What Is a Startup?

Startups Explained in About Five Minutes

A meeting at a startup company to discuss private loan options

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Table of Contents
Table of Contents

Startups are new businesses formed by one or more entrepreneurs to develop a unique product or service and bring it to market. Startups are typically launched on little capital and a shoestring budget.

As remote work became the norm during the COVID-19 pandemic, startups became more prevalent than ever, and new business and startup applications have been filed at unprecedented rates since 2020. As home businesses and other startups continue to emerge, it’s important to learn what startups entail, how they work, and some of the main types. 

Definition and Examples of Startups

Startups are business ventures built from a new idea for a product or service. These companies typically have little money to start, so entrepreneurs look to venture capitalists (VCs) and other financiers to help them. Most startups begin with a small team and budget.

One prime example of a startup would be Uber. Its founders noticed an opportunity in the market when they realized consumers couldn’t order rides from apps at the time. Uber first launched as UberCab, and its rideshare concept was unveiled in San Francisco, where the first Uber ride took place in July 2010. Eventually, during its initial angel financing round, Uber received over $1 million from a venture capital group. 

Airbnb is another example of a startup-turned-multibillion-dollar brand.  The seeds for the company were planted when co-founders Joe Gebbia and Brian Chesky began setting up air mattresses in their loft and renting them out to guests who couldn’t find San Francisco hotel rooms. Like many successful startups, however, Airbnb faced challenges during its infancy. Several angel investors initially rejected and ignored its  “designer bed and breakfast” business concept until the company received its first, $600,000 investment from Sequoia Capital in 2009.

How Startups Work

A startup has similar characteristics to “regular” businesses. However, the former focuses on new ideas, while other companies enter industries that already exist. Before Uber, “ride-hailing” was essentially limited to taxis. But rather than become another taxi company, Uber, along with Lyft, created a new market.

Further, unlike regular small businesses, startups follow scalable business models. If you own a family restaurant, for example, you may not want to turn that concept into a franchise. Startups, meanwhile, have growth in mind, as entrepreneurs eventually want to evolve into companies.

After an entrepreneur has an idea for a new product or service, they may pull in a partner to help them launch the business. Then they’ll create a business plan for their startup. Often, startup founders will use personal finances to fund their initial moves. But in order to truly survive and thrive, they typically will need to secure capital from investors, which is accomplished through funding rounds. 

Without market validation, startups can’t progress, so product or service tests are also crucial to the business.

Funding Rounds

The most common funding rounds are Series A, Series B, and Series C. Each occurs at a certain stage, with A happening when the startup has a lower valuation, usually after an initial seed investment for product development. Then, startups seek funding from investors in the form of B and C rounds once they’ve established themselves.

When does a startup no longer qualify as a startup? There’s really no clear-cut answer or timeline—though factors may include achieving scale or profitability, or adding a certain number of employees. Uber, for example, became publicly traded in May 2019 after essentially spending 10 years as a startup, so the point of transformation may vary.

Types of Startups

For the most part, startups are technology-based. When you think about companies like Uber, and other examples like Airbnb and HelloFresh, they’re rooted in websites and apps. However, startups actually come in many forms.

Scalable Startups

Uber, again, for example, was a scalable startup before going public. These startups are focused on growth, and can often require market research to determine whether a need or audience exists for the idea or concept they want to pursue. 

Buyable Startups

Rather than build a startup for their own interests, entrepreneurs sometimes create startups with the intention to sell to other companies. These businesses are also often software and tech-focused. Those who don’t want to commit to a startup for the long haul may prefer starting buyable startups. WhatsApp originally began as a buyable startup because the creators intended to create competition with major communication apps. It was eventually bought by Facebook in 2014 for $19 billion in cash and stock.

Lifestyle Startups

People who want to turn their hobby into a business might launch a lifestyle startup. These companies serve as independent endeavors for hopeful entrepreneurs. For example, you might like books, so you create a service where you shop for customers’ books based on their interests.

Many of these businesses begin as blogs. A Cup of Jo is a leading lifestyle blog, but it originally began as a weekend hobby for the founder, Joanna Goddard. After a few years, the site made enough revenue that she turned it into her full-time job. The long-term business plan helped A Cup of Jo garner steady clicks and sales, leading to a profitable company.

Social Entrepreneurship Startups

A social entrepreneurship startup works toward social change. Rather than aim to receive funds from outside sources, entrepreneurs focus on humanitarianism to create a positive impact on the world. These businesses can still make money—but that’s not the primary goal.

Textbooks for Change, for instance, was launched to assist East African universities that had wavering budgets and couldn’t always stock the educational textbooks they needed for provided courses. The company connects libraries with these universities so donations fill the gaps left when the latter’s budgets can’t stretch to accommodate everything they need.

Keep in mind that social entrepreneurship startups are for-profit endeavors. While they can seem similar to nonprofit organizations, these startups do generate sales.

An example would be Toms Shoes, which made its name by applying a one-for-one business model to selling shoes—meaning for each pair sold, the company donated one pair to children in need.

Key Takeaways

  • A startup is introduced by one or more entrepreneurs who intend to bring new ideas to the market.
  • Startups can build capital and funds through funding rounds and investments from venture capitalists, among other sources.
  • A startup’s main goal is to grow into a larger, influential company in the industry.
  • Many types of startups exist beyond the technology sector, from lifestyle to social entrepreneurships.