What is a Startup?
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What is a startup?
A startup is a business, typically in its early stages, that aims to introduce a new product or service to the marketplace. In many cases, startups aren’t profitable for years but can still attract eye-popping investments from private equity or venture capital firms. That’s because most startups pitch themselves as the answer to some form of untapped demand, in the way AirBNB pitched itself as an answer to overbooked hotels.
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The basics of a startup
Startups aren’t limited by industry, and they’re not all funded by venture capital. There are several key differences between a young company and a true 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. Startup founders regularly tweak aspects of their business until they find the right product, customer base or revenue sources to facilitate long term 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.
Startup companies
Many large and well-known companies began as startups, and their respective growth can be measured in several ways. Here are some examples.
Company | Year founded | Business description | Example of growth |
|---|---|---|---|
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’s still being developed and tested. Initially, startup founders have an idea for a product or service that, hopefully, will appeal to a large number of people and earn revenue. At this stage, it’s unclear whether the idea will work, or whether it needs to be altered.
Once the concept 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 to running the business.
Startup funding
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.
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.
