When I hear the term ‘startup‘, I instantly imagine a group of young, successful people having meetings in jeans and t-shirts, sipping soft drinks in Silicon Valley. But is this the reality of a startup? And what exactly is the difference between a startup and another new business?
What is a startup?
Startups are new businesses that are created with the idea that they will experience rapid growth in a short period of time. They are not tied down to geographical locations like a new restaurant or a new chain of shops; instead, they are expected to sell some kind of service or product to an extremely wide audience. It is for this reason that most startups are technologically based, because by using the internet, their audience or proposed consumers are potentially worldwide.
How to begin?
Startups often start as an idea, but an idea is not enough to ensure success. Imagine for example you have an idea for an app that allows you to order pizza without leaving your sofa. In order to make this idea reality, you have to develop the technology, test it and, most importantly, secure enough funding to help this idea materialise. This is an expensive and lengthy process and many startups do not get beyond this stage.
Funding
Startups are expensive and often involve months or even years without generating any revenue, let alone a profit. In order to fund the expensive process of creation and promotion, startups can get funding from three types of investors:
1. Incubators
These types of investors often supply premises, internet connection, advice and services for the startup. The non-profit incubators –also known as ‘accelerators’– may support the entrepreneurs as part of an educational service out of universities or business schools. The for-profit incubators, on the other hand, will help and advise startups with a view to helping them grow their business in exchange for equity shares. Having equity shares in a company means that the incubator does not receive any return on their investment until the point when the startup is sold, and hopefully, if the mentoring has been successful, a profit will be made.
2. Angel investors
These are private investors (either individuals or groups) who provide support and finance to startups (or new businesses in general). They may provide a single injection of cash, or alternatively may support the startup financially as it gets going. They often do this in exchange for equity ownership, but unlike venture capitalists, they are not simply looking for a huge return on their investment; they are also interested in helping the startup succeed.
3. Venture capitalists
Venture capitalists also provide finance for startups. They will take high risks, expecting a huge return on their investment. Many startups they invest in fail, but the ones that succeed more than pay for the others’ failures, and often venture capitalists have so much money that they can afford to take the risk. When Facebook went public in 2012, the first three million shares that Zuckerberg sold went for a value of 1.3 billion dollars, a significant return on investment for the investors.
Fear of failure?
Considering that nine out of ten startups fail and many businesses don’t last beyond five years, throwing your passion and life into creating a startup definitely takes a lot of time and energy. If you are the type of person who is easily discouraged, or give up easily, then maybe this isn’t the option for you. So, when we see photos of these young entrepreneurs, sitting in meetings in their t-shirts, we should take our hats off to them, because despite their success, it is unlikely that it has been an easy ride.
Start up and succeed
Airbnb
The concept for Airbnb (the name comes from air bed and breakfast) was thought up by Brian Chesky, Joe Gebbia and Nathan Blecharczyk. During the 2008 election campaign they raised money by selling cereal boxes to fund their website. The original website was called airbedandbreakfast.com, but after receiving $20,000 dollars from Y Combinator, an incubator in the US, it shortened its name and expanded the possibility of renting rooms and whole apartments. In 2010 Airbnb received its first round of funding from a venture capitalist to the amount of $7.2 million. This may seem a lot, but to date Airbnb has received billions of dollars in funding in order to become the international company that it is today.
Spotify
The Swedish online music platform was launched in 2008. It is based on a freemium business model – which means that the basic service is free, but you have to pay for extras and the free service includes ads. This means that Spotify has two avenues of income: one from paying clients, and the other from the advertisers. Spotify has made huge losses, largely because of the payments it has to make to the music industry. But it has survived on funding until now and is only just starting to be profitable.