What is a startup and how does it work?
Tips / 29.09.2021
Whether they want to offer a new standard in their industry or simply accomplish their business vision, the founders of startups dream of giving society something innovative that has not yet been created.
On the other hand, startup businesses have another attractive feature – dazzling ratings, which could lead to a successful public offering with a huge return on investment.
Table of contents
- What is a startup?
- How does a startup work?
- How are startups financed?
- Difference between a small business and a startup
What is a startup?
A startup is a young company founded by one or more entrepreneurs in order to develop a unique product or service and, accordingly, to place it on the market. A startup should not be confused with a small business. In essence, a typical startup usually has limited resources with initial funding provided by the founders or their relatives.
One of the first tasks of a startup is to raise a significant amount of money for further product development. To do this, entrepreneurs must present strong arguments, and/or a prototype, in support of their claim that their idea is really innovative or represents a major improvement on an existing product/service.
Although the vast majority of startups fail, some of the most successful entrepreneurs in history have created startups such as Microsoft and Apple.
How does a startup work?
At the most general level, a startup works like a regular company, namely – a group of employees work together to create a product that customers can buy or a service that they can use. What distinguishes a startup from other companies is the work process.
Ordinary companies duplicate what has been done before. This means that they are working on an existing template for how a business should work. The startup, on the other hand, aims to create an entirely new template. In turn, this provides a scale that ordinary companies cannot reach.
Another key factor that distinguishes startups from others is the speed of growth. Startups strive to develop their ideas very quickly, often through a process called iteration, through which they continually improve products through feedback and data usage.
Often, startups start with a basic product concept that they test and adapt until it is ready for launch. As they refine their products, companies of this type usually seek to rapidly expand their customer base. This helps them to establish a larger market share, which in turn, helps them to raise more funds that are used to develop the product or service.
All this rapid growth through innovation serves one ultimate goal and that is going public. When a company opens up to public investment, it creates an opportunity to compensate the early investors.
How are startups financed?
Startups typically raise funds through several rounds of funding:
- Preliminary round – Also known as “bootstrapping”, this round is the stage when the founders and their relatives invest in the business.
- Initial investors – Afterward comes the initial funding from the so-called “angel investors” who are high-value individuals that invest in companies in the early stages of their development.
- A, B, C, and D – The rounds that follow are those which typically seek to acquire capital through a series of funding, which is led primarily by venture capital firms that invest tens to hundreds of millions in startups.
- Market entry – Startups can decide to go public and open up to external funds through an IPO, acquisition by a special purpose vehicle or a direct listing on a stock exchange.
Anyone can invest in a public company, and the founders of the startup and the first sponsors can sell their shares to realise a potentially high return on investment.
It is worth noting that the initial stages of financing startup companies are limited to persons called “accredited investors” as their high income and net asset value help protect them from potential losses.
Although everyone wants to get a well-deserved return on their startup investment, according to statistics, about 90% of startups fail. This means that investors at an early stage can end up with a 0% return on their investment.
Difference between a small business and a startup
Startups differ from traditional companies mainly because they are designed for extremely fast growth. This means that they have a product or service that they can sell to a wide base of customers, which is not the case for most businesses.
In the business world, the word “startup” doesn’t just refer to a company that was just started. The term is also associated with a business that is usually technologically or fintech oriented and has a high potential for development. Businesses of this type face difficulties, especially in terms of financing. This is because investors are looking for the highest potential return on investment, while balancing the associated levels of risk, which in these cases, is quite high.
A startup is a temporary organisation designed to look for a unique business model. This company can change its business template many times to find the right one, as the goal of the organisation shifts to the implementation of this model. At this point, the organisation is no longer a startup but becomes a company.
If you want to launch your own startup, you probably don’t have the necessary funds at the moment, but that shouldn’t stop the development of your idea!
There are many different startup tools that you can use, but some of them can be quite expensive. Fortunately, there are many ways you can grow your business at no extra cost, or at least keep it to a minimum.
For example, accepting online payments is a process that should not be overlooked. myPOS’ payment solutions can help with this and many other processes related to your startup.
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