Startup Company

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Startup Company Meaning

A startup can be expressed as a business in its initial phases, searching for a practical and scalable model. Often, these companies launch and market a unique idea, product, or service that in some way offers fresh benefits to the societ. Reliable models aid in the rapid growth of the business.

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Such ventures aim to raise the required capital to fund their business model. The funds through the model aid for product development. Whether a single person or several people started it, the startup has to prove that its business idea is a viable and scalable business option.

Key Takeaways

  • Startup companies are newly set up organizations that are seeking to develop into fully formed scalable business models. They aim for rapid growth and profit. 
  • The goal of such enterprises is to raise the necessary funds to support their business strategy. The funds raised through this approach are used to develop new products.
  • Initially, startup company investors could be friends or family or the founders themselves, after which the options extend to crowdfunding, angel investors, and venture capitalists. Finally, when startups go public, they can attract bigger investors and provides the initial investors an opportunity to exit.
  • Startups work like any other company, but their focus largely leans towards innovation and launching the new idea.

Startup Company Explained

Startups are companies that people form to develop a product or service that is fresh in its origin. They are rooted in innovation and aim to find solutions to exciting problems. They take a refreshing outlook on traditional business practices and implement them. Their main aim is to derive profitsProfitsProfit refers to the earnings that an individual or business takes home after all the costs are paid. In economics, the term is associated with monetary gains. read more from that idea, but with a different approach. Startup Company funding can be through one or more investors or crowdfunding.

Starting companies with startup company ideas work similarly to other companies. Employees work and come together to create a marketable product for customers. However, the way or the approach taken by startup companies differs from how established companies work. While other companies replicate the current way of working, these startups aim to innovate and expand.

Another key factor that distinguishes startups from other companies is rapid growth. The startup intends to build on ideas innovatively and quickly. They use information from feedback and usage data to consistently improve the quality of products and services. They try to complete the business model with a combination of model designs and customer feedback. The fundamental data on whether an idea will work or not will be tested and revised until it is launched. Companies, especially tech startup company aim for rapid growth to provide the initial startup investors or founders a chance to exit. This can happen when the entity goes public, opening the gates to new and external funding. The opportunity also provides old investors an opportunity to collect profits. 

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How To Start?

There are a few steps to start a startup company, which may be in any industry. Let us check how startup company ideas can be used..

  • Great Idea – Th efirst and most important thing needed for a startup is a great idea. The idea should be such that it will solve a problems for consumers and a solution to the problem is not yet available in the market. It may also be such that it introduces a new technology which no one has ever imagined before.
  • Business plan – Then it becomes necessary to frame a good business plan. This will include the details of the product or service that the company will provide, the capacity of the business, the amount of funding needed, what kind of problem it will solve, its future prospects, etc.
  • Get funds – This is perhaps the most difficult step while setting up the buiness. Funds will be required to set up the business, which may be acquired either from friends, relatives, small and large investors or perhaps from financial institutions like banks. For this step, the business plan should be well framed and should be able to convince potential investors that there is a good possibility for the business to take off well and investors will get good returns.
  • Legal formalities – All legal issues and papers or documents for tech startup company or any other type, should be clear and transparent. This will ensure that here is no unnecessary legal problems and all documents are in order and the company is ready to be set up.
  • Location – It is important to select a favourable location for the office, especially if it involves manufacturing or sales using the office for client interaction, so that it is easily accessible. This will make marketing, sales and customer meeting easy, involving less use of resources.
  • Good marketing and networking – This is essential so that more and more people come to know about the products and services. This increase customer base and revenue, bring down cots and increase profits.

Therefore, the above are essential in order to set up a new business and consistently gain success in it.

Stages

Startup Company

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Startup company registration takes a lot of steps, and the following are stages involved in the evolution of a startup.

#1 – Bootstrapping stage

The early stage of the preliminary stage is where the entrepreneurs themselves initiate activities to turn ideas into profitable ventures. Startup company investors in the initial phase are usually friends and family. This stage involves greater risk due to its high uncertainty. Nevertheless, these entrepreneurs keep working on idea development, forming a team, using personal funds to fund the idea, and demonstrating its feasibility. It also reveals capabilities in management, finance management, team building, etc. High net worth individualsHigh Net Worth IndividualsA high net worth individual possesses liquid assets worth $1 million to $5 million. They are also referred to as HNWIs. In order to qualify for HNWI status, the individual’s liquid assets must be readily available in their bank or brokerage accounts. The assets must be accessible and easily converted into cash.read more called Angel investors are more likely to invest in these early stages.

#2 – Seed stage

This stage utilizes the initial capital. It involves developing a prototype, gaining market entry, seeking support from accelerators and incubators, and investing for growth. A valuation of the startup venture is done at the end of this stage to evaluate progress.

#3 – Creation stage

This stage is where a company sells its products by entering the market. This is where the startup transforms into a corporation, and the funding becomes corporate funding. Venture capitalists fund at this stage. These venture capitalistsVenture CapitalistsVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. read more could have an A, B, or C series of funding rounds. The startup then becomes a public company and opens itself to new investment via an IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more (Initial Public Offering), acquisition by SPACSPACA Special Purpose Acquisition Company (SPAC) refers to an entity with no commercial operations but intends to merge with or acquire an existing business.read more (special purpose acquisition company), or direct listingDirect ListingDirect listing refers to the process by which privately held firms go public by selling their outstanding and existing shares to retail and institutional investors. Companies that want to list on stock exchanges do not need an underwriter, investment bank, or broker-dealer to help them through the procedure, and there are no lock-up periods.read more on stock exchanges.

#4 – Growth stage

Once the company has established its space, it is no longer a startup, and the returns begin to build. The company starts mass recruiting, and the bills and sales graph ascend considerably. The company also strengthen its marketing game, attracting more customers.

#5 – Expansion stage

During the expansion stage, the company considers the scope of its evolution. They either introduce new products or make modifications to the existing product or idea to meet the market’s demands. The business model’s success allows the company to take up riskier ventures and initiate ambitious steps to expand its horizons.

Types 

Startup companies can be of different types. Some of them are:

  1. Large business startups – These types of startup company investment want to have a significant impact on the industry. Innovation is the backbone of such companies.
  2. Small-to-mid-sized business startups – They are not big in size and have no more than two thousand employees. They maintain revenue assets.
  3. Social startups – All these have a social goal in mind. They develop, fund, and implement solutions for social, cultural, and environmental issues.
  4. Scalable startups – They are formed to become big over time. It is created to be highly profitable and exhibit high growth.
  5. Acquirable/buyable startups – People create them with little capital but it possess quick growth tendencies. It was designed to be sold to high-profile companies.
  6. Lifestyle startups – They are created to focus on lifestyle aspects of people, such as the behaviors and activities of a particular segment of the population.

Example

Let us examine the case of Airbnb to understand the emergence of a startup.

Airbnb allows travelers to book accommodation based on location, reasonable prices, number of rooms, etc. 

Hotels often have a fixed number of rooms for accommodation. They can make adjustments while the demand is low. Even for a day, extending capacity is not possible in the peak season when the need for accommodation is high. Airbnb understood this problem and chose to capitalize on it. With this service, the hosts with extra space can accommodate when prices are high. They can use the area for private use when the demand is low. This gave them flexibility and the opportunity to earn extra income. While the travelers have a variety of advantages, the sellers offer varied prices compared to hotels. They also do not have to worry about running out of space at night, especially in peak season.

The advantage of choosing was another contributing factor to their success. Because it is more efficient and offers more ingenious solutions than the competition, Airbnb has dominated the short-term rental and home-sharing sectors. Today, Airbnb is one of the most popular online travel marketplaces, and they keep expanding their service boundaries to meet the customers’ requirements.

Startup Company Vs Established Company

The above refers to two different types of organizations with a certain business purpose. However, there are a few differences between them, as follows:

  • The startup company investment refers to that stage of business where it has just entered the market and started its operations but the latter refers to that stage where the business has already grown to a considerable level and established a market for itself.
  • The former refers to initial stage of a company whereas the latter refers to the matured stage of the company.
  • In case of the former, the business will face a lot of challenges regarding competition, funding, infrastructure, quality issues, etc. But in case of the latter, the business is expected to have already overcome them, resulting in an established phase where it has carved out its own market.
  • The startup company business plan has the risk of failure if not handled strategically and consistently, but the latter has already survived the risk of failure due to which it is still operating successfully in the market.
  • The primary focus of the former is growth and scaling, with the aim to capture as more market as possible, get funding from investors and establish a strong presence among competitors. But the aim of the latter is to continue maintaining its customer base along with some expansion, innovation, etc, through maintenance of quality and good relationship with clients.
  • The startup company business plan will face limited resources regarding finance, labor, etc, since it has just started the business. But the latter will have better access to resources including financial stability and large labor base. They have better economies of scale with more possibility for expansion and marketing facility.

Thus, the above are some noteworthy differences between the two of them.

Frequently Asked Questions (FAQs)

How to set up a startup company?

It requires a strong, viable business idea to begin with. Then there must be a business plan, strategies for achieving them, and a clear understanding of profitability. This includes developing marketing strategies, customer bases, and making investments. Finally, adhering to legal norms is important for startup company registration.

How does a startup company work?

They work like any other company but focus more on building innovative solutions. They create a business plan and a strategy to achieve the same. Startup Company funding is important; therefore, one should make them easier to find. Quicker growth numbers are another goal of startups.

When should a startup company expect profit?

The period of profitability depends on many factors. It includes the nature of the business, the economic state, industry, capital required, etc. Earning profit in the first year can be difficult, and, on average, it takes 3–4 years for companies to be profitable.

This has been a guide to Startup Company it’s meaning. We explain how to start it along with stages, examples, types and vs established companies. You can learn more from the following articles – 

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