A startup is a business that is currently in its creation phase, or in the early stages of growth, working to bring a new product or service to the market. Startups can be considered risky for investors because they are not yet publicly known, so they are often privately funded, usually by the owners or founders.
If you’re thinking of coming to market as a startup with an innovation, it’s important to understand how the process works. Learn about the different types of startups, funding options and general requirements for running your startup business.
Definition and Examples of Startups
Startups are new businesses started by founders who aim to bring a new idea or product to market that can create a significant business opportunity and impact. Businesses are considered startups during their formation and early stages of development or growth as they build awareness of their brand, purpose or product.
Startup founders focus on various aspects of launching a business, including securing funding, conducting market research, choosing a business structure, and meeting any legal requirements for operating a business.
Startup businesses can form in a variety of ways because almost any industry has room for innovation. Businesses like Uber and Airbnb are startups that have generated new concepts and tremendous growth in the technology and lifestyle sectors. Some other industries that often see startups include business-to-business services, consumer media, and consumer goods.
How Startups Work
Startups operate just like any other business, this difference is an additional barrier to trying to introduce a new product or service idea to the market. Startup founders must be able to find opportunities, innovative solutions and ultimately investors while minimizing overall risk. They face challenges in raising awareness and raising the funds needed to grow the business.
To cover startup costs, businesses must determine their funding options. Here are some common fundraising methods:
- Bootstrapping : Many startups are initially privately funded. Owners or founders often invest in the business themselves and build it from scratch, a process commonly known as bootstrapping.
- Family and Friends : A common financing method is to get money from family and friends who are willing to invest in your business. In many cases, it may be best to consider this type of financing as a loan rather than equity in your business.
- Loans : Depending on the type of business, entrepreneurs may qualify for grants or business loans from the Small Business Administration (SBA) or other organizations.
- Crowdfunding : Crowdfunding can help startups raise money without the hassle of transferring partial ownership; Typically, those who donate funds receive early versions of products or exclusive rewards from the company.
- Equity : Startups can give up an ownership or equity stake in exchange for startup capital. They must prove the worthiness of their business to investors, a challenging task that can pay off.
Types of Startups
Startups build their businesses with different goals and objectives, and can be classified by their business structures, their industries, or their purposes. Business structures, or business entities, are established when businesses are formed to determine how the business operates, registration requirements, taxes and legal protections. Depending on the number of owners and liability protection preferences, businesses can form by choosing one of several legal structures, including:
- Sole Proprietorship : A sole proprietorship does not need to be registered and usually has one owner who is personally liable for expenses Limited Liability Company (LLC): Whether single- or multi-member, LLCs offer liability protection to owners and act as a pass-through entity considered, meaning they do not pay tax on business income. Instead, business income is reported on the owners’ personal income taxes.
- Limited Liability Partnership (LLP) : An LLP has multiple owners and provides liability protection to each owner.
- Limited Partnership (LP) : LPs give the owner unlimited liability while other partners are protected with limited liability.
- Corporation : A corporation operates as a completely separate legal entity, but is usually the most expensive structure to form.
Startups can also be classified by purpose. Some aim only to make a profit, while others intend to make a difference in their communities.
Small business startup
Small business startups are common forms of entrepreneurship. These are typically locally owned businesses such as restaurants or retailers that aim to make a profit but do not want to expand to other locations or develop franchises.
A scalable startup
A scalable startup is a business whose purpose is much larger than its inception. Scalable startups believe their ideas can grow and have the drive to make businesses successful. These are usually funded by venture capital and eventually aim to be publicly traded.
Social Entrepreneurship Startup
Social entrepreneurship has other goals besides profit. Their goal is to change or influence the community. Many social entrepreneurships are nonprofits driven by a specific mission. These startups can also use grants and sponsorships for funding.
Big company startup
Big company startups use innovative approaches to improve their companies. The objective is to extend a company’s already well-known brand through a new entity within the same company, such as a new product line.