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.

Note: The first few years are very important for startups. Entrepreneurs should use this time to
concentrate on raising capital and developing a business model.
Special Considerations
There are several different factors that entrepreneurs must think of as they try to get their new business
off the ground and begin operations. We have 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 are 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 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.

Pros Cons
 More opportunities to learn  Risk of failure
 Increased responsibility  Having to raise capital
 Workplace benefits  High stress
 Innovation is encouraged  Competitive business environment
 Flexible hours  Low compensation
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.

How Do You Start a Startup Company?

The first step is to have a great idea. From there, market research is the next step to determine how
feasible the idea is and how it may fit in the current marketplace. After the market research, you'll need
to create a business plan that outlines your company structure, goals, mission, values, and objectives.

One of the most important steps is obtaining funding. This money can come from savings, friends,
family, investors, or a loan. After raising funds, make sure you've handled all legal matters and
paperwork. This means registering your business and obtaining any required licenses or permits. After
this, establish a business location. From there, create an advertising plan to attract customers, establish
a customer base, and adapt as your business grows.

How Do You Get a Startup Business Loan?

A startup can obtain a loan from a startup business loan provider, a bank, certain organizations, or
friends and family. One of the best and first options should be working with the U.S. Small Business
Administration, which provides microloans to small businesses. These loans are usually from nonprofit
community lenders and can be easier to obtain than traditional loans from banks.

What Are the Benefits of Working for a Startup?

The benefits of working at a startup include greater opportunities to learn about your specific business
and business in general, increased responsibility, flexible work hours, a relaxed work environment,
increased employee interaction, good workplace benefits, and innovation.
How Do You Value a Startup Company?

Valuing a startup can be difficult as startups don't usually have revenue to show or the marketplace
longevity by which to measure success. They usually don't generate profits for a few years after starting.
As such, using the traditional financial statement metrics for valuations doesn't apply. Some of the best
ways to value a startup include the cost to duplicate, market multiples, discounted cash flow, and
valuation by stage.

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.

References:

1. U.S. Small Business Administration. "Choose a Business Structure."

2. U.S. Small Business Administration. "Frequently Asked Questions About Small Business, 2024
Factsheet." Page 2.
3. U.S. Small Business Administration. "Microloans."