Nowadays most of us have heard more or less about the concept of Startup. Much has been written and spoken about it and its impact on entrepreneurship during these last years, but what is really a Startup? What are its objectives and characteristics? Why are they so important?
To these and other questions we will try to answer in the following article through real cases that will help us to know and understand the startup world. As Reid Hoffman, founder of LinkedIn, says, “entrepreneurship is like throwing yourself into a vacuum and trying to set up a company during a downturn”.
What is a Startup?
The vague term “start up” can be translated as “to set in motion”, “to start up” or “to enable” and is used in the business world to refer to those business projects that are recently created, present a great potential for growth and are in an early stage of their activity, called the start-up phase, developing their product or service to generate income to consolidate their sustainability and growth. It is therefore an organization focused on the development of products or services, highly innovative, with a great capacity for change and flexibility, and completely customer-oriented.
In most cases we usually relate the term with projects that have a high technological component related to the field of information technology, digital environment and Internet, however, the concept is more extensive as it refers to any business project that presents a significant degree of innovation, and is at a very early stage, regardless of the level of technological application that presents the same.
As a consequence of the stage in which these types of companies are in, in most cases their initial financing is through the contribution of capital made by the founders themselves in the first place, and through the already known triple “friends, family and fools” referring to the closest and most accessible circle of the founders when it comes to seeking external financing: friends, family and acquaintances who believe in the idea, and which entails a financial cost associated with the investment obtained. However, these small-scale funding avenues will not be sustainable in the long term without other complementary avenues of additional funding.
Basic characteristics of a Startup
If there is one thing that characterizes the business world today on a global level, it is the environment of uncertainty in which business relationships and transactions are sustained. This factor becomes more evident when we talk about startups as the scenario of uncertainty about the future and sustainability of them increases.
As indicated above, a startup is an organization focused on developing products or services with unique characteristics that differentiate it from the category of small and medium enterprises (SMEs) that will later expand. The objective of a startup is to go out to the market in search of funding to cover their capital needs, making use of great innovation and generally relying on the use of digital technologies to achieve growth. In the case of SMEs, the objective is more focused on investing and risking part of their profits in projects and business lines that generate an increase in profits in the medium to long term.
Although they share some of the characteristics of other types of business projects, startups have a set of main features that make them so peculiar and important:
- They are young companies with less than 3 years, with a high creative component and great motivation for the project.
- Their usual environment is uncertainty, as they are constantly debating between disappearance and evolution.
- The speed of growth and development is a major factor in seeking their survival and sustainability. Their alternative therefore is to evolve or disappear.
- They are led and managed through a combination of business analysis and personal emotions by the founders. In these beginnings, faith and emotions have a great weight in the decision making process.
- Innovation is their reason for being. These are companies with a large component of radical or incremental innovation on which their growth and evolution are based.
- The projects present a high degree of scalability, a key factor, being able to replicate their business model in different markets at a low cost, thus seeking that necessary evolution from the increase in revenue and decrease in associated costs.
- They are made up of multidisciplinary teams, with a variety of profiles, which enrich the project and operate under non-hierarchical horizontal or mixed business structures.
- They operate in an environment of greater uncertainty, seeking sustainability in a rapid manner, thus assuming greater risks and seeking new disruptive formulas to address and solve the problems.
- They focus on the development of products and services in an incremental way from an agile methodology that allows to try and test them through trial and error. This requires direct contact with the client and a collaborative vision with the client.
- The financial management is focused on the control of the Cash Flow as the main indicator of the company’s health: increase the income in a fast way and keep the expenses very reduced.
- They look for and use sources of financing.
As we can see, some of these characteristics are also common to SMEs, and are gradually being incorporated into business activities and structures, but all together form the particularities that show the startups.
Is a startup a microenterprise?
Within the current context there is some confusion when talking about startups, scaleups and SMEs. This confusion is common and is based on the similarity between different organizations in terms of size and structure. It is common to find startups with less than 10 employees and microenterprises with similar size, so, although the reduced size is a common basic feature in itself does not determine whether we are facing a startup or another type of company. It is the factors of seniority, degree of innovation and the existence of a business model that mainly make the difference.
According to the European Union (EU) in its Regulation No. 651/2014 of the Commission determines as a microenterprise those companies with fewer than 10 employees and a turnover or balance sheet total equal to or less than 2 million euros. To be considered a small company, it must have less than 50 employees and a turnover or balance sheet total equal to or less than 10 million euros.
Within this classification there is no place to talk about startups since it could fall into any of these categories if it achieves the figures indicated in its first three years. Their main mission is to look for and find their business model, which is scalable and repeatable, with high growth potential and an existence of less than 3 years. The micro and small enterprises seek however to increase their business volume, with a business model already defined and tested in the market, regardless of their years of life or existence.
In summary, we speak of startups as business projects under 3 years, which seek their scalable business model, based on innovation, and with great growth potential, while SMEs create a business network of companies with business models already consolidated and tested in the market, which focus on increasing their turnover and profits.
What does a startup become when it stops being one?
One of the most frequent doubts in the entrepreneurial ecosystem is when a startup stops being one, either because it finds its business model disruptive and innovative, producing rapid and scalable growth, or because it adapts to an existing traditional business model. In the first case we are already talking about a scaleup. In this second case we will speak of a microenterprise or SME following the criteria described in the classification of the European Commission described above.
What is a scaleup?
When the turnover of a startup grows at a rate of 20% per year for more than three years in a row, thanks to the fact that they have managed to validate their product on the market, or reach more than one million dollars in funding, we start talking about a scaleup. This term, which could be translated as “expand” or “increase”, refers to those startups that, through their innovative and scalable business model, have started a process of growth and expansion into new markets, new customers and improvements in their products or services.
Scale-ups are mainly characterized by having found their model and sustainability in the market, with a very low percentage of failure, thus reducing the high initial risk linked to entrepreneurial projects, creating a more formal and hierarchical business structure, and boosting the number and professional development of their employees as the company grows. In terms of management we could say that startups need founders with passion, initiative, resilience, motivation and above all capacity for action, while in a scaleup it is very important to be surrounded by business managers, executives and MBA’s for their management, going from entrepreneurs to businessmen.
In search of the Unicorns
Due to the very special characteristics of this mythological being of pure character, kind, spiritual, immortal, elusive and difficult to reach, in the entrepreneurial ecosystem every startup wishes to become Unicorn.
It was in 2013 when Aileen Lee coined the term entrepreneurship in an article published under the title “Welcome To The Unicorn Club: Learning From Billion-Dollar Startups”. This concept refers to those startups or scaleups whose value has reached the amazing figure of one billion U.S. dollars in a very short time of life, hence they are so rare, sought after and appreciated to obtain.
What are Unicorn companies?
Unicorn companies are based on the use and application of innovation in cutting-edge technological areas, in many cases creating trends where none existed before, developing markets with business models yet to be exploited and little competition that are very attractive to investors.
Currently the most important characteristics that show this type of companies are basically:
- Their valuation exceeds one billion dollars without having taken part in any acquisition or merger operation, mainly due to the accelerated growth of their activity.
- They are financed entirely by private capital and are not listed on the stock exchange.
- Young company with less than 10 years of life.
- Business models based on information technology, digitalization, internet and disruptive innovation.
It is because of all the above that any startup dreams of becoming the next unicorn.
In summary, the entrepreneurial ecosystem and the world of startups have allowed in recent years to create and develop new business models, new projects and innovations that, on the one hand, have revolutionized existing segments and industries, and on the other, have created markets and businesses that did not exist until then, giving a new twist to the system and business literature, having to review in many cases the regulation and standards for these sectors.