What a Startup Is and What’s Involved in Getting One Off the Ground

Mitchell Grant is a self-taught investor with over 5 years of experience as a financial trader. He is a financial content strategist and creative editor.

What Is a Startup?

A startup is a company in the first stages of operations. Startups are founded by entrepreneurs who want to develop a product or service they believe is in demand. These companies start with high costs and limited revenue, so they seek capital from various sources such as venture capitalists.

Key Takeaways

• A startup is a company in the initial stages of business.
• Founders finance their startups and may attract outside investment before they get off the ground.
• Funding sources include family and friends, venture capitalists, crowdfunding, and loans.
• Startups must also consider where they’ll do business and their legal structure.
• Startups come with high risk as failure is possible but they can also be unique places to work with benefits, a focus on innovation, and opportunities to learn.

Understanding Startups

Startups are companies or ventures focused on a single product or service founders want to bring to market. These companies typically lack a fully developed business model and adequate capital to move forward. Most startups are initially funded by their founders.

Many startups turn to others for more funding, including family, friends, and venture capitalists. Silicon Valley is known for its strong venture capitalist community and is a popular destination for startups.

Startups can use seed capital to invest in research and develop business plans. Market research determines demand, while a comprehensive business plan outlines the company’s mission statement, vision, goals, and strategies.

The first years are important for startups. Entrepreneurs should concentrate on raising capital and developing a business model.

Special Considerations

Entrepreneurs must think about factors as they try to get their new business off the ground and begin operations. We’ve listed some common ones below.

Location

Location can make or break any business. It’s an important consideration for startups. Startups must decide whether their business is conducted online, in an office or home office, or in a store. The location depends on the product or service 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 features.

Legal Structure

Startups need to consider the best legal structure for 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 with joint ownership. Personal liability can be reduced by registering a startup as a limited liability company (LLC).

Funding

Startups often raise funds from family and friends or venture capitalists. Crowdfunding has become a viable way for many people to get access to the cash they need. Startups may also use credit or choose small business loans to help fuel growth.

Advantages and Disadvantages of Startups

Working for a startup offers advantages like learning opportunities, increased responsibility, flexibility, workplace benefits, and innovation. Disadvantages include increased risk, the need to raise capital, high stress, and competition.

• More opportunities to learn
• Increased responsibility
• Flexibility
• Workplace benefits
• Innovation is encouraged
• Flexible hours
• Risk of failure
• Need to raise capital
• High stress
• Competitive business environment

Examples of Startups

Dotcoms were common startups in the 1990s. Venture capital was easy to obtain during this time due to investor speculation. Most of these internet startups eventually went bust due to major flaws in their business plans. However, a handful of companies survived when the dotcom bubble burst, like Amazon and eBay.

Many startups fail within the first years. The initial period is important. Entrepreneurs need to find money, create a business model and plan, hire key personnel, and plan for the long run. Many successful companies began as startups and became publicly traded companies.

How Do You Start a Startup Company?

The first step in starting a startup is having a great idea. Market research determines feasibility and the current marketplace. After market research, create a business plan that outlines company structure, goals, mission, values, and objectives.

One of the most important steps is obtaining funding. This can come from savings, friends, family, investors, or a loan. After raising funding, complete the necessary legal and paperwork. Register the business and obtain any required licenses or permits. Establish a business location. From there, create an advertising plan, establish a customer base, and adapt as the business grows.

How Do You Get a Startup Business Loan?

A startup can obtain a loan from a bank, organizations, or friends and family. Work with the U.S. Small Business Administration, which provides microloans to small businesses. The average SBA loan is $13,000 and the max loan amount is $50,000. These loans are usually from nonprofit community lenders and can be easier to obtain than traditional bank loans.

What Are the Benefits of Working for a Startup?

The benefits of working at a startup include greater learning opportunities, 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 longevity to determine their success. Startups also don’t generate profits or revenue for a few years. Some 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 challenges, such as attracting capital, employees, marketing, legal work, and managing finances. Keep in mind, though, that startups lead to increased job satisfaction and the possibility of leaving a legacy.