What Is A Startup?
This post is a quick guide for people looking for a starting point to understand what a startup is.
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I often talk to founders still figuring out what they’re building and how. At the same time, they have a ton of terms flying at them – startup, lifestyle business, venture capital, angel investment, and more. There can also be different definitions depending on where you look for answers and who you ask. The various terms and definitions can be confusing and overwhelming at times. I understand this because I went through it as a founder myself.
Some people dismiss the word startup as just a label. While labeling people can be problematic, labeling businesses can help founders raise the right capital, adopt the best model, build a winning strategy, and recruit the right talent. Interestingly, the people who often say the labels don’t matter are the people who understand the differences between them.
To make things more complicated, some terms like startup have evolved as they began being used by people outside of tech over time, meaning providing a clear, universally accepted definition is difficult. I wrote this as a guide for people looking for a starting point to understand what a startup is.
What is a Startup?
A startup is a company that is intentionally created to scale in size extremely quickly while addressing a huge problem or need, using some type of innovation to enable that rapid growth.
What does that mean?
A startup is a company just like any other business. When launched, most startups meet the definition of a small business because of how much revenue they generate and the number of employees they have. Also, some startups are brand-new businesses, while some have been around for years.
However, unlike traditional businesses that grow fairly steadily, startups are intentionally created to grow rapidly. The rapid growth of a startup is usually enabled through some combination of innovation and technology.
Traditional Business Growth vs Startup Growth
Traditional Business vs Startup Example
A Restaurant vs. DoorDash - The growth of a traditional brick-and-mortar restaurant will always be limited by the number of tables the owners can fit in the restaurant, how much the restaurant can charge for food, and the number of people the restaurant can hire. Once a restaurant reaches its maximum capacity for the number of tables in it and how much it can charge for food, it can no longer grow. At that point, if the restaurant owner wants to grow their business, they will need to open another restaurant with the same limitations as the first restaurant.
DoorDash’s growth is limited by things such as the number of people in the world who want to order food online to either pick it up or have it delivered to them and the number of restaurants that want to give people the ability to order from them to either pick their food up or have it delivered. This allows DoorDash to grow far faster and larger than the restaurant ever could. DoorDash’s growth is enabled through the combination of an innovative business model supported by technology. Their business model allows people anywhere to order food from their phones without DoorDash needing to take on the cost of owning or operating restaurants.
How are startups financed?
Like traditional businesses, startups can be financed through bootstrapping, angel investment, and debt in the early stages. Unlike traditional businesses, early-stage startups can also be funded through venture capital.
Bootstrapping - When a founder uses their own money or revenue from operations to fund and grow their business.
Angel investment - Capital received from an individual investor at the early stages of a business in exchange for equity.
Debt - Money an entrepreneur obtains for their business using loans or lines of credit.
Venture capital - Capital invested in a company by professional venture capital investors representing venture capital firms in exchange for equity in the business.
It is not uncommon for startup founders to use a combination of financing methods to launch and grow their businesses. For example, a founder may bootstrap their startup to get it launched, raise capital from angel investors to conduct early validation, and finally raise venture capital to scale. It is, however, far less common for early-stage startups to use debt financing for their companies.
Why do startups raise venture capital?
A startup is far riskier than a traditional business. Startups are often using novel technologies and models to go after large markets. This results in startups having extremely high failure rates. Because of the risks involved with startups, they are generally too risky for a traditional bank to lend to them. But they still need capital to grow. Venture capital fills this void by providing capital to startups that, while too risky for banks to lend to them, have the potential to generate massive returns because of their innovative business models and technologies. The potential for extremely large returns is why venture capital investors are willing to take on the risks of investing in these companies.