What do you picture in your mind when you hear the word “startup”? Two economics students wearing hoodies, working night-in, night-out on their revolutionary idea in their dorm room while drinking club-mate? We show how much truth is there behind this cliche, what exactly makes a startup, and how it differs from more traditional companies.
What Does “Startup” Mean?
Usually, “startup” refers to newly launched companies which are in the early stages of their development and have lot of potential for grwoth. There are many different answers to the question what exactly a startup is. The most common definitions include the following core aspects:
- the company is not older than 5 years (sometimes extended to 10 years)
- the founders are working with limited financial and personnel resources
- the company is working with an innovative approach
- the business idea is scalable
So, at the start of a successful startup there – just like in our cliched mental picture – visionary heads with an innovative idea and little capital. These innovative ideas usually concern new technologies like digital marketplaces, IoT, or AI applications. The search for financing opportunities is a part of the company journey right from the start. Throughout several funding phases, many founders apply for outside capital provided by such entitites as business angels or venture capital firms.
A not less important role in the setup of a startup is the business model’s scalability. Already in the early stages of building their company, founders start developing a tangible and scalable business model for their business idea as well as writing a precise business plan.
Is Every New Company a Startup?
Definitely not. The core elements above already suggest that a startup is different from a traditional company launch (e.g., like starting a new bakery). The specific differences between startups and a classically founded new company lie in multiple aspects, from the available resources to the level of innovation of the company’s basic idea.
A startup is typically characterized by a innovative approach. Which means that not every newly launched company is automatically a startup. If, for example, you launch a design agency, a shoe shop, or a real estate agency, you aren’t launching a startup. The concept is neither new nor innovative and not characterized by a scalable business idea.
How Does a Startup Typically Evolve?
There are many models which describe the successive stages of development for a startup. Most of them include the following steps:
- Developing & validating an idea
A real market problem is identified and used to develop a business idea to address that issue. This idea is validated until it reaches the Problem-Solution-Fit stage. - Developing business model and the product
During the next stage, a business plan is created for the business model and the product itself. For creating the business model, the Business Model Canvas is an especially helpful tool. The product itself is often developed by building a first Minimum Viable Product. The basic principle of product development should be grounded in the Lean Startup method so that the develop can be developed according to the customer’s requirements. - Financing and scaling the startup
To realize their business idea, founders need capital, e.g., from business angels and venture capital firms. The type of internal or outside financing usually depends on the various stages of funding. As soon as the product reaches the Product-Market-Fit, the startup is ready for market entry. - Exit
These steps are repeated and adapted to the market until the founders can achieve an exit, meaning selling the startup to another company. Another options would be the so-called Buy Back, a repurchase of the company by the founders, or a public offering (IPO).
So, a startup always has an innovative and scalable business idea with clearly defined development stages. Also, it always is an experiment which requires the agreement of all participating parties, first and foremost of course the founders and investors.
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