Chapter 13: Business Models

45 13.3 Startup Companies

From wikipedia: https://en.wikipedia.org/wiki/Startup_company

A startup company (startup or start-up) is an entrepreneurial venture which is typically a newly emerged, fast-growing business that aims to meet a marketplace need by developing or offering an innovative product, process or service. A startup is usually a company such as a small business, a partnership or an organization designed to rapidly develop scalable business model.[1] Often, startup companies deploy technologies, such as Internet, e-commerce, computers, telecommunications, or robotics. These companies are generally involved in the design and implementation of the innovative processes of the development, validation and research for target markets.[2] While start-ups do not all operate in technology realms, the term became internationally widespread during the dot-com bubble in the late 1990s, when a great number of Internet-based companies were founded.[3]

The exact definition of “startup” is widely debated. However at their core, most definitions are similar to what the U.S. Small Business Administration describes as a “business that is typically technology oriented and has high growth potential”.[4] The reference to “growth potential” may mean growth in revenues, number of employees, or both, or to the scaling up of a business to offer its goods or services to a wider or larger market. One popular definition by entrepreneur-mentor Steve Blank and Bob Dorf defines a startup as an “organization formed to search for a repeatable and scalable business model.” In this case “search” is intended to differentiate established late-stage startups from traditional small businesses, such as a restaurant opening up a mature market. The latter implements a well-known existing business strategy whereas a startup explores an unknown or innovative business model in order to disrupt existing markets, as in the case of the online merchant Amazon, the “app“-based ride service Uber or the search engine Google, each of which pioneered the development of their respective market categories. Blank and Dorf add that startups are not smaller versions of larger companies: a startup is a temporary organization designed to search for a product/market fit and a business model, while in contrast, a large company is a permanent organization that has already achieved a product/market fit and is designed to execute a well-defined, fully validated, well-tested, proven, verified, stable, clear, unambiguous, repeatable and scalable business model. Blank and Dorf further say that a startup essentially goes from failure to failure in an effort to learn from each failure and discover what does not work in the process of searching for a repeatable, high growth business model.[3][5][6][7]

Paul Graham states that “a startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit“. The only essential thing is growth. Everything else we associate with startups follows from growth.” Graham added that an entrepreneur starting a startup is committing to solve a harder type of problem than ordinary businesses do. “You’re committing to search for one of the rare ideas that generates rapid growth.”[8] Aswath Damodaran states that the value of a startup firm “rests entirely on its future growth potential.” His definition emphasizes the stage of development rather than the structure of the company or its respective industry. Consequently, he attributes certain characteristics to a startup which include, but are not limited to, its lack of history and past financial statements, its dependency on private equity, and its statistically small rate of survival.[9]

Evolution

Startup development phases

Startup companies can come in all forms and sizes. Some of the critical tasks are to build a co-founder team to secure key skills, know-how, financial resources and other elements to conduct research on the target market. Typically, a startup will begin by building a first minimum viable product (MVP), a prototype, to validate, assess and develop the new ideas or business concepts. In addition, startups founders do research to deepen their understanding of the ideas, technologies or business concepts and their commercial potential.[10] A Shareholders’ agreement (SHA) is often agreed early on to confirm the commitment, ownership and contributions of the founders and investors and to deal with the intellectual properties and assets that may be generated by the startup. Business models for startups are generally found via a “bottom-up” or “top-down” approach. A company may cease to be a startup as it passes various milestones,[11] such as becoming publicly traded on the stock market in an Initial Public Offering (IPO), or ceasing to exist as an independent entity via a merger or acquisition. Companies may also fail and cease to operate altogether, an outcome that is very likely for startups, given that they are developing disruptive innovations which may not function as expected and for which there may not be market demand, even when the product or service is finally developed. Given that startups operate in high-risk sectors, it can also be hard to attract investors to support the product/service development or attract buyers.

The size and maturity of the startup ecosystem where the startup is launched and where it grows have an effect on the volume and success of the startups. The startup ecosystem consists of the individuals (entrepreneurs, venture capitalists,Angel investors, mentors); institutions and organizations (top research universities and institutes, business schools and entrepreneurship programs operated by universities and colleges, non-profit entrepreneurship support organizations, government entrepreneurship programs and services, Chambers of commerce) business incubators and business accelerators and top-performing entrepreneurial firms and start-ups. A region with all of these elements is considered to be a “strong” entrepreneurship ecosystem. Some of the most famous entrepreneurial ecosystems are Silicon Valley in California, where major computer and Internet firms and top universities such as Stanford University create a stimulating start-up environment, Boston (where Massachusetts Institute of Technology is located) and Berlin, home of WISTA (a top research area), numerous creative industries, leading entrepreneurs and start-up firms.

Investors are generally most attracted to those new companies distinguished by their strong co-founding team, a balanced “risk/reward” profile (in which high risk due to the untested, disruptive innovations is balanced out by high potential returns) and “scalability” (the likelihood that a start-up can expand its operations by serving more markets or more customers). Attractive startups generally have lower “bootstrapping” (self-funding of startups by the founders) costs, higher risk, and higher potential return on investment. Successful startups are typically more scalable than an established business, in the sense that the startup has the potential to grow rapidly with a limited investment of capital, labor or land.[12] Timing has often been the single most important factor for biggest startup successes,[13] while at the same time it’s identified to be one of the hardest things to master by many serial entrepreneurs and investors.[14]

Startups have several options for funding. Venture capital firms and angel investors may help startup companies begin operations, exchanging seed money for an equity stake in the firm. Venture capitalists and angel investors provide financing to a range of startups (a portfolio), with the expectation that a very small number of the start-ups will become viable and make money. In practice though, many startups are initially funded by the founders themselves using “bootstrapping“, in which loans or monetary gifts from friends and family are combined with savings and credit card debt to finance the venture. Factoring is another option, though it is not unique to startups. Other funding opportunities include various forms of crowdfunding, for example equity crowdfunding,[15] in which the startup seeks funding from a large number of individuals, typically by pitching their idea on the Internet

Culture

An strong startup ecosystem is vital to a thriving local entrepreneurial culture.

Startup founders often have a more casual or offbeat attitude in their dress, office space and marketing, as compared to traditional corporations. Startup founders in the 2010s may wear hoodies, sneakers and other casual clothes to business meetings. Some startups have recreational facilities in their offices, such as pool tables, ping pong tables and pinball machines, which are used to create an attractive, fun work environment, stimulate team development and team spirit, and encourage creativity. Some of the casual approaches, such as the use of “flat” organizational structures, in which regular employees can talk with the founders and chief executive officers informally, are done to promote efficiency in the workplace, which is needed to get their business off the ground[citation needed]. In a 1960 study, Douglas McGregor stressed that punishments and rewards for uniformity in the workplace are not necessary, because some people are born with the motivation to work without incentives.[18] Some startups do not use a strict command and control hierarchical structure, with executives, managers, supervisors and employees. Some startups offer employees stock options, to increase their “buy in” into the start up (as these employees stand to gain if the company does well). This removal of stressors allows the workers and researchers in the startup to focus less on the work environment around them, and more on achieving the task at hand, giving them the potential to achieve something great for their company.

This culture today has evolved to include larger companies aiming at acquiring the bright minds driving startups. Google, amongst other companies, has made strides to make purchased startups and their workers feel at home in their offices, even letting them bring their dogs to work.[19] The main goal behind all changes to the culture of the startup workplace, or a company hiring workers from a startup to do similar work, is to make the people feel as comfortable as possible so they can have the best performance in the office[citation needed]. Some companies even try to hide how large they are to capture a particular demographic, as is the case with Heineken recently.[20]

Trends and obstacles

If a company’s value is based on its technology, it is often equally important for the business owners to obtain intellectual property protection for their idea. The news magazine The Economist estimated that up to 75% of the value of US public companies is now based on their intellectual property (up from 40% in 1980).[43] Often, 100% of a small startup company’s value is based on its intellectual property. As such, it is important for technology-oriented startup companies to develop a sound strategy for protecting their intellectual capital as early as possible.[44] Startup companies, particularly those associated with new technology, sometimes produce huge returns to their creators and investors—a recent example of such is Google, whose creators became billionaires through their stock ownership and options. However, the failure rate of startup companies is very high.[45] One common reason for failure is that startup companies can run out of funding, without securing their next round of investment or before becoming profitable enough to pay their staff. When this happens, it can leave employees without paychecks. Sometimes these companies are purchased by other companies, if they are deemed to be viable, but oftentimes they leave employees with very little recourse to recoup lost income for worked time.[46]

Although there are startups created in all types of businesses, and all over the world, some locations and business sectors are particularly associated with startup companies. The internet bubble of the late 1990s was associated with huge numbers of internet startup companies, some selling the technology to provide internet access, others using the internet to provide services. Most of this startup activity was located in the most well known startup ecosystem – Silicon Valley, an area of northern California renowned for the high level of startup company activity:

The spark that set off the explosive boom of “Silicon startups” in Stanford Industrial Park was a personal dispute in 1957 between employees of Shockley Semiconductor and the company’s namesake and founder, Nobel laureate and co-inventor of the transistor William Shockley… (His employees) formed Fairchild Semiconductor immediately following their departure…

After several years, Fairchild gained its footing, becoming a formidable presence in this sector. Its founders began leaving to start companies based on their own latest ideas and were followed on this path by their own former leading employees… The process gained momentum and what had once began in a Stanford’s research park became a veritable startup avalanche… Thus, over the course of just 20 years, a mere eight of Shockley’s former employees gave forth 65 new enterprises, which then went on to do the same…[47]

Start-up advocates are also trying to build a community of tech start-ups in New York City with organizations like NY Tech Meet Up[48] and Built in NYC.[49] In the early 2000s, the patent assets of failed startup companies are being purchased by what are derogatorily known as patent trolls, who then take the patents from the companies and assert those patents against companies that might be infringing the technology covered by the patent.[50]

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Information, People, and Technology by by Wikipedia, with help from Bart Pursel is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License, except where otherwise noted.

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