What a Startup Is and What's Involved in Getting One Off the Ground

What Is a Startup?

The term "startup" refers to a company in the early stages of its operations. Startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand.

These companies generally launch with high costs and limited revenue, which is why they look for capital from a variety of sources such as angel investors and venture capitalists.

Startups typically require several years to make a profit, so significant, high-risk investments typically are needed to get one off the ground.

Understanding Startups

Startups are companies or ventures that are focused on a single product or service that the founders want to bring to market.

These companies typically don't have a fully developed business model and, crucially, lack adequate capital to move on to the next phase of business. Most of these companies are initially funded by their founders.

Many startups turn to others for additional financing, including family and friends. Silicon Valley is known for its strong venture capitalist community and is a popular destination for startups. However, it is widely considered the most demanding arena, as well.

Startups can use seed capital to invest in research and to develop their business plans. Market research helps determine the demand for a product or service. A comprehensive business plan outlines the company's mission statement, vision, and goals, as well as management and marketing strategies.

Special Considerations

There are a number of different factors that entrepreneurs must think of as they try to get their new business off the ground and begin operations. We've listed some of the most common ones below.

Location

Location can make or break any business. It's often one of the most important considerations for anyone starting up in the business world. Startups must decide whether their business will operate online, in a brick-and-mortar office or home office, or in a store. The location depends on the product or service being offered.

For example, a technology startup selling virtual reality hardware may need a physical storefront to give customers a face-to-face demonstration of the product's new and perhaps complex features. Working with people in person can also help develop the relationships that can drive the purchase of what may be expensive items.

Legal Structure

Startups need to consider what legal structure best fits their entity. A sole proprietorship is suited for a founder who is also the key employee of a business.

Partnerships are a viable legal structure for businesses that consist of several people who have joint ownership, and they're also fairly straightforward to establish. Personal liability can be reduced by registering a startup as a limited liability company (LLC).

Funding

Startups often raise funds by turning to family and friends or by using venture capitalists. Venture capitalists are professional investors that specialize in funding startups.

Crowdfunding has become a viable way for many people to get access to the cash they need to move forward in the business process. The entrepreneur sets up a crowdfunding page online, allowing people who believe in the company to donate money.

Startups also may use credit to commence their operations. A perfect credit history may help you get a line of credit. Of course, as this is debt that needs to be repaid and often comes with a sizeable interest rate, this option carries the most risk, particularly if the startup is unsuccessful.

Other companies choose small business loans to help fuel growth. Banks typically have several specialized options available for small businesses. For instance, a microloan is a short-term, low-interest product tailored for startups. A detailed business plan is often required in order to qualify.

Advantages and Disadvantages of Startups

Advantages

There are a variety of advantages to working for a startup:

• You may have more responsibility and greater opportunities to learn. As startups have fewer employees than large, established companies, employees tend to wear many hats, which leads to more work experience and chances to build knowledge.
• Startups tend to be more relaxed in nature, making the workplace more of a communal experience.
• Many offer flexible hours and increased employee interaction.
• Since startups tend to be cash-poor, they often provide a large amount of delayed compensation in the form of stock options, which can gain significant value if the company goes public.
• Work can be rewarding as innovation is welcomed and managers allow talented employees to run with ideas with little supervision.

Disadvantages

One of the primary disadvantages of a startup is increased risk. This primarily applies to the success and longevity of a startup.

• New businesses need to prove themselves and raise capital before they can start turning a profit.
• Keeping investors happy with the startup's progress is critical. The risk of shutting down or not having enough capital to continue operations before turning a profit is ever-present.
• Long hours are characteristic as everyone is working toward the same goal—to see the startup succeed.
• Employees may experience high levels of stress and compensation that isn't commensurate with the hours worked.
• Competition between startups may be intense because more than one company may be working on the same ideas.

Examples of Startups

Dotcoms were a common startup in the 1990s. Venture capital was extremely easy to obtain during this time due to a frenzy among investors to speculate on the emergence of these new businesses.

Unfortunately, most of these internet startups eventually went bust due to major flaws in their business plans, such as lacking a path to sustainable revenue. However, a handful of companies survived when the dotcom bubble burst. Amazon (AMZN) and eBay (EBAY) are just two examples.

Many startups fail within the first few years. That's why this initial period is important. Entrepreneurs need to find money, create a business model and business plan, hire key personnel, work out intricate details such as equity stakes for partners and investors, and plan for the long run.

Many of today's most successful companies—Microsoft (MSFT), Apple (AAPL), and Meta (META), formerly Facebook, to name a few—began as startups and ended up becoming publicly traded companies.

The Bottom Line

Starting a company can be a difficult but rewarding venture. Having a great idea and attempting to bring it to market comes with a host of challenges, such as attracting capital, employees, marketing, legal work, and managing finances. Keep in mind, though, that startups can lead to major job satisfaction and the possibility of leaving a legacy.