A startup is defined by innovation. It’s a company guided by the spirit of building or doing something new or developing on an already existing idea by giving it a new direction.
A startup is born from a gap in the already existing systems. When an entrepreneur identifies a need in the market that hasn’t already been met by product or can come up with an idea that will likely modify the customer’s needs, that’s the seed of a startup.
It’s different from a small business as it is conceived with the vision to disrupt the existing order in the world of business. Let’s talk more about startups now.
What is a startup all about?
More than anything else, a startup is about speed and growth. When a startup is conceptualized, it is done without any inhibition about the market size. A startup is built on the principle of iteration where they build a product, receive feedback about it and improve it continuously. If you have heard about continuous development in agile DevOps structures in the context of software companies, that is purely a startup thing that big businesses have now borrowed.
A few things come together in the initial establishment of a startup.
It all starts with an idea backed by a team (or sometimes one person). The team works tirelessly to shape the idea into a minimum viable product (MVP) and gets it out there for testing.
Then, on one side they receive feedback on the MVP, and keep enhancing it until a solid product is built and on the other side they focus on branding and marketing to build a customer base and expand it.
This process is iterative- a startup has to be constantly on its toes when it comes to improving a product. Once an idea is successful, copycats follow. The startup has to keep offering something that burgeoning competitors cannot. So, the process of innovation and iteration is continuous.
While these things are happening, the startup has to secure the money needed to run itself through multiple forms of funding. The end goal is usually to be big enough and go public through an initial public offering, or to sell the company to the highest bidder.
How does a startup secure funding?
In the beginning, once an idea is mature enough, the founders, their friends, and family invest in the business to get it started. This level of funding is called bootstrapping. If you think about it, this is exactly how Amazon started when Bezos’ parents invested almost $250,000 in his business starting out of a garage.
The following step is called seed funding where high-net-worth individuals invest in the early-stage company in hopes of getting massive returns should the startups succeed. These people also run the risk of losing their money should it fail. Peter Thiel is a case in point who invested $500,000 in Facebook in the early days and bagged 200,000% returns.
Seed funding is followed by Series A,B, C, and D funding led by venture capital firms that invest in a startup in millions.
After all that, and some significant amount of success, a startup can become a public company through an IPO or open itself up for acquisition by a special purpose acquisition company (SPAC).
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Who can invest in an early-stage startup?
The opportunity to invest in startups in early stages is reserved for “angel investors” with deep pockets. According to the Securities Exchange Commission (SEC) you need an yearly income of $200,000 or a net worth of $1million to be able to invest in a startup. These investors are called accredited investors. 90% of startups fail, so the angel investors take a pretty high risk. But when a startup succeeds it can really fill their pockets.
What are the keys to a startup’s success?
- The team behind the startup has to be passionate or borderline obsessed with the idea. The founders should be able to dedicate the better half of their days to the startup.
- The founders need to be domain experts – they should know the market they’re jumping into.
- The market size is very important. Does the startup solve a problem for a niche customer base? In that case scaling up can be an issue.
- Timing is another important aspect. Do the consumers care about the solution at that time?
If a startups ticks these boxes, the chances are better for them to succeed. And it’s definitely better for the investors.