The word “StartUp” is an icon in the digital economy in which we live. It is common to associate it with companies like Google or Facebook that are so big today. However, the definition of startup is unclear and different authors give us different definitions. In this post we explain it to you.
The definition that you will most frequently find in multiple sources is that of “ an organization designed to work in environments of extreme uncertainty”. Another very interesting definition is that of Wil Schroter: “a startup is the entity through which a team led by a founder can make a dream come true, not only for him but for the world.”
However, these are global definitions that generally encompass what a startup is. Throughout this post we are going to try to explain in a synthesized but deep way the main characteristics of a startup and what differentiates it from other entities. Let’s start from top to bottom.
What is a Startup?
A start-up could be defined as a digital startup that has great growth potential. In other words, what differentiates a newly created company from a startup is that the latter are focused on exponential growth. While a regular company may have an ambitious goal of growing 10% per year, a startup usually aims to multiply its business between 3 and 5 times a year.
At the sector level, although the term startup can refer to companies of any field, it is usually used for those that have a strong technological component and that are related to the world of the Internet and ICTs.
We could say that all the big tech companies like Google, Apple, Facebook and Amazon have had to go through being startups in the earliest moments of their journey. Once they found the Product-Market-Fit and had grown enough, they became large companies focused on optimizing their operations.
Origin by necessity
Although it may seem like common sense, one of the components that differentiate a great startup from the others is solving a big problem in a simple and effective way. It seems obvious right? Who would build a company that did not solve a problem?
Well, the data tells us the opposite. 6 out of 10 startups that close are because they have created products and services that did not have a fit in the market. That is, potential customers did not buy your products because it did not solve a need.
Why is it important that the product is developed around a need? To avoid the technology dilemma. That is, nowadays the technical barriers to product development are so low that many teams end up losing sight of the problem they solve and simply focus on building products that are better designed and faster, but that do not solve real-life problems.
One of the reasons that startups are widely known is because of the news of the high investment rounds they collect to continue carrying out their activity.
Famous names such as WeWork ($ 22.5 billion), AirBnB ($ 4.4 billion), and SpaceX ($ 3.2 billion) top the charts in America, the pinnacle of startups.
It should be noted that the vast majority of startups do not use traditional sources of financing such as lines of credit or bank loans in the first stages of their lives. The two main sources of income at the beginning are capital contributed by the founders and equity-funding (giving participation or shares of your company to an investor in exchange for money). Among the main equity-funding investors we find business angels and venture capital funds.
If you are interested in knowing the ways of financing startups in greater depth, be sure to check our entry on financing startups.
What are the differences between a startup and a company
The essential difference between the two resides in exploration vs exploitation. In other words, while a startup is an agile organization designed to seek a business model (exploration of business models), a company is an entity structured to execute a business model that already exists (exploitation of business models). This is where we find the first difference between a company and a startup.
The activity of searching for a new business model and idea through which to solve a potential problem for the market is the most difficult part of creating and forming a startup. To follow an orderly methodology that ensures the maximum probability of success, the most famous entrepreneurs in the United States have developed the Lean Startup method, a replica of the scientific method brought to the world of emerging companies.
Other references usually lie in scalability. A company is considered scalable when its ability to create products increases exponentially while the expenses derived from such activity increase linearly.
This means that the more sales a scalable company makes, the greater the profit it makes per sale made.
Generally, this scalability is related to the technological nature of the startups. Many of them are Internet-based service companies (Saas) that have a huge initial development cost but later each new user that is added to the platform translates into a very low cost for the company. Examples are communication platforms like Slack or Zoom.
How to start a startup?
Although this question does not have an immediate and simple answer, at IEBS Business School we have compiled a checklist in which we summarize some of the points that you must take into consideration in the launch process of your startup:
1. Find a big problem to solve and try to think of a solution to solve it.
The solution you have devised to solve the problem you are focusing on will be your business idea. An important point is that you do not have to start a business only thinking about the economic return. If your business prospers, you will spend years working on it. You have to look for it to be something that motivates you to work and you can combine it with your personal life.
2. Put your business idea to the test and carry out small tests and market studies.
Remember that we talked in the previous points about the importance of the scientific method applied to the world of companies. The only way to know if our business makes sense is to prove it through small tests. These tests can be from a simple web page to creating and selling a prototype of your product.
If you are interested in knowing how to test your business model, you cannot miss our entry on Minimum Viable Product (PMV).
3. Once you have validated the riskiest hypotheses in the previous step, try to formalize all the information and create your sales and pitch decks.
Now that you have proven that your business idea makes sense, it is time to formalize your proposal. To do this, build a sales presentation or pitch deck that you can use to present your company to potential clients and investors. This will help you practice your sales skill, essential in the world of entrepreneurship.
4. Define a strong brand that differentiates you from your competition.
Regardless of what strategy you intend to follow to differentiate yourself from your competition (low prices, expanded value proposition / better product or exclusivity) it will be important that you create a powerful branding so that your brand attracts all eyes. This is very important in the “attention economy” in which we live in the 21st century, as we are subjected to a large amount of stimuli and your company has to attract attention to achieve sales.
5. Create the minimum legal structure necessary for you to continue scaling your operations.
If, after having carried out your first tests, you have managed to validate the hypotheses you needed to start your business or have even already generated your first sales, it is now (and only now) the time to formalize a legal structure. This point is important since having a legal form will help you as an entrepreneur to separate your legal responsibility from the responsibility of the company.
6. Look for external financing for your business.
Now is the time to grow and scale your operations. This step is always better to avoid (since if you can finance yourself with sales you will have healthy and sustained growth) but there are business models that require a large initial investment and need capital from third parties (hardware or ” hard tech” companies). There are many ways to finance startups, you can review them in the next post.
With this we complete this entry of what is a startup. We recommend that you continue with the underlined readings throughout the post and we invite you to leave any doubts or comments that arise below so that our experts can resolve them as soon as possible.