What Exactly is a Start-up ?
A start-up is sometimes misrepresented as a new small business, but both are characterised by major differences.
it’s not easy to launch a small business, but it’s much more difficult to launch a start-up.
While a small business tends to start raising cash fast, start-ups will go through several fundraising and investment stages. Start-ups concentrate on developing a whole new market or transforming an industry and acquiring market share rather than making a profit for the first few years.
What is a Start-up ?
A start-up is a business which is in its first stage of operations.
These companies are often originally bankrolled by ambitious investors as they seek to focus on creating a product or service they feel there is a market for. Most of these small-scale projects are not viable in the long run without external financing from venture investors due to minimal sales or high costs.
The Key Differences Between a Start-up and a Small Business
Firstly, the main distinction between these two forms of businesses is their goals.
Profits and predictable long-term value drives small businesses, while start-ups rely on top-end sales and growth opportunities. A start-up is often financed differently: While both a start-up and a small business are likely to launch with investments from the founder, friends and family support, or a bank loan, if a start-up is profitable, it will gain further investment from institutional investors, venture capitalists, and ultimately an initial public offering (IPO).
After these series of funding, the ownership of the start-up diversifies as the founder’s equity diminishes.
Eventually a start-up can cease to exist as an independent entity following a merger or acquisition. For a small business owner, surrendering ownership would negate the intent of operating their own business; however, this process is necessary for a start-up to grow.
Is a Start-up Business Right for You?
Given the increase of start-up incubators and accelerators, the availability of financing for early-stage start-ups, and the fact that big business is buying start-ups everywhere, rather than relying on in-house growth, you may want to explore launching a start-up instead of a conventional business.
Here are some signs that a start-up might be the right type of business for you:
You like working hard and then moving on
If you know that you get bored easily or want to see a lot of your ideas come to fruition, a start-up might be a better approach. This means of course you need staying power and the motivation to work your butt off.
Your start-up will have a five-year lifetime, so it’s going to be up to you to make it work and make it work fast.
Your product or service has a massive audience
That is part of why tech start-ups are the most common form of start-ups.
It’s easy to access millions of customers on the internet, no matter where they live or where they do business. So, if you have a product or service that is guaranteed to attract huge attention, you may do well launching a start-up rather than a regular business.
You are an innovator
The ‘idea’ is everything in the world of start-up ventures, as is rapid innovation. Today, many businesses have stopped innovating internally and instead have invested millions, even billions in purchasing start-ups that now do new things for them. That’s why several start-up investors are launching start-ups with exit plans based on a buy-out.
When you’re an innovator, a start-up is the best alternative.
When is a Business no Longer a Start-up?
Google, Twitter, LinkedIn. All these immensely popular companies have become household names. Such companies, once start-ups, have long ago outgrown their ’emerging business’ name.
Although there is no golden rule to decide whether a start-up should be considered to have been a traditional corporation, there are many indicators that may give an indicator that the business has achieved, or is on the verge of completing this move.If:
- It goes public
- it is seen by other firms as an influence, and continues to have rivals on the market.
- Employees are no longer expected to operate more than eight hours a day.
- Employee leave will not impact the business’s service.
- It is no longer an individual entity, but has been combined with or purchased by another business.
Finance is always the first obstacle business owners need to cross.
The good news is that start-ups don’t have to focus on traditional sources like banks to raise funds.
Here are a number of other ways to gain financing for the start-up idea:
Crowdfunding is a way to collect funds by getting a large number of individuals to contribute a limited sum of money each time.
Crowdfunding has different types: equity, donation and debt.
Equity crowdfunding is when people invest in your business in return for shares or a stake in your business.
Donation crowdfunding is when people contribute money to your business solely because they believe in what you’re doing – in return they want nothing.
Debt crowdfunding is when people are lending you money with the expectation of receiving interest on their money back.
Most start-ups resort to friends and relatives to help finance their next business. Once you sign any contractual deal with them, make sure you write down everything and obtain legal counsel if necessary – particularly if the sum lent reaches £100,000.
A clear deal between the parties would eliminate any further problems down the track. Do not take your loved ones for granted – treat them like you should any organised business partner by providing them with a detailed project strategy and financial outlook for the next six to twelve months.
You will also clarify if your family member or relative may have any financial obligations for the operation of your business.
This is where an investor makes use of their personal discretionary finance to provide equity financing to a business. The investor would usually take shares in the business in return.
An angel investor will usually take an active interest in your business to see a good return on their investment, and with their expertise and experience will support you. Angel investors expect their investment to return within three to eight years.
The UK government aims to boost the UK economy by offering loans through its Start-up Loans scheme to aspiring entrepreneurs to start and run their businesses.
The loan average is £6,000, but you can apply for up to £25,000, and it needs to be repaid within five years, at an interest rate of 6% a year.
Sir Richard Branson also funds small companies with Virgin Start-up – providing loans at an estimated valuation of £5,000, to be repaid at an interest rate of 6.17% over three to five years.
GrantsThe government puts out a percentage of taxpayers’ funds to invest on corporate incentives and supporting small businesses each year. The money is allocated by the national and local agencies to which you apply, and which then decide if you are eligible for support.
Start-up Statistics in the UK
- 64& of the UK population wants to set up a company
- 83% of 18 to 24-year-olds dream of running their own businesses
- Yorkshire, West Midlands and London are UK aspiring entrepreneurial hubs
- Men are much more optimistic than women that they can start a business.
Start-up Statistics in the USA
- Just 6% of U.S. entrepreneurs believe organic growth is the next source of funding for their venture.
- Incompetence at 46%, according to a recent Brain Report, is the most common explanation why companies struggle.
- San Francisco and Silicon Valley constitute 13.5% of global start-ups.
- In 2019, 50% of U.S. start-ups stated that they are worried about trade policies between the U.S. and China.
- 58% of the companies surveyed started with less than $25,000 and one-third started with less than $5,000.
- More than 80% of U.S. companies say they’re planning to recruit staff by 2019.
A start-up is usually a company in its early stages of growth. Usually these entrepreneurial projects are launched by 1-3 entrepreneurs who concentrate on capitalising on perceived consumer demand by creating a viable product, service, or platform.
If your business is no longer searching for fairly large investment amounts from venture capital firms and you are no longer investing your personal resources to remain alive, you probably have outgrown the designation of the start-up. Plus, if you have a workforce of more than 30, it is no longer a start-up.
A little over half of all start-ups successfully survive their fourth year, although the four-year start-up failure rate is about 44%.
In general, the drawbacks of working in a software start-up, like any company, are linked to short-term risks. Pay is usually not as good early, benefits are reduced before more workers are in place, and the work-life balance can be tenuous. To those who work at start-ups it is not just a job; it is more of a mission.
According to recent reports, people 35 or older are more likely to start a successful company than their younger counterparts. You could be in a position to self-finance your business by the mid-thirties, which means greater flexibility and reduced debt.