What is a startup? Types and ideas

Startups are newly established companies with the goal of developing a distinctive product or service, bringing it to market, and making it highly desirable and indispensable for consumers. Built on innovation, startups focus on solving problems with current products or introducing entirely new categories that challenge traditional methods and business models. Their goal is to disrupt industries by creating alternatives that lead to more efficient or unique solutions, which is why they are often referred to as "disruptors."

While many people associate startups with major players in the tech industry, such as Facebook, Amazon, Apple, Netflix, and Google (commonly grouped as FAANG stocks), the concept of startups extends far beyond technology. Companies like WeWork, Peloton, and Beyond Meat are also considered startups, even though they operate in different sectors like real estate, fitness, and food production. These businesses share a common characteristic of innovation-driven growth and the desire to reshape their respective industries.

Startups tend to operate with a high level of agility, often embracing risk and rapid iteration in order to quickly adapt to market demands or technological advances. They are typically funded through venture capital, angel investors, or crowdfunding, and they aim for scalability, hoping to achieve substantial market share in a short period of time. Despite their potential for success, many startups face challenges like high competition, financial uncertainty, and market unpredictability, making their journey from conception to profitability an uncertain one.

The culture of startups is often characterized by a dynamic, fast-paced environment where employees wear multiple hats and work towards common goals of innovation, customer acquisition, and market disruption. Their unique approach to problem-solving, driven by a willingness to experiment and pivot when necessary, is a key differentiator from traditional companies.

How do startups operate?

At a basic level, a startup functions similarly to any other company—a team of employees collaborates to develop a product that customers will purchase. However, what sets startups apart from traditional businesses is how they go about achieving this goal.

Established companies typically replicate proven business models. For instance, a potential restaurant owner might opt to open a franchise of an already successful restaurant, relying on an existing framework for running the business.

In contrast, startups strive to create entirely new business models. Take the food industry, for example—startups like Blue Apron or Dinnerly don’t operate like traditional restaurants. Instead, they provide meal kits, offering chef-prepared meals with the added benefits of convenience and customization that dining establishments can't match. This approach allows them to reach far beyond the customer base of individual restaurants, serving millions rather than thousands.

Focus on speed and growth

Another major factor that sets startups apart is their emphasis on speed and rapid expansion. Startups aim to develop ideas quickly, often using a process called iteration, where they continuously refine their products based on user feedback and data. Typically, a startup will start with a basic version of a product, known as a minimum viable product (MVP), which is tested and improved upon until it’s ready for wider release.

While refining their product, startups are also aggressively working to grow their customer base. The faster they acquire new customers, the more market share they capture, allowing them to secure additional funding. This, in turn, helps them further develop their products and expand their audience.

This focus on fast growth and continuous innovation usually serves a larger goal: going public. When a startup offers shares to the public, it allows early investors to sell their stakes and profit from their initial investments—a concept referred to in the startup world as an "exit."

Keys to startup success

Though many startups fail, some do succeed. For a startup to thrive, several critical factors need to come together, and key questions must be addressed.

Is the team deeply passionate about their idea? Success hinges on execution. Even a great idea can fall flat if the team isn’t fully committed to driving it forward.

Do the founders possess deep industry knowledge? Founders should have an in-depth understanding of the market in which they operate.

Are they prepared to dedicate the necessary time? Startup teams often work long hours. A 2018 survey by MetLife and the U.S. Chamber of Commerce revealed that startup owners frequently put in over 14 hours a day. Without that level of commitment, the business may struggle to succeed.

Why this idea, and why now? If the idea is new, what prevented others from pursuing it before? If it’s not new, what makes this team particularly suited to solve the problem?

How large is the market? The potential market size determines the startup's growth opportunities. Even if a company excels in a niche, the market must be large enough to sustain long-term viability.

Successfully answering these questions can improve a startup’s chances of joining the roughly 10% of early-stage companies that survive.

How are startups funded?

Startups typically secure funding through multiple stages:

The first stage, known as bootstrapping, involves the founders and their close network, such as friends and family, investing in the business. 

Following this, startups often receive seed funding from "angel investors," who are wealthy individuals investing in early-stage companies. 

Next come the Series A, B, C, and D funding rounds, predominantly led by venture capital firms. These firms invest significant sums, often ranging from millions to hundreds of millions of dollars, to help startups grow.

Eventually, a startup may opt to go public, allowing broader access to investment through methods like an initial public offering (IPO), acquisition by a special purpose acquisition company (SPAC), or direct listing on a stock exchange. When a startup goes public, anyone can invest, and founders or early investors can sell their shares for a potentially large profit.

It's important to note that early funding stages are generally limited to wealthy, accredited investors, as the Securities Exchange Commission (SEC) believes their financial resources provide some protection against losses.

While early investors dream of massive returns—like Peter Thiel's more than 200,000% gain from Facebook—roughly 90% of startups fail, according to research by UC Berkeley and Stanford. This means there is a significant risk for early-stage investors of receiving no return at all.

How to invest in startups

Investing in startups is generally not accessible to the average person. 

To invest in the most promising early-stage startups or top venture capital funds with the potential for substantial returns, you need to be an accredited investor. This means having an annual income of at least $200,000 or a net worth of at least $1 million, excluding your primary residence. Alternatively, you can qualify as an accredited investor if you work as a registered investment adviser.

However, if you don’t meet these criteria, there are still options available. Crowdfunding platforms like WeFunder and Seedinvest allow anyone to invest small amounts in startups. Seedinvest, for instance, offers pre-vetted opportunities and has a minimum investment of $500—far below the typical sums expected from accredited investors entering the startup space.