What is a startup ? Explained by Digimagg

Startups are enterprises aiming to revolutionize industries and make a global impact on a large scale. Their founders aspire to fill societal gaps with innovative solutions, envisioning remarkable valuations culminating in an initial public offering (IPO) and significant returns on investment.

Comprehending startups

Startups are emerging businesses established to develop innovative products or services, introduce them to the market, and render them indispensable and unmatched for consumers.

Founded on innovation, startups seek to address shortcomings in existing products or establish entirely new categories of goods and services, challenging established norms and practices across industries. Hence, many startups are recognized as "disruptors" within their sectors.

While you may associate startups predominantly with Big Tech companies like Facebook, Amazon, Apple, Netflix, and Google (collectively known as FAANG stocks), other entities such as WeWork, Peloton, and Beyond Meat also fall under the startup category.

How does the operation of a startup function?

At its core, a startup operates similarly to any other business, with a team collaborating to develop a product for consumer purchase. However, what sets a startup apart is its approach to achieving this goal.

Conventional companies often replicate existing models. For instance, a prospective restaurant owner might opt to franchise an established eatery, adhering to an existing business blueprint.

Conversely, a startup seeks to establish an entirely novel framework. In the food industry, this could entail offering meal kits, akin to services like Blue Apron or Dinnerly, which provide chef-prepared meals with unmatched convenience and customization compared to traditional restaurants. This approach allows startups to achieve scalability beyond the reach of individual establishments, catering to tens of millions of potential customers rather than merely thousands.

Startups prioritize rapid development and expansion

One defining aspect that sets startups apart from other businesses is their emphasis on speed and expansion. Startups strive to swiftly advance their ideas, often employing a process known as iteration, wherein they continuously refine products based on feedback and usage data. Typically, startups begin with a basic product framework, referred to as a minimal viable product (MVP), which they test and refine until it's ready for market launch.

Simultaneously, startups aim to rapidly grow their customer bases to establish larger market shares, enabling them to secure additional funding for further product and audience expansion.

This rapid growth and innovation primarily serve a key objective: to go public. By making themselves available for public investment, startups create opportunities for early investors to realize their returns—a concept in startup terminology referred to as an "exit."

What leads to success for startups?

While many startups face failure, some manage to succeed by addressing crucial questions and aligning various factors:

• Is the team deeply passionate about their idea? Success often hinges on execution, and even a brilliant concept can falter if the team lacks dedication.
• Do the founders possess domain expertise? In-depth knowledge of the industry is essential for navigating challenges effectively.
• Are they committed to putting in the necessary time and effort? Startup founders typically endure rigorous work schedules, necessitating a significant investment of time and energy.
• What sets this idea apart, and why is it timely? Whether introducing a novel concept or improving upon existing ones, startups must offer unique value propositions to thrive in the market.
• How large is the target market? The market's size dictates the startup's potential, with niche markets offering advantages but potentially limiting growth opportunities.

By addressing these questions comprehensively, startups increase their chances of joining the 10% of early-stage companies that survive and thrive. 

How do startups acquire funding?

Startups typically secure funding through various rounds:

• Bootstrapping: In the initial phase, founders, along with friends and family, invest in the venture.
• Seed funding: Following bootstrapping, startups may receive funding from angel investors—wealthy individuals who support early-stage companies.
• Series A, B, C, and D funding rounds: Venture capital firms lead these rounds, investing significant amounts ranging from tens to hundreds of millions of dollars.
• Public offering: Eventually, a startup may opt to go public through an initial public offering (IPO), acquisition by a special purpose acquisition company (SPAC), or direct listing on a stock exchange. This opens up investment opportunities to the public, allowing founders and early investors to realize substantial returns.

It's important to note that initial startup funding stages are typically accessible only to accredited investors, as per Securities Exchange Commission (SEC) regulations, due to their presumed ability to absorb potential losses.

While everyone hopes for extraordinary returns like Peter Thiel's investment in Facebook, where he saw over a 200,000% return, the reality is that the majority of startups—around 90%—fail. This underscores the considerable risk involved for early-stage investors, with the possibility of seeing no returns on their investment.

How can one invest in startups?

Regrettably, investing in startups isn't readily accessible to the general public.

To access the most sought-after early-stage startups or top-performing venture capital funds like those with potential returns akin to Thiel's, one must qualify as an accredited investor. Essentially, this entails having an annual income exceeding $200,000 or a net worth, excluding one's primary residence, of at least $1 million. Alternatively, individuals employed as registered investment advisers may qualify for accredited investor status, irrespective of income or net worth.

However, individuals who don't meet these criteria still have alternatives. Crowdfunding platforms such as WeFunder or Seedinvest enable anyone to invest a modest amount in exchange for a stake in a startup. Seedinvest offers pre-screened opportunities with a minimum investment of $500—significantly lower than the typical investment threshold for accredited investors entering the startup investing arena.