The answer to “What is a Startup Company?” is that are in the initial stages of trying to offer a vital product or service to society that is highly in demand. That is not necessarily the case, because there have been instances in the past where startups have invented the need for a product or service and then went on to capitalize on that demand.
Take Amazon, for instance, they wanted people to buy books online using their website, although there were ample offline bookstores around the world. They created the need for an online marketplace for books and then became the king of the sector. People initially thought that the whole idea of selling books online was outrageous, and nobody would ever buy a book online. But they missed one crucial detail about Amazon. Amazon was not trying to sell books, it was trying to sell convenience. And everyone needed convenience. Amazon just reminded people of this fact and went on to become one of the most successful businesses in the world.
So now that we have established that startups are a more flexible concept. I will try to define it using a more accommodative approach that encompasses all ideas and efforts. We will look at how startups have different operating strategies than conventional businesses, and what are the advantages and disadvantages of working with startups. We will also look at some factors that are crucial metrics to forecast the success of the venture and some defining features of startups along with some examples.
Ok, now going back to where we picked up the discussion…
What is a Startup Company?
A startup company is any entity that is trying to manifest an idea in the form of a product or a service that can create value for customers and generate some revenue as a result. Startups are not all about making money, they are more about making people’s lives easier by giving them something that can solve a problem, or simplify a process, consequently making their lives easier.
The individuals or groups of individuals who formulate the idea and incorporate an entity to follow through on the idea are called entrepreneurs. Entrepreneurs are people with a keen sense of the market, critical observational skills, and a highly logical mindset. They are often people with expertise in a particular field and a high tolerance for failure. Because good entrepreneurs are not the ones who win all the time. They are the ones who bang their heads on the wall, fall on their knees, then stand up again, and bang their head again and again until they find a way to get rid of the wall. They are highly competitive, have good leadership skills, and are extremely motivated to get things done.
The success of a startup depends heavily on the entrepreneurs because startups operate on low capital, have high work-load, fewer resources, and an evolving business model. Running a startup is a challenging task because you have more questions than answers. In fact, more than 90% of startups fail within the first five years according to a report by Startup Genome from 2019. Therefore, a good entrepreneur is crucial to the success of a startup.
How do you Fund a Startup?
Now that we have answered, “What is a Startup Company?”, it’s time to move on to questions that might pop into your head. As already mentioned, startups are infant businesses and they don’t have a lot of money like conglomerates. And since they are new around the block, they usually don’t have a huge customer base to mint money out of.
So where does the money come from?
There are essentially two ways to fund a startup. The first is to bootstrap the venture and the second is to get external funding. Although both of these methods are equally effective, startups usually take the external finding route. Let’s zoom into these concepts to understand why.
Bootstrapping is the process of funding a startup without divesting equity, or ownership of the venture. Entrepreneurs use personal funds, money from friends and family, or loans to fund the operations during the initial stages and use the profits to continue operations once the venture turns profitable. This method is preferred by startups that are initially profitable and have a disruptive idea backing them. Because very few people would be willing to invest their personal savings into a venture that has no signs of revenue and an idea with vague potential.
One of the best examples of a bootstrapped startup is Zerodha. One of the biggest stock brokerage firms in the country has bootstrapped its way to a billion-dollar valuation in a decade. Zerodha had an extremely disruptive business model and was profitable from the first month of its operation. We have done a detailed analysis of Zerodha and its business model, which you can read to expand your horizons.
External funding is the process of raising funds for a startup in exchange for the ownership or equity of the venture. The ones who invest usually venture capital funds, High Net-Worth Individuals, and startup incubators who wish to make high returns on their investments. Startups are known to give thousands of percent returns or more on initial investments during IPOs. An initial investment of $2,50,000 into Google made by Jeff Bezos in 1998 turned into a whopping $248 million dollars at the IPO of Google in 2004. That’s an ROI of 1,12,000% in less than 6 years. A startup can go through multiple rounds of funding before going public. Some of the common types are discussed below-
- One of the first investment rounds in early-stage startups is called the seed round where angel investors take part.
- After that comes the series A, B, C, and D funding rounds that take place when the startup is fairly mature. Venture capitalists participate in these rounds. Some startups even go as far as a series F round of funding based on their capital requirements.
A startup may choose to go public after venture capitalist rounds. One of the best examples of funded startups is CRED, a credit card bill repayment platform, that has raised a total of $801.5 million through 9 rounds of funding. CRED is also one of the unicorn startups in India and you can read our case study on CRED if you want to know more about the startup.
Most startups choose external funding over bootstrapping because it is very difficult for a startup to be profitable during the initial period, and funding a startup from personal savings carries high risk. Also, external funding gives startups access to the resources and connections of venture capital funds and great exposure to new markets.
Defining Features of a Startup Company
Startups use different strategies than conventional businesses to stay afloat in the highly competitive environment. While established entities use pre-defined templates to handle projects and do business. Startups are more experimental in nature and find new and innovative ways to solve problems and increase efficiency. Here are some of the defining features of a startup company that make them stand out from conventional businesses.
Working with a startup is completely different from working for a big established organization. How do I know that? Because I work for a startup. Startups have small teams that are closely knit together by a web of challenging tasks. Startups don’t have specialized functions for each task, which means that there are a lot of opportunities to learn, experiment, and grow as an individual. In a startup, every team member has to wear multiple hats and manage multiple projects at the same time, while keeping up with time constraints.
There are no defined boundaries of work, you have to take up new and challenging tasks on a regular basis and prove that you have the mettle to cope with the expectations. Working at a startup means long work hours and a challenging environment, which might make you feel that the compensation does not complement your work hours. But that’s the thing, your upside is linked with the startups’ growth. The extra efforts you make, compound over time into success, as the startup grows.
Efficiency is one of the parameters that can help you clearly specify “What is a Startup Company?” Startups have a small team and a plethora of tasks to handle. Therefore, every team member is like a team on their own and is capable of handling multiple tasks and meeting deadlines. Because startups don’t have the kind of resources to train and hire hundreds of employees and manage them.
They have highly skilled team members that are highly dependable and willing to take more responsibility. Startups are much more capable of squeezing out the best productivity from their team members and managing any problems at hand. Efficiency in managing tasks and resources is the key to the success of any startup.
Fast and Experimenting
Startups are extremely quick in terms of implementing changes and incorporating new strategies because they have the liberty to experiment with their work to optimize their results. Startups have a flexible business model and therefore, they have the liberty to experiment with new ideas to figure out what works and what doesn’t because startups are underhanded in terms of time and resources and the only option they have is to come up with innovative ideas and solutions to problems to satisfy their clients and make sure they live another day to fight in the competitive startup ecosystem.
- A startup company is any entity that is trying to manifest an idea in the form of a product or a service that can create value for customers and generate some revenue as a result.
- Startups are a flexible concept that accommodates an umbrella of organizations and ventures working towards a goal.
- Startups can be funded in two ways: The first is bootstrapping and the second is external funding.
- Bootstrapping refers to the process of raising funds for startups without giving away ownership or equity. Loans, personal savings, and profit reinvesting are some of the common methods.
- External funding is the process of raising capital from venture capitalists, and HNIs in return for the equity or ownership of the venture.
- There are three defining features of the startup, they are a competitive work environment, high efficiency, and experimental nature.
- Working for a startup is challenging and requires you to take up challenges and meet deadlines.
- Startups are highly efficient in optimizing the resources at hand bringing out the best possible results through critical problem-solving and effective management.
- Startups are fast in implementing changes in strategies and incorporating feedback because of the lower complexity. And they keep experimenting with new ideas to push their boundaries and deliver excellent results.
Startups are extremely inclusive and broad as a concept that embraces anyone who is trying to convert an idea into an actionable product or service. They are highly efficient and innovative in the way they operate and aim to create value for their customers on multiple fronts. The idea of startups is subjective and can mean different things to different people based on their idea. But what remains constant throughout the multiple iterations of the concept is the fact that startups solve problems and make our lives better. The focus is never on making money but on creating value for people. Financial incentives are just a by-product of the value created.
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