Startup Explained

A startup is a type of new business whose primary purpose is growth.
Apr 7, 2022

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What is a startup?

A startup is a type of new business whose primary purpose is growth. Startups go through a process of experimenting and using customer feedback to develop a business model that will allow the organization to become a large company.

The basics of a startup

Startups aren’t limited by industry, and they’re not all funded by venture capital. There are certain qualities of a young company that set it apart as a startup:

  • Startups want to grow fast. Their goal is to create a product or service that a lot of people want and deliver it in a way that scales, allowing the company to serve all those customers while maintaining growth

    .

  • Startups prioritize experimentation. Founders of these young companies work to identify a business model by tweaking aspects of the business until they find the right product, customer base and revenue sources to facilitate growth

    .

  • Startups are temporary. Once the focus of the company shifts from searching for and refining the business to simply running it, the company is no longer a startup.

Examples of startup companies

Many large and well-known companies began as startups. A startup’s growth can be measured in a variety of ways. Here are a few examples.

Company

Year founded

Business description

Example of growth

Facebook

2004.

Social network.

Grew from 1 million users in December 2004 to 5.5 million users in December 2005, according to TechCrunch.

Airbnb

2008.

Travel accommodations.

Valuated by investors at $1 billion in 2011.

Uber

2009.

Ridesharing app.

Bought mapping technology company deCarta in 2015.

Coinbase

2012.

Cryptocurrency marketplace.

IPO in 2021.

DoorDash

2013.

Delivery service app.

IPO in 2020.

Cruise

2013.

Self-driving car technology.

Acquired by GM in 2016 for $581 million.

Modern Fertility

2017.

At-home fertility tests and tools.

Acquired by Ro in 2021; price was reported to be more than $225 million, according to The New York Times.

How long a startup is a startup

A business is considered a startup while it is being developed and tested. In the beginning, startup founders have an idea for a product or service that they believe will appeal to a large number of people and earn revenue. It’s not clear yet at this stage whether the idea will work or will need to be altered as they learn more about and from customers.

Once the concept for the business has been proven to work, the company emerges from its phase as a startup. It may still be pursuing venture capital and growing aggressively, but its focus has shifted from developing and testing its business model to running the business.

Startup funding sources

To get off the ground, startups need funding. Founders may self-fund, or bootstrap, the initial stages of the company, take out a loan or turn to investors.

Personal and family savings are the most common sources of startup funding. Entrepreneurs also turn to personal loans from banks and credit cards

.

Private equity investors may get involved in a startup if they see potential for a high return on their investment. Venture capital is a type of private equity targeted at young companies. Investors offer cash to develop and grow the business in exchange for a share of ownership

.

This kind of investment typically comes from high net worth individuals, called angel investors, or venture capital firms. Individuals also can invest in startups through crowdfunding campaigns like Wefunder.

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Startup company shares

It’s common for multiple groups to hold equity in a startup company. Ownership may be divided by distributing shares of the company to founders, investors, employees and others who contributed to its inception

.

Once a startup is incorporated, it can distribute shares in the company. How many shares can be distributed depends on the number of authorized shares outlined in its articles of incorporation. It’s common for a startup to authorize 10 million shares.

The total is somewhat arbitrary, but it’s a common amount because it can be easily divided without resorting to giving someone a fraction of a share. Authorizing a large number of shares also allows for a lower price per share, which appeals to investors and employees given options to purchase stock.

When shares are distributed, founders typically maintain a majority. Then, portions of varying sizes may be set aside for other groups.

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