Startup company

A startup company (startup or start-up) is an entrepreneurial venture which is typically a newly emerged, fast-growing business that aims to meet a marketplace need by developing or offering an innovative product, process or service. A startup is usually a company such as a small business, a partnership or an organization designed to rapidly develop scalable business model.^[1] Often, startup companies deploy technologies, such as Internet, e-commerce, computers, telecommunications, or robotics. These companies are generally involved in the design and implementation of the innovative processes of the development, validation and research for target markets.^[2] While start-ups do not all operate in technology realms, the term became internationally widespread during the dot-com bubble in the late 1990s, when a great number of Internet-based companies were founded.^[3]

Definition

The exact definition of "startup" is widely debated. However at their core, most definitions are similar to what the U.S. Small Business Administration describes as a "business that is typically technology oriented and has high growth potential".^[4] The reference to "growth potential" may mean growth in revenues, number of employees, or both, or to the scaling up of a business to offer its goods or services to a wider or larger market. One popular definition by entrepreneur-mentor Steve Blank and Bob Dorf defines a startup as an "organization formed to search for a repeatable and scalable business model." In this case "search" is intended to differentiate established late-stage startups from traditional small businesses, such as a restaurant opening up a mature market. The latter implements a well-known existing business strategy whereas a startup explores an unknown or innovative business model in order to disrupt existing markets, as in the case of the online merchant Amazon, the "app"-based ride service Uber or the search engine Google, each of which pioneered the development of their respective market categories. Blank and Dorf add that startups are not smaller versions of larger companies: a startup is a temporary organization designed to search for a product/market fit and a business model, while in contrast, a large company is a permanent organization that has already achieved a product/market fit and is designed to execute a well-defined, fully validated, well-tested, proven, verified, stable, clear, unambiguous, repeatable and scalable business model. Blank and Dorf further say that a startup essentially goes from failure to failure in an effort to learn from each failure and discover what does not work in the process of searching for a repeatable, high growth business model.^[3][5][6][7]

Paul Graham states that "a startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit". The only essential thing is growth. Everything else we associate with startups follows from growth." Graham added that an entrepreneur starting a startup is committing to solve a harder type of problem than ordinary businesses do. "You're committing to search for one of the rare ideas that generates rapid growth."^[8] Aswath Damodaran states that the value of a startup firm "rests entirely on its future growth potential." His definition emphasizes the stage of development rather than the structure of the company or its respective industry. Consequently, he attributes certain characteristics to a startup which include, but are not limited to, its lack of history and past financial statements, its dependency on private equity, and its statistically small rate of survival.^[9]

Evolution

Startup development phases

Startup companies can come in all forms and sizes. Some of the critical tasks are to build a co-founder team to secure key skills, know-how, financial resources and other elements to conduct research on the target market. Typically, a startup will begin by building a first minimum viable product (MVP), a prototype, to validate, assess and develop the new ideas or business concepts. In addition, startups founders do research to deepen their understanding of the ideas, technologies or business concepts and their commercial potential.^[10] A Shareholders' agreement (SHA) is often agreed early on to confirm the commitment, ownership and contributions of the founders and investors and to deal with the intellectual properties and assets that may be generated by the startup. Business models for startups are generally found via a "bottom-up" or "top-down" approach. A company may cease to be a startup as it passes various milestones,^[11] such as becoming publicly traded on the stock market in an Initial Public Offering (IPO), or ceasing to exist as an independent entity via a merger or acquisition. Companies may also fail and cease to operate altogether, an outcome that is very likely for startups, given that they are developing disruptive innovations which may not function as expected and for which there may not be market demand, even when the product or service is finally developed. Given that startups operate in high-risk sectors, it can also be hard to attract investors to support the product/service development or attract buyers.

The size and maturity of the startup ecosystem where the startup is launched and where it grows have an effect on the volume and success of the startups. The startup ecosystem consists of the individuals (entrepreneurs, venture capitalists, Angel investors, mentors); institutions and organizations (top research universities and institutes, business schools and entrepreneurship programs operated by universities and colleges, non-profit entrepreneurship support organizations, government entrepreneurship programs and services, Chambers of commerce) business incubators and business accelerators and top-performing entrepreneurial firms and start-ups. A region with all of these elements is considered to be a "strong" entrepreneurship ecosystem. Some of the most famous entrepreneurial ecosystems are Silicon Valley in California, where major computer and Internet firms and top universities such as Stanford University create a stimulating start-up environment, Boston (where Massachusetts Institute of Technology is located) and Berlin, home of WISTA (a top research area), numerous creative industries, leading entrepreneurs and start-up firms.

Investors are generally most attracted to those new companies distinguished by their strong co-founding team, a balanced "risk/reward" profile (in which high risk due to the untested, disruptive innovations is balanced out by high potential returns) and "scalability" (the likelihood that a start-up can expand its operations by serving more markets or more customers). Attractive startups generally have lower "bootstrapping" (self-funding of startups by the founders) costs, higher risk, and higher potential return on investment. Successful startups are typically more scalable than an established business, in the sense that the startup has the potential to grow rapidly with a limited investment of capital, labor or land.^[12] Timing has often been the single most important factor for biggest startup successes,^[13] while at the same time it's identified to be one of the hardest things to master by many serial entrepreneurs and investors.^[14]

Startups have several options for funding. Venture capital firms and angel investors may help startup companies begin operations, exchanging seed money for an equity stake in the firm. Venture capitalists and angel investors provide financing to a range of startups (a portfolio), with the expectation that a very small number of the start-ups will become viable and make money. In practice though, many startups are initially funded by the founders themselves using "bootstrapping", in which loans or monetary gifts from friends and family are combined with savings and credit card debt to finance the venture. Factoring is another option, though it is not unique to startups. Other funding opportunities include various forms of crowdfunding, for example equity crowdfunding,^[15] in which the startup seeks funding from a large number of individuals, typically by pitching their idea on the Internet

Business partnering

Startups usually need to form partnerships with other firms to enable their business model to operate.^[16] To become attractive to other businesses, startups need to align their internal features, such as management style and products with the market situation. In their 2013 study, Kask and Linton develop two ideal profiles, or also known as configurations or archetypes, for startups that are commercializing inventions. The inheritor profile calls for management style that is not too entrepreneurial (more conservative) and the startup should have an incremental invention (building on a previous standard). This profile is set out to be more successful (in finding a business partner) in a market that has a dominant design (a clear standard is applied in this market). In contrast to this profile is the originator which has a management style that is highly entrepreneurial and in which a radical invention or a disruptive innovation (totally new standard) is being developed. This profile is set out to be more successful (in finding a business partner) in a market that does not have a dominant design (established standard). New startups should align themselves to one of the profiles when commercializing an invention to be able to find and be attractive to a business partner. By finding a business partner a startup will have greater chances to become successful.^[17]

Culture

An strong startup ecosystem is vital to a thriving local entrepreneurial culture.

Startup founders often have a more casual or offbeat attitude in their dress, office space and marketing, as compared to traditional corporations. Startup founders in the 2010s may wear hoodies, sneakers and other casual clothes to business meetings. Some startups have recreational facilities in their offices, such as pool tables, ping pong tables and pinball machines, which are used to create an attractive, fun work environment, stimulate team development and team spirit, and encourage creativity. Some of the casual approaches, such as the use of "flat" organizational structures, in which regular employees can talk with the founders and chief executive officers informally, are done to promote efficiency in the workplace, which is needed to get their business off the ground. In a 1960 study, Douglas McGregor stressed that punishments and rewards for uniformity in the workplace are not necessary, because some people are born with the motivation to work without incentives.^[18] Some startups do not use a strict command and control hierarchical structure, with executives, managers, supervisors and employees. Some startups offer employees stock options, to increase their "buy in" into the start up (as these employees stand to gain if the company does well). This removal of stressors allows the workers and researchers in the startup to focus less on the work environment around them, and more on achieving the task at hand, giving them the potential to achieve something great for their company.

This culture today has evolved to include larger companies aiming at acquiring the bright minds driving startups. Google, amongst other companies, has made strides to make purchased startups and their workers feel at home in their offices, even letting them bring their dogs to work.^[19] The main goal behind all changes to the culture of the startup workplace, or a company hiring workers from a startup to do similar work, is to make the people feel as comfortable as possible so they can have the best performance in the office . Some companies even try to hide how large they are to capture a particular demographic, as is the case with Heineken recently.^[20]

Co-founders

Co-founders are people involved in the initial launch of startup companies. Anyone can be a co-founder, and an existing company can also be a co-founder, but frequently co-founders are entrepreneurs, engineers, hackers, venture capitalists, web developers, web designers and others involved in the ground level of a new, often high-tech, venture. The language of securities regulation in the United States considers co-founders to be "promoters" under Regulation D. The U.S. Securities and Exchange Commission definition of "Promoter" includes: (i) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer;^[21] However, not every promoter is a co-founder. In fact, there is no formal, legal definition of what makes somebody a co-founder.^[22][23] The right to call oneself a co-founder can be established through an agreement with one's fellow co-founders or with permission of the board of directors, investors, or shareholders of a startup company. When there is no definitive agreement (like SHA), disputes about who the co-founders are can arise.

Startup investing

Diagram of the typical financing cycle for a startup company.

Startup investing is the action of making an investment in an early-stage company (the startup company). Beyond founders' own contributions, some startups raise additional investment at some or several stages of their growth. Not all startups trying to raise investments are successful in their fundraising. The solicitation of funds became easier for startups as result of the JOBS Act.^{[24][25][26][27]} Prior to the advent of equity crowdfunding, a form of online investing that has been legalized in several nations, startups did not advertise themselves to the general public as investment opportunities until and unless they first obtained approval from regulators for an initial public offering (IPO) that typically involved a listing of the startup's securities on a stock exchange. Today, there are many alternative forms of IPO commonly employed by startups and startup promoters that do not include an exchange listing, so they may avoid certain regulatory compliance obligations, including mandatory periodic disclosures of financial information and factual discussion of business conditions by management that investors and potential investors routinely receive from registered public companies.^[28]

Evolution of investing

After the Great Depression, which was blamed in part on a rise in speculative investments in unregulated small companies, startup investing was primarily a word of mouth activity reserved for the friends and family of a startup's co-founders, business angels and Venture Capital funds. In the United States this has been the case ever since the implementation of the Securities Act of 1933. Many nations implemented similar legislation to prohibit general solicitation and general advertising of unregistered securities, including shares offered by startup companies. In 2005, a new Accelerator investment model was introduced by Y Combinator that combined fixed terms investment model with fixed period intense bootcamp style training program, to streamline the seed/early stage investment process with training to be more systematic.

Following Y Combinator, many accelerators with similar models have emerged around the world. The accelerator model have since become very common and widely spread and they are key organizations of any Startup ecosystem. Title II of the Jumpstart Our Business Startups Act (JOBS Act), first implemented on September 23, 2013, granted startups in and startup co-founders or promoters in US. the right to generally solicit and advertise publicly using any method of communication on the condition that only accredited investors are allowed to purchase the securities.^[29][30][31] However the regulations affecting equity crowdfunding in different countries vary a lot with different levels and models of freedom and restrictions. In many countries there are no limitations restricting general public from investing to startups, while there can still be other types of restrictions in place, like limiting the amount that companies can seek from investors. Due to positive development and growth of crowdfunding,^[32] many countries are actively updating their regulation in regards to crowdfunding.

Investing rounds

When investing in a startup, there are different types of stages in which the investor can participate. The first round is called seed round. The seed round generally is when the startup is still in the very early phase of execution when their product is still in the prototype phase. At this level angel investors will be the ones participating. The next round is called Series A. At this point the company already has traction and may be making revenue. In Series A rounds venture capital firms will be participating alongside angels or super angel investors. The next rounds are Series B, C, and D. These three rounds are the ones leading towards the IPO. Venture capital firms and private equity firms will be participating.^[33]

Investing online

The first known investment-based crowdfunding platform for startups was launched in Feb. 2010 by Grow VC,^[34] followed by the first US. based company ProFounder launching model for startups to raise investments directly on the site,^[35] but ProFounder later decided to shut down its business due regulatory reasons preventing them from continuing,^[36] having launched their model for US. markets prior to JOBS Act. With the positive progress of the JOBS Act for crowd investing in US., equity crowdfunding platforms like SeedInvest and CircleUp started to emerge in 2011 and platforms such as investiere, Companisto and Seedrs in Europe and OurCrowd in Israel. The idea of these platforms is to streamline the process and resolve the two main points that were taking place in the market. The first problem was for startups to be able to access capital and to decrease the amount of time that it takes to close a round of financing. The second problem was intended to increase the amount of deal flow for the investor and to also centralize the process.^[37][38][39]

Internal startups

Large or well-established companies often try to promote innovation by setting up "internal startups", new business divisions that operate at arm's length from the rest of the company. Examples include Bell Labs, a research unit within Bell Corporation and Target Corporation (which began as an internal startup of the Dayton's department store chain) and threedegrees, a product developed by an internal startup of Microsoft.^[40]

Re-starters

Failed entrepreneurs, or restarters, who after some time restart in the same sector with more or less the same activities, have an increased chance of becoming a better entrepreneur.^[41] However, some studies indicate that restarters are more heavily discouraged in Europe than in the US.^[42]

Trends and obstacles

If a company's value is based on its technology, it is often equally important for the business owners to obtain intellectual property protection for their idea. The newsmagazine The Economist estimated that up to 75% of the value of US public companies is now based on their intellectual property (up from 40% in 1980).^[43] Often, 100% of a small startup company's value is based on its intellectual property. As such, it is important for technology-oriented startup companies to develop a sound strategy for protecting their intellectual capital as early as possible.^[44] Startup companies, particularly those associated with new technology, sometimes produce huge returns to their creators and investors—a recent example of such is Google, whose creators became billionaires through their stock ownership and options. However, the failure rate of startup companies is very high.^[45] One common reason for failure is that startup companies can run out of funding, without securing their next round of investment or before becoming profitable enough to pay their staff. When this happens, it can leave employees without paychecks. Sometimes these companies are purchased by other companies, if they are deemed to be viable, but oftentimes they leave employees with very little recourse to recoup lost income for worked time.^[46]

Although there are startups created in all types of businesses, and all over the world, some locations and business sectors are particularly associated with startup companies. The internet bubble of the late 1990s was associated with huge numbers of internet startup companies, some selling the technology to provide internet access, others using the internet to provide services. Most of this startup activity was located in the most well known startup ecosystem - Silicon Valley, an area of northern California renowned for the high level of startup company activity:

The spark that set off the explosive boom of "Silicon startups" in Stanford Industrial Park was a personal dispute in 1957 between employees of Shockley Semiconductor and the company’s namesake and founder, Nobel laureate and co-inventor of the transistor William Shockley... (His employees) formed Fairchild Semiconductor immediately following their departure...

After several years, Fairchild gained its footing, becoming a formidable presence in this sector. Its founders began leaving to start companies based on their own latest ideas and were followed on this path by their own former leading employees... The process gained momentum and what had once began in a Stanford’s research park became a veritable startup avalanche... Thus, over the course of just 20 years, a mere eight of Shockley’s former employees gave forth 65 new enterprises, which then went on to do the same...^[47]

Start-up advocates are also trying to build a community of tech start-ups in New York City with organizations like NY Tech Meet Up^[48] and Built in NYC.^[49] In the early 2000s, the patent assets of failed startup companies are being purchased by what are derogatorily known as patent trolls, who then take the patents from the companies and assert those patents against companies that might be infringing the technology covered by the patent.^[50]

See also

• Business incubator
• Business plan
• Lean startup
• Liquidity event
• Stock market bubble

References

1. Robehmed, Natalie (16 December 2013). "What Is A Startup?". Forbes. Retrieved 30 April 2016.
2. Lueg, Rainer, Lina Malinauskaite, and Irina Marinova. "The vital role of business processes for a business model: the case of a startup company."Problems and Perspectives in Management 12.4 (2014): 213-220.
3. Blank, Steve and Dorf, Bob (2012). The Startup Owner's Manual, K&S Ranch (publishers), ISBN 978-0984999309
4. "Startups & High-Growth Businesses | The U.S. Small Business Administration | SBA.gov". www.sba.gov. Retrieved 2016-01-26.
5. Blank, Steve (2008-2015). Blog on entrepreneurship
6. Blank, Steve (2013). What I Wish I Knew About Startups - Steve Blank, Consulting Associate Professor at Stanford University (video, 30-min). The audience is composed of the CEOs of the portfolio companies of Khosla Ventures. Talk given in May 2013, posted on the official You Tube channel of Khosla Ventures in May 2014
7. Blank, Steve (May 2013). Why the Lean StartUp Changes Everything, in Harvard Business Review
8. Graham, Paul (September 2012). Startup Equals Growth, in Graham's Essays on entrepreneurship
9. Damodaran, Aswath (April 2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Wiley, ISBN 978-1118011522, 3rd edition
10. Blake, Martin; Wijetilaka, Shehan (26 February 2015). "5 tips to grow your start-up using SWOT analysis". Sydney. Retrieved 13 August 2015.
11. Rachleff, Andy. "To Get Big, You've Got to Start Small". TechCrunch. Retrieved 2013-01-28.
12. Amit Ghosh (14 December 2014). "How To Choose The Best Business Structure To Choose For A Start-up?". The Startup Journal. Retrieved 30 April 2016.
13. Bill Gross. "Bill Gross: The single biggest reason why startups succeed - TED Talk - TED.com".
14. "Timing your startup".
15. "Cash-strapped entrepreneurs get creative". BBC News.
16. Teece, David J. (2010). "Business Models, Business Strategy and Innovation". Long Range Planning. 43 (2–3): 172. doi:10.1016/j.lrp.2009.07.003.
17. Kask, Johan; Linton, Gabriel (2013). "Business mating: When start-ups get it right". Journal of Small Business & Entrepreneurship. 26 (5): 511. doi:10.1080/08276331.2013.876765.
18. Douglas McGregor. Theory X Theory Y employee motivation theory. Accel-team.com. Retrieved on 2013-07-21.
19. Barking mad: Can office dogs reduce stress? - CNN.com. Edition.cnn.com. Retrieved on 2013-07-21.
20. "Marketing like a start-up". Retrieved 2015-06-03.
21. Securities and Exchange Commission (September 12, 2008), "Guide to Definitions of Terms Used in Form D", SEC.GOV, retrieved July 1, 2014
22. Lora Kolodny (April 30, 2013). "The Other Credit Crisis: Naming Co-Founders". Wall Street Journal. Retrieved July 1, 2014.
23. Katie Fehrenbacher (June 14, 2009). "Tesla Lawsuit: The Incredible Importance of Being a Founder". Giga Om. Retrieved July 1, 2014.
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26. "Startups Remain Cloudy on the New General Solicitation Rule". Bloomberg Businessweek. Retrieved September 20, 2013.
27. "The ban has lifted: Here's what these 6 companies think about general solicitation". Venturebeat. Retrieved September 23, 2013.
28. "Investor.gov". Securities and Exchange Commission. Retrieved July 1, 2014.
29. "Jumpstart Our Business Startups (JOBS) Act Spotlight". SEC.GOV. Retrieved July 1, 2014.
30. "Newly Legal: Buying Stock in Start-Ups Via Crowdsourcing". ABC News. Retrieved September 24, 2013.
31. "Levine on Wall Street: Chrysler's Unwanted IPO". Bloomberg. Retrieved September 24, 2013.
32. "Global Crowdfunding Market to Reach $34.4B in 2015, Predicts Massolution's 2015CF Industry Report". www.crowdsourcing.org.
33. "With the new JOBS Act a new era of investment banking?". Nasdaq. Retrieved September 24, 2013.
34. "Grow VC launches, aiming to become the Kiva for tech startups". TechCrunch. AOL. 15 February 2010.
35. "Crowdsourced Fundraising Platform ProFounder Now Offers Equity-Based Investment Tools". TechCrunch. AOL. 3 May 2011.
36. "Fundraising Platform For Startups ProFounder Shuts Its Doors". TechCrunch. AOL. 17 February 2012.
37. "Shout it out: New rules allow startups to advertise fundraising". UpStart Business Journal. Retrieved September 23, 2013.
38. "General Solicitation Ban Lifted Today - Three Things You Must Know About It". Forbes. Retrieved September 23, 2013.
39. "For broker/dealers, crowdfunding presents new opportunity". Washington Post. Retrieved March 28, 2013.
40. "Hong Kong in Honduras", The Economist, December 10th 2011.
41. Alexandros Kakouris Proceedings of the 4th European Conference on Innovation 2010 p95 "In other words, failed entrepreneurs will set up a new business with more and better know-how. Especially if they choose to restart in the same sector with more or less the same activities, there is a big chance that the restarter becomes the better entrepreneur (Schror, 2006). Restarters in this study are defined as entrepreneurs, whose company went bankrupt, but who, after some time, have the courage to start a new company (i.e. 'pure' restarters)."
42. Adam Jolly The European Business Handbook 2003 0749439750 2003 p5 "Our interviews with entrepreneurial restarters underscore the fact that failure is still severely stigmatised in Europe. In marked contrast to the United States, there is no general public perception in Europe that failure is a necessary precondition for success."
43. See generally A Market for Ideas, ECONOMIST, Oct. 22, 2005, at 3, 3 (special insert)
44. For a discussion of such issues, see, e.g., Strategic management issues for starting an IP company, Szirom, S.Z., RAPID, HTF Res. Inc., USA (ISBN 0-7695-0465-5); What Business Owners Should Know About Patenting, Wall Street Journal, available at http://www.wsj.com/article/SB121820956214224545.html (Interview with James McDonough, Intellectual property attorney),
45. "The Complete Handbook For Entrepreneurial Success (9780684878607)". Shlomo Klahr.
46. "Zirtual Crashed But Can Its Brand Still Fly?". Forbes. Retrieved 2015-10-16.
47. A Legal Bridge Spanning 100 Years: From the Gold Mines of El Dorado to the 'Golden' Startups of Silicon Valley by Gregory Gromov 2010.
48. https://nytm.org/
49. Majewski, Taylor. " NYC tech's 35 people to watch in 2016", builtinnyc, New York, 26 May 2016. Retrieved on 01 June 2016.
50. JAMES F. MCDONOUGH III (2007). "The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy". Emory Law Journal. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=959945. Retrieved 2007-07-27.