You've probably heard someone use the term startup in some conversation. In recent years we've never heard that word as much as before! The term has become popular due to the growing number of innovative new companies, oops, I've already delivered a part… But do you really know what defines a startup?
There are several definitions out there, and the community can't seem to agree on a global definition, for example, some think a startup can limit itself between size and lifetime while others think these limitations aren't enough to differentiate a startup of a "traditional" company. I have separated two definitions that, for me, briefly encompass what a Startup is:
A startup is a company working for solve a problem where the solution is not obvious it's the success is not guaranteed .Neil Blumenthal cofounder and co-CEO of Warby Parker
A startup is a human institution designed for deliver new products or services under conditions of extreme uncertainty .Eric Ries, author of The Lean Startup
So if we put the two definitions together we have: A startup is a company working to solve a problem, where the solution is not obvious, through innovative products and services, under conditions of extreme uncertainty.
Differences between Startup and Company
Just analyzing the two definitions above may still not be enough to understand what a startup actually is. After all, opening a Bakery is also not a guaranteed success and extreme conditions can be somewhat ambiguous… So here we go: The first difference is in the business model, a Startup seeks to innovate a product or service that does not yet have a tested and proven business model, that is, because it is a new way of providing a service or product, the market is different or even non-existent, which makes his performance in "extreme uncertainty". Compared to a traditional bakery, its business model and target audience have already been validated and proven, whether it will work or not is due to other existing conditions and not because there is no viable business model.
If you're wondering: Could a Bakery be a Startup? Of course, if someone somehow finds a way to innovate the way the daily bread rolls reach consumers, using limited technology and resources and offering a new service to an uncertain market, voila, we have a Startup.
Unlike companies already consolidated and commonly called traditional companies, Startups start in a scenario with little or no money, they seek their growth through a series of investment rounds, we'll talk about that later. Many startups can go years and years without making a profit , and that's okay, many initially aim only at the growth and financial multiplier potential that only an unexplored market tends to have.
Let's take Google as an example, when they started the internet it was also starting to take its first steps to be the incredible tool we have today. Giant tech companies at the time already existed when Google was created, and why was it created? Previously, you needed to resort to some search engines, also startups, that sought to solve the problem of finding news, articles, resources in general on the internet. Both the technology and the market were new, and for some products that Google has today: the market was non-existent. This is the difference between Google and other companies like IBM, which at the time already had a consolidated market for selling machines but did not venture into this unexplored and potentially inhospitable market.
The famous startup mood
When we talk about Startup, what comes to almost everyone's mind is a cool company, with ping-pong, people going to work in shorts, flexible hours, among other things. This is all true, but it cannot be used to define a Startup, traditional companies can and are implementing this new business model.
Startups, in addition to innovating in their products and services, seek to innovate in internal management, offering a pleasant atmosphere and differentiated benefits that help to attract and retain talent, who in turn, are increasingly demanding in their work environment.
But not everything is a bed of roses, although these companies seem to be perfect to work for, we have to take into consideration some points mentioned above! They are uncertain companies, seeking a sustainable business model, which can lead to somewhat complicated situations. Short deadlines and the need for quick delivery can lead to long working hours and stressful collections. Another point to consider is that you are subject to the risk of the company not prospering, therefore, it is always good to evaluate all the pros and cons of each business model and if they suit you.
Normally, the funding for expansion of these companies takes place through investment rounds, as these companies usually do not have any money coming in yet, their expansion plans or even just operational plans are unfeasible without external investments. Which is not a problem, as there is a market that is hungry for these types of companies and their potential to multiply money.
What are the types of investors?
A common type called "Friends&Family" is a very common way to raise money to fund your projects. The money is raised from people close to the business in exchange for part of the company or sometimes just as a loan.
Bank loans are very common too, if for some reason the Startup failed to attract the attention of investors, a solution is to seek out financial institutions to raise capital in exchange for interest.
The Anjo Investment is the investment made by individuals with their own capital. These people are usually specialists in this type of investment and seek a high return and high risk in these companies, they usually add value to companies with their knowledge and/or network of relationships. They usually invest in the initial stages of the company ( seed money ), where the amount needed is not as significant from an investment point of view, we will talk more about this investment stage.
Venture Capital Funds (VC)
Venture Capital are companies and people specializing in this type of investment, they usually have a fund and investment with large capital and invest in several Startups simultaneously, they usually enter the scene after the business already has a considerable source of income. They usually come in with large amounts for investment in exchange for shares in the company.
Before any round of financing begins, analysts conduct an assessment of the company, the famous " valuation " in question. These assessments are derived from a variety of factors including management, proven track record, market size and risk. These valuations are important to distinguish funding rounds, as well as the level of maturity and growth prospects. These factors are important as they affect the types of investors who are likely to be involved and the reasons the company may be seeking new capital. Once the valuation is done, you have a sense of how much that company is potentially worth and how and how much investment will be needed.
Seed Funding ( Seed Investment )
Start-up financing is the first "official" stage of financing these companies. It usually represents the first official third-party money invested in the Startup. This money is usually raised to operationalize the company and possibly take it to other rounds of investment. Usually angel investors and some venture capital funds specialized in this stage invest here.
Here, theoretically, the startup already has a business model and is in the process of consolidation and market expansion. Invested capital is allocated to optimize and adjust your business model and accelerate your expansion. This is where big people's investments start, venture capital funds usually invest from this round to the top.
At this stage, Startup is already consolidated, and its market and consumers are established, as well as its business model validated. The main objective at this stage is to improve your processes, hire, departmentalize, seek new markets, and possibly acquire other competing companies or companies that align with the expansion objectives.
At this point, the company is already well developed and many end up launching themselves in the foreign market. In addition to Venture Capital funds, they attract capital from Private Equity companies and Hedge funds.
We learned what a Startup is and how they are created and financed, their products as well as business models are innovative and often inspiring. In Brazil, one of the most popular startups is Nubank , which each year attracts relevant numbers of new customers and continues to grow! For those who don't know, Nubank is a Fintech, a type of specialized startup, I taught what these companies are here .
Do you have any definitions different from what I presented here? I left your comment!