What Is a Startup?

Startups Explained

Business colleagues brainstorming in the office
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Table of Contents
Table of Contents

A startup is a business that is currently in its formation stages, or early stages of growth, that works to bring a new product or service to market. Startups can be considered risky for investors because they’re not yet publicly known, so they’re often privately funded, usually by the owners or founders.

If you’re looking to venture out into the market as a startup with an innovation, it’s important to understand how the process works. Learn about the different types of startups, funding options, and general requirements for running your startup business. 

Definition and Examples of Startups

Startups are new businesses launched by founders who aim to bring a new idea or product to market that can create a significant business opportunity while also making an impact. Businesses are considered startups during their formation and early stages of development or growth as they bring awareness to their brand, purpose, or product. Startup founders focus on different aspects of the business to get it started, including funding, conducting market research, choosing a business structure, and fulfilling any legal requirements for running the business.

While startup founders can be considered entrepreneurs, there are some key differences. For instance, founders launch startups with the intention to unveil an innovation, to grow, and are very hands-on. Meanwhile, entrepreneurs are typically more financially motivated, eyeing new business opportunities and investments, and figuring out how to make them profitable without directly running operations.

Startup businesses can form in various ways as there’s room for innovations in just about any industry. Businesses such as Uber and Airbnb are startups that have generated new concepts and have grown tremendously in the technology and lifestyle sectors. Some other industries that often see startups include business-to-business services, consumer media, and consumer goods.

How Startups Work

Startups operate just as any other business, the difference being the added barrier of trying to introduce a new idea of a product or service to the market. Startup founders must be able to seek out opportunities, innovative solutions, and ultimately, investors, while minimizing the overall risk. They face the challenges of creating awareness and obtaining the funds necessary to grow the business.

Financing Options

To cover the startup costs, businesses must determine their funding options. Here are some common methods of raising funds:

  • Bootstrapping: Many startups are privately funded in the beginning. The owners or founders often invest in the business themselves and build it from scratch, a process commonly referred to as bootstrapping.
  • Family and friends: A common financing method is obtaining money from family and friends who are willing to invest in your business. In many cases, it might be best to consider this type of financing as a loan rather than a stake in your business.
  • Loans: Depending on the type of business, entrepreneurs may qualify for a grant or a business loan from the Small Business Administration (SBA) or other organizations.
  • Crowdfunding: Crowdfunding can help startups raise money without the hassle of transferring partial ownership; generally, those who donate funds receive early versions of products or exclusive rewards from the company.
  • Equity: Startups can give up a share of ownership, or equity, in exchange for startup capital. They must prove the worth of their business to investors, a challenging task that could pay off.

Make sure to accurately calculate your startup costs so you know how much you need when requesting funds. Consider all costs of running your business, including equipment, marketing, licenses, office space, research, and any other costs relevant to your business.

Types of Startups

Startups form their businesses with various goals and purposes, and may be categorized by their business structures, their industries, or their purposes. Business structures, or business entities, are established when businesses are formed to determine how the business operates, registration requirements, taxes, and legal protections. Depending on the number of owners and liability protection preferences, businesses can form by choosing one of several legal structures, including:

  • Sole proprietorship: Sole proprietorships don’t need to be registered and generally have one owner who is personally liable for costs.
  • Limited liability company (LLC): Whether single- or multi-member, LLCs give liability protection to owners and are treated as pass-through entities, meaning they don’t pay taxes on business income. Instead, the business income is reported on the owners’ personal income taxes.
  • Limited liability partnership (LLP): LLPs have multiple owners and give each owner liability protection.
  • Limited partnership (LP): LPs give an owner unlimited liability while other partners are protected with limited liability.
  • Corporation: A corporation works as a completely separate legal entity, but is generally the most expensive structure to form.

When choosing a business structure, it’s important to consider whether you’ll be seeking investors. Because limited liability also protects the assets of the investors, it’ll be easier to receive funding if you opt for a structure that offers limited liability protection.

Startups may also be categorized by purpose. Some simply aim to make a profit, while others intend to make a difference in their communities.

Small Business Startup

Small business startups are common forms of entrepreneurship. These are typically local-owned businesses such as restaurants or retailers that are aiming to profit but aren’t looking to expand into other locations or grow a franchise.

Scalable Startup

A scalable startup is a business that aims to expand much bigger than it first started off. Scalable startups believe their ideas can grow and have the drive to make the businesses succeed. These are commonly funded through venture capital and aim to eventually become publicly traded.

Social Entrepreneurship Startup

Social entrepreneurships have other goals besides profit. Their goal is to make a change or impact within the community. Many social entrepreneurships are nonprofits driven by specific missions. These startups may also use grants and sponsorships for funding.

Large Company Startup

Large company startups use innovative approaches to improve their companies. The aim is to expand a company’s already well-known brand through a new entity within that same company, such as a new product line.

Key Takeaways

  • A startup is a new business working to launch a new, innovative product or service and bring it to market.
  • Startups are often intertwined with entrepreneurship. However, startups are typically focused on innovation, hands-on work, and scaling for growth, while entrepreneurship can refer to all business ventures and is focused on profitability.
  • Startups can use a variety of funding options, including bootstrapping, crowdfunding, bank loans, and venture capital.
  • Depending on the purpose, startups can be categorized into several different types, including small business startups, scalable startups, social entrepreneurships, and large companies.