress, office space, and marketing, as compared to traditional corporations. For example, startup founders may wear hoodies, sneakers and other casual clothes to business meetings. Their offices may have recreational features, such as pool tables, ping pong tables and pinball machines, which are used to create a "fun" work environment, stimulate team development and team spirit, and encourage creativity. However, this view is changing as traditional corporations take on 'startup' like characteristics, the definition of 'startup' expands to include more exceptions than the rule. Typical examples of companies that were considered startups at some point include Facebook, Snapchat and Google which are now considered by some to now not be startups as they have crossed a weakly defined threshold of size.
Startup investing is the action of making an investment in an early-stage company (the startup company). Beyond founders' own contributions (which may be negligible), some startups raise additional investment at some or several stages of their growth. Not all startups trying to raise investments are successful in their fundraising.
The solicitation of funds became easier for startups as result of the JOBS Act.
Evolution of Investing
After the Great Depression, which was blamed in part on a rise in speculative investments in unregulated small companies, startup investing was primarily a word of mouth activity reserved for the friends and family of a startup's co-founders, business angels and Venture Capital funds. In the United States, this has been the case ever since the implementation of the Securities Act of 1933. Many nations implemented similar legislation to prohibit general solicitation and general advertising of unregistered securities, including shares offered by startup companies. In 2005, a new Accelerator investment model was introduced by Y Combinator that combined fixed terms investment model with fixed period intense bootcamp style training program, to streamline the seed/early stage investment process with training to be more systematic.
Following Y Combinator, many accelerators with similar models have emerged around the world.
Title II of the Jumpstart Our Business Startups Act (JOBS Act), first implemented on September 23, 2013, granted startups and startup co-founders or promoters in US the right to generally solicit and publicly advertise using any method of communication on the condition that only accredited investors are allowed to purchase the securities.
When investing in a startup, there are different types of stages in which the investor can participate. The first round is normally called seed round (sometimes their is a round before this called the 'preseed'). The seed round generally is when the startup is still in the very early phase of execution when their product is still in the prototype phase (though it can also be after traction). At this level, angel investors will be the ones participating. The next round is called Series A.
At this point the company may already have traction and may be making revenue. In Series A rounds venture capital firms will be participating alongside angels or super angel investors (however, sometimes only venture capital firms will participate). The next rounds are Series B, C, and D. These three rounds precede any potential IPO. Venture capital firms and private equity firms may be participating. Sometimes, the A or B rounds can be extended in what is called an A prime or B prime.
Platforms like Angel List have altered the landscape of fund raising to include 'syndicates' which are SPVs (special purpose vehicles) which allow unconventional fund raising rounds.
The first known investment-based crowdfunding platform for startups was launched in Feb. 2010 by Grow VC, followed by the first US based company ProFounder launching model for startups to raise investments directly on the site, but ProFounder later decided to shut down its business due regulatory reasons preventing them from continuing, having launched their model for US markets prior to JOBS Act. With the impact of the JOBS Act for crowd investing in US, equity crowdfunding platforms like SeedInvest and CircleUp emerged in 2011 and platforms such as investiere, Companisto and Seedrs in Europe and OurCrowd in Israel. The idea of these platforms is to streamline the process and resolve the two main points that were taking place in the market. The first problem was for startups to be able to access capital and to decrease the amount of time that it takes to close a round of financing. The second problem was intended to increase the amount of deal flow for the investor and to also centralize the process.
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- OrganizationAn organization or organisation is an entity comprising multiple people, such as an institution or an association, that has a collective goal and is linked to an external environment.
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- Mark ZuckerbergMark Zuckerberg is an internet entrepreneur and the CEO of Facebook
- Venture capitalA form of financing or funding for emerging companies. Investment on early-stage companies in exchange for equity in the companies they invest in.
- Brian CheskyBrian Joseph Chesky (born August 29, 1981) is an American Internet entrepreneur who co-founded the hospitality exchange service Airbnb.
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