A startup or start up is a company or project initiated by an entrepreneur to seek, effectively develop, and validate a scalable business model.
Hence, the concepts of startups and entrepreneurship are similar.
However, entrepreneurship refers to all new businesses, including
self-employment and businesses that never intend to grow big or become
registered, while startups refer to the new businesses that intend to
grow beyond the solo founder, have employees, and intend to grow large. Start ups face high uncertainty
and do have high rates of failure, but the minority that go on to be
successful companies have the potential to become large and influential.
Some startups become unicorns, i.e. privately held startup companies valued at over US$1 billion.
Some startups become unicorns, i.e. privately held startup companies valued at over US$1 billion.
Startup actions
Startups
typically begin by a founder (solo-founder) or co-founders who have a
way to solve a problem. The founder(s) of a startup will begin market
validation by problem interview, solution interview, and building a minimum viable product (MVP), i.e. a prototype,
to develop and validate their business models. The startup process can
take a long period of time (by some estimates, three years or longer),
and hence sustaining effort is required. Sustaining effort over the long
term 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 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 (early adopters)
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 lots of heuristics and exhibit biases
in their startup actions. Biases and heuristics are parts of our
cognitive toolboxes in the decision making process, and they help us to
take a decision as quick as possible under uncertainty, but sometimes
become erroneous and fallacious.
Entrepreneurs often become not only overconfident about their startups but also about their personal influence on an outcome (case of the illusion of control).
Entrepreneurs tend to believe they have more degree of control over
events, discounting the role of luck. Below are some of the most
important 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.
Startups use a number of action principles (lean startup) to generate
evidence as quickly as possible to reduce the downside effect of
decision biases such as an escalation of commitment, overconfidence, and
the illusion of control.
Mentoring
Many entrepreneurs seek feedback from mentors
in creating their startups. Mentors guide founders and impart
entrepreneurial skills and may increase self-efficacy of the nascent
entrepreneurs.
Mentoring offers direction for Entrepreneurs for the purpose of
enhancing their knowledge on how to sustain their asset relating to
their status and identity, along with the enhancement of their real-time
skills.
Startup principles
There are many principles in creating a startup.
Lean startup
Lean startup
is a popular set of principles to create and design startups under
limited resources and tremendous uncertainty to build their ventures
more flexibly and at 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 tests 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 principle 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
A
key principle of startup is to validate the market need before building
a customer-centric product to avoid business ideas with weak demand.
Market validation can be done in a number of ways, including surveys,
cold calling, email responses, word of mouth or through sample research.
Design thinking
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 (Larrick, 2004; Mussweiler, Strack, &
Pfeiffer, 2000).
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 (I feel more uncertain this
year than last year) and between-person (he feels more uncertain than
she does). A study found that when entrepreneurs feel more uncertain,
they identify more opportunities (within-person difference), but
entrepreneurs who perceive more uncertainties than others do not
identify more opportunities than others do (no between-person
difference).
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 (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 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 (2018)
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 (2018):
- Change of business concept for the start up
- Change of collaboration constellation (change several relationships)
- Change of characteristic of business relationship (with the partner, e.g. from a transactional relationship to more of a collaborative type of relationship)
Entrepreneurial learning
Startups need to learn at a huge speed before running out of
resources. Proactive actions (experimentation, searching, etc.) enhance a
founder's learning to start a company. To learn effectively, founders often formulate falsifiable hypotheses, build a minimum viable product (MVP), and conduct A/B testing.
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: (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; 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 (like shareholders' agreement), disputes about who the co-founders are can arise.
Self-efficacy
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
Startups are pressure cookers. Don’t let the casual dress and playful office environment fool you. New enterprises operate under do-or-die conditions. If you do not roll out a useable product or service in a timely fashion, the company will fail. Bye-bye paycheck, hello eviction.Iman Jalali, chief of staff at ContextMedia
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 (Carter et al., 1996;
Reynolds & Miller, 1992). 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 (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 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 start ups, the top five factors in failure were lack of
consumer interest in the product or service (42% of failures); funding
or cash problems (29%); personnel or staffing problems (23%);
competition from rival companies (19%); and problems with pricing of the
product or service (18%).
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
(Cooper et al., 2004; Pittaway and Cope, 2007), in which students are
exposed to a large extent to a real-life entrepreneurship context as new
venture teams (Wu et al., 2009).
An example of group-based experiential startup training is the Lean
LaunchPad initiative that applies the principles of customer development
(Blank and Dorf, 2012) and Lean Startup (Ries, 2011) 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 (e.g. lack of funding to keep operating) 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
A startup ecosystem can contribute to local entrepreneurial culture.
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 (entrepreneurs, venture capitalists, angel investors, mentors,
advisors); institutions and organizations (top research universities
and institutes, business schools and entrepreneurship programs and
centres 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 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 (where Massachusetts Institute of Technology is located) and Berlin, home of WISTA (a top research area), 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:
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...
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 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.
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. 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 (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.
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 startup 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. 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 (a portfolio), 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 (would-be) 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 (up from 40% in 1980).
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 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.
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.
Investing online
The first known investment-based crowdfunding platform for startups was launched in Feb. 2010 by Grow VC, followed by the first US. based company ProFounder launching model for startups to raise investments directly on the site, but ProFounder later decided to shut down its business due regulatory reasons preventing them from continuing,
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.
Internal startups
Internal startups are a form of corporate entrepreneurship.
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. To accommodate startups internally, companies, such as Google
has made strides to make purchased startups and their workers feel at
home in their offices, even letting them bring their dogs to work.
Unicorns
Some startups become big and they become unicorns, i.e. privately held startup companies valued at over US$1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures. According to TechCrunch,
there were 279 unicorns as of March 2018, and most of the unicorns are
in China, followed by the USA. The unicorns are concentrated in a few
countries: China (131), US (76), India (14), UK (7), Indonesia (4),
Argentina (4), Singapore (3), Switzerland (2), South Korea (2), Hong
Kong (2), and 13 countries (1 each). The largest unicorns included Ant Financial, ByteDance, DiDi, Uber, Xiaomi, and Airbnb.
