Startup company
A startup or start-up is a company or project initiated by an entrepreneur to seek, effectively develop, and validate a scalable business model. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to become registered, startups refer to the new businesses that intend to grow large beyond the solo founder. Startups face high uncertainty and have high rates of failure, but a minority of them do go on to be successful and influential. Some startups become unicorns, i.e. privately held startup companies valued at over US$1 billion.
Startup actions
Startups typically begin by a founder or co-founders who have a way to solve a problem. The founder of a startup will begin market validation by problem interview, solution interview, and building a minimum viable product, i.e. a prototype, to develop and validate their business models. The startup process can take a long period of time, and hence sustaining effort is required. Over the long term, sustaining effort is especially challenging because of the high failure rates and uncertain outcomes.Design principles
Models behind startups presenting as ventures are usually associated with design science. Design science uses design principles considered to be a coherent set of normative ideas and propositions to design and construct the company's backbone. For example, one of the initial design principles in effectuate is "affordable loss".It's better to first make a must-have for a small number of users than a nice-to-have for a large number of users. It is much easier to get more users than to go from nice-to-have to must-have.
Heuristics and biases in startup actions
Because of the lack of information, high uncertainty, the need to make decisions quickly, founders of startups use many heuristics and exhibit biases in their startup actions. Biases and heuristics are parts of our cognitive toolboxes in the decision-making process. They help us decide quickly as possible under uncertainty but sometimes become erroneous and fallacious.Entrepreneurs often become overconfident about their startups and their influence on an outcome. Entrepreneurs tend to believe they have more degree of control over events, discounting the role of luck. Below are some of the most critical decision biases of entrepreneurs to start up a new business.
- Overconfidence: Perceive a subjective certainty higher than the objective accuracy.
- Illusion of control: Overemphasize how much skills, instead of chance, improve performance.
- The law of small numbers: Reach conclusions about a larger population using a limited sample.
- Availability bias: Make judgments about the probability of events based on how easy it is to think of examples.
- Escalation of commitment: Persist unduly with unsuccessful initiatives or courses of action.
Mentoring
Many entrepreneurs seek feedback from mentors in creating their startups. Mentors guide founders and impart entrepreneurial skills and may increase the self-efficacy of nascent entrepreneurs. Mentoring offers direction for entrepreneurs to enhance their knowledge of how to sustain their assets relating to their status and identity and strengthen their real-time skills.Startup principles
There are many principles in creating a startup. Some of the principles are listed below.Lean startup
is a clear set of principles to create and design startups under limited resources and tremendous uncertainty to build their ventures more flexibly and at a lower cost. It is based on the idea that entrepreneurs can make their implicit assumptions about how their venture works explicit and empirically testing it. The empirical test is to de/validate these assumptions and to get an engaged understanding of the business model of the new ventures, and in doing so, the new ventures are created iteratively in a build–measure–learn loop. Hence, lean startup is a set of principles for entrepreneurial learning and business model design. More precisely, it is a set of design principles aimed for iteratively experiential learning under uncertainty in an engaged empirical manner. Typically, lean startup focuses on a few lean principles:- find a problem worth solving, then define a solution
- engage early adopters for market validation
- continually test with smaller, faster iterations
- build a function, measure customer response, and verify/refute the idea
- evidence-based decisions on when to "pivot" by changing your plan's course
- maximize the efforts for speed, learning, and focus
Market validation
Design thinking
is used to understand the customers' need in an engaged manner. Design thinking and customer development can be biased because they do not remove the risk of bias because the same biases will manifest themselves in the sources of information, the type of information sought, and the interpretation of that information. Encouraging people to “consider the opposite” of whatever decision they are about to make tends to reduce biases such as overconfidence, the hindsight bias, and anchoring.Decision-making under uncertainty
In startups, many decisions are made under uncertainty, and hence a key principle for startups is to be agile and flexible. Founders can embed options to design startups in flexible manners, so that the startups can change easily in future.Uncertainty can vary within-person and between-person. A study found that when entrepreneurs feel more uncertain, they identify more opportunities, but entrepreneurs who perceive more uncertainties than others do not identify more opportunities than others do.
Partnering
Startups may form partnerships with other firms to enable their business model to operate. 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 a management style that is not too entrepreneurial and the startup should have an incremental invention. This profile is set out to be more successful in a market that has a dominant design. 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 is being developed. This profile is set out to be more successful in a market that does not have a dominant design. 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 has greater chances of becoming successful.Startups usually need many different partners to realize their business idea. The commercialization process is often a bumpy road with iterations and new insights during the process. Hasche and Linton argue that startups can learn from their relationships with other firms, and even if the relationship ends, the startup can have gained valuable knowledge about how it should move on. When a relationship is failing for a startup it needs to make changes. Three types of changes can be identified according to Hasche and Linton :
- Change of business concept for the start up
- Change of collaboration constellation
- Change of characteristic of business relationship
Entrepreneurial learning
Business Model Design
With the key learnings from market validation, design thinking, and lean startup, founders can design a business model. However it's important not to dive into business models too early before there is sufficient learning on market validation. Paul Graham said "What I tell founders is not to sweat the business model too much at first. The most important task at first is to build something people want. If you don’t do that, it won’t matter how clever your business model is."Founders/entrepreneurs
Founders or 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 the most common co-founders are founder-CEOs, engineers, hackers, web developers, web designers and others involved in the ground level of a new, often venture. The founder that is responsible for the overall strategy of the startup plays the role of founder-CEOs, much like CEOs in established firms.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: 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; However, not every promoter is a co-founder. In fact, there is no formal, legal definition of what makes somebody a co-founder. 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, disputes about who the co-founders are can arise.
Self-efficacy
refers to the confidence an individual has to create a new business or startup. It has a strong relation with startup actions. Entrepreneurs' sense of self-efficacy can play a major role in how they approach goals, tasks, and challenges. Entrepreneurs with high self-efficacy—that is, those who believe they can perform well—are more likely to view difficult tasks as something to be mastered rather than something to be avoided.Stress
Entrepreneurs often feel stressed. They have internal and external pressures. Internally, they need to meet deadlines to develop the prototypes and get the product or service ready for market. Externally they are expected to meet milestones of investors and other stakeholders to ensure continued resources from them on the startups. Coping with stress is critical to entrepreneurs because of the stressful nature of start up a new firm under uncertainty. Coping with stress unsuccessfully could lead to emotional exhaustion, and the founders may close or exit the startups.Emotional exhaustion
Sustaining effort is required as the startup process can take a long period of time, by one estimate, three years or longer. Sustaining effort over the long term is especially challenging because of the high failure rates and uncertain outcomes.Founder identity and culture
Some startup founders have a more casual or offbeat attitude in their dress, office space and marketing, as compared to executives in established corporations. For example, startup founders in the 2010s may wear hoodies, sneakers and other casual clothes to business meetings. Their offices may have recreational facilities in them, such as pool tables, ping pong tables, football tables and pinball machines, which are used to create a 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. Some startups do not use a strict command and control hierarchical structure, with executives, managers, supervisors and employees. Some startups offer employees incentives such as stock options, to increase their "buy in" from the start up. 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 both themselves and their company.
Failure
The failure rate of startup companies is very high. A 2014 article in Fortune estimated that 90% of startups ultimately fail. In a sample of 101 unsuccessful startups, the top five factors in failure were lack of consumer interest in the product or service ; funding or cash problems ; personnel or staffing problems ; competition from rival companies ; and problems with pricing of the product or service ; more than one factor can be cited as a cause for failure so these numbers add up to more than 100%. In cases of funding problems 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.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. However, some studies indicate that restarters are more heavily discouraged in Europe than in the US.Startup training
Many institutions and universities provide training on startups. In the context of universities, some of the courses are entrepreneurship courses that also deal with the topic of startups, while other courses are specifically dedicated to startups. Startup courses are found both in traditional economic or business disciplines as well as the side of information technology disciplines. As startups are often focused on software, they are also occasionally taught while focusing on software development alongside the business aspects of a startup.“The best way of learning about anything is by doing.” – Richard Branson
Founders go through a lot to set up a startup. A startup requires patience and resilience, and training programs need to have both the business components and the psychological components. Entrepreneurship education is effective in increasing the entrepreneurial attitudes and perceived behavioral control, helping people and their businesses grow. Most of startup training falls into the mode of experiential learning, in which students are exposed to a large extent to a real-life entrepreneurship context as new venture teams. An example of group-based experiential startup training is the Lean LaunchPad initiative that applies the principles of customer development and Lean Startup to technology-based startup projects.
As startups are typically thought to operate under a notable lack of resources, have little or no operating history, and to consist of individuals with little practical experience, it is possible to simulate startups in a classroom setting with reasonable accuracy. In fact, it is not uncommon for students to actually participate in real startups during and after their studies. Similarly, university courses teaching software startup themes often have students found mock-up startups during the courses and encourage them to make them into real startups should they wish to do so. Such mock-up startups, however, may not be enough to accurately simulate real-world startup practice if the challenges typically faced by startups are not present in the course setting.
To date, much of the entrepreneurship training is yet personalized to match the participants and the training.
Startup ecosystem
The size and maturity of the startup ecosystem is where a startup is launched and where it grows to have an effect on the volume and success of the startups. The startup ecosystem consists of the individuals ; institutions and organizations business incubators and business accelerators and top-performing entrepreneurial firms and startups. A region with all of these elements is considered to be a "strong" startup ecosystem. One of the most famous startup ecosystems is Silicon Valley in California, where major computer and internet firms and top universities such as Stanford University create a stimulating startup environment, Boston and Berlin, home of WISTA, numerous creative industries, leading entrepreneurs and startup firms.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:
Startup advocates are also trying to build a community of tech startups in New York City with organizations like NY Tech Meet Up and Built in NYC. In the early 2000s, the patent assets of failed startup companies were being purchased by people known as patent trolls, who assert those patents against companies that might be infringing the technology covered by the patents.
Startup investing
Startup investing is the action of making an investment in an early-stage 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.In the United States, the solicitation of funds became easier for startups as result of the JOBS Act. 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 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.
Investors are generally most attracted to those new companies distinguished by their strong co-founding team, a balanced "risk/reward" profile and "scalability". Attractive startups generally have lower "bootstrapping" 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. Timing has often been the single most important factor for biggest startup successes, while at the same time it's identified to be one of the hardest things to master by many serial entrepreneurs and investors.
Startups have several options for funding. Revenue-based financing lenders can help startup companies by providing non-dilutive growth capital in exchange for a percentage of monthly revenue. 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, with the expectation that a very small number of the startups 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, in which the startup seeks funding from a large number of individuals, typically by pitching their idea on the Internet.
Necessity of funding
While some entrepreneurs believe that they can't start a company without funding from VC, Angel, etc. That is not the case.Startup valuations
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. 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. 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.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.History of startup 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 has 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, first implemented on 23 September 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. 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, many countries are actively updating their regulation in regards to crowdfunding.