What Are Startup Companies: Everything You Need to Know
What are startup companies? They are young companies just starting to develop and usually a high-tech businesses offering products that leverage technology.3 min read
2. Unique Characteristics of Startups
3. Different Ways to Fund a Startup
What are startup companies? They are young companies just beginning to develop. While there are no rules outlining what type of company is considered a startup, the term usually applies to high-tech businesses offering products that leverage technology in order to provide something different or perform a current task in a new way.
Normally, startups are small. Initial financing and operations are handled by one person or a handful of founders. Startup offer a service or product that's not currently offered anywhere else in the market or one that the founders believe is better than what's currently being offered.
In the late 1990s, dotcom companies were the most common startups. It was easy for startup founders to obtain venture capital during that era because investors were interested in the emergence of those new businesses.
Because most internet startups had major oversights in their business plans — including no sustainable revenue source — a lot of them failed. A handful survived the dot-com bubble burst, such as eBay and Amazon.com.
Many startups don't have a revenue stream or sell products.
There are no firm rules outlining when a startup is no longer a startup, but some people believe a company is no longer a startup when one or more of the following occur:
- It completes its path to profitability.
- It reaches a certain size.
- It becomes public.
- A larger corporation acquires it.
- It receives substantial investment funds.
Unique Characteristics of Startups
Just because a company is new doesn't make it a startup. For instance, companies with limited growth potential regarding their revenue, product, and customer base aren't considered startups. A new professional services firm, dry cleaner, or restaurant isn't likely to be considered a startup.
Even though no single standard exists for what defines a startup, most people in the business world recognize the particular work culture and special class of young businesses that exist within startups.
The startup culture, or mindset, has several key characteristics, including the following:
- Willingness to take risks
- Commitment to innovation
- Willingness to quickly make decisions
Workers who are attracted to that type of environment may seek out startups. Startup cultures tend to be egalitarian because workers at all levels pitch in and pull together. The workspace often reinforces that view. Open areas where staffers and leaders work side by side are common. However, founders and executives are still in charge, and they often serve as company ambassadors.
Different Ways to Fund a Startup
Startups usually require financing in their early stages because the expenses often exceed revenues as founders develop, test, and work on marketing their ideas.
There are several funding options, such as the following:
- Small business loans from credit unions or banks
- Small Business Administration loans
- Nonprofit grants
- Private investors
- Personal credit or assets
Some startup founders either use their own money and/or borrow money to fund their business's day-to-day operations. Others rely on angel investors; later, they may turn to venture capitalists.
Venture capitalists — professional investors who specialize in startup funding — may invest in startups that prove their potential. In exchange, they might receive an ownership percentage of the company. California's Silicon Valley has a well-known venture capitalist community, and many startups begin there.
Crowdfunding is another way to raise funds from people who believe in the startup company and wish to contribute money.
When seeking loans for financing, startups should look into the specialized options that banks have for small companies. Microloans are short-term, low-interest products that are ideal for startups. The company needs to provide a detailed business plan to quality for loans.
Startup founders can also use their credit to fund their companies. This requires a flawless credit history and is the riskiest option, especially if the startup fails.
The term “unicorn” applies to startups with a value of $1 billion or more. People who invest in startups — as well as leaders and founders in the startup — often recoup their investments when the company sells to larger, more established businesses.
Startups, like any new business, may or may not be successful. Having a solid business plan and a source of revenue can increase your chances of success.
If you need help with starting a company, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.