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A startup or start-up is a company or project undertaken by an
entrepreneur Entrepreneurship is the creation or extraction of value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values than simply ...
to seek, develop, and validate a scalable
business model
business model
. While entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to become registered, startups refer to new businesses that intend to grow large beyond the solo founder. At the beginning, startups face high uncertainty and have high rates of failure, but a minority of them do go on to be successful and influential.Erin Griffith (2014)
Why startups fail, according to their founders
Fortune.com, 25 September 2014; accessed 27 October 2017
Some startups become
unicorns The unicorn is a legendary creature that has been described since Classical antiquity, antiquity as a beast with a single large, pointed, spiraling horn (anatomy), horn projecting from its forehead. The unicorn was depicted in ancient seals of ...
; that is privately held startup companies valued at over US$1 billion.


Actions

Startups typically begin by a founder (solo-founder) or co-founders who have a way to solve a problem. The founder of a startup will begin market validation by problem interview, solution interview, and building a
minimum viable product A minimum viable product (MVP) is a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development. A focus on releasing an MVP means that developers potentially avoid ...
(MVP), i.e. a
prototype A prototype is an early sample, model, or release of a product built to test a concept or process. It is a term used in a variety of contexts, including semantics Semantics (from grc, wikt:σημαντικός, σημαντικός ''sēma ...

prototype
, to develop and validate their business models. The startup process can take a long period of time (by some estimates, three years or longer), and hence sustaining effort is required. Over the long term, sustaining effort is especially challenging because of the high failure rates and uncertain outcomes. Having a business plan in place outlines what to do and how to plan and achieve an idea in the future. Typically, these plans outline the first 3 to 5 years of your business strategy.


Design principles

Models behind startups presenting as ventures are usually associated with
design scienceA concept of design science was introduced in 1957 by R. Buckminster Fuller who defined it as a systematic form of designing. He expanded on this concept in his ''World Design Science Decade'' proposal to the International Union of Architects in 1961 ...
. Design science uses design principles considered to be a coherent set of normative ideas and propositions to design and construct the company's backbone. For example, one of the initial design principles is "affordable loss".


Heuristics and biases in startup actions

Because of the lack of information, high uncertainty, the need to make decisions quickly, founders of startups use many
heuristic A heuristic (; ), or heuristic technique, is any approach to problem solving Problem solving consists of using generic or ad hoc Ad hoc is a List of Latin phrases, Latin phrase meaning literally 'to this'. In English, it generally signifi ...
s and exhibit
biases Bias is a disproportionate weight ''in favor of'' or ''against'' an idea or thing, usually in a way that is closed-minded, prejudicial, or unfair. Biases can be innate or learned. People may develop biases for or against an individual, a group, ...
in their startup actions. Biases and heuristics are parts of our cognitive toolboxes in the decision-making process. They help us decide quickly as possible under uncertainty but sometimes become erroneous and fallacious. Entrepreneurs often become overconfident about their startups and their influence on an outcome (case of ''the illusion of control''). Entrepreneurs tend to believe they have more degree of control over events, discounting the role of luck. Below are some of the most critical decision biases of entrepreneurs to start up a new business. #
Overconfidence Confidence is a state of being clear-headed either that a hypothesis or prediction is correct or that a chosen course of action is the best or most effective. Confidence comes from a Latin word 'fidere' which means "to trust"; therefore, having ...
: Perceive a subjective certainty higher than the objective accuracy. #
Illusion of controlThe illusion of control is the tendency for people to overestimate their ability to control events. It was named by U.S. psychologist Ellen Langer and is thought to influence gambling File:A photo of a gambling stand in Paris.jpg, A gambling stan ...
: Overemphasize how much skills, instead of chance, improve performance. # The law of small numbers: Reach conclusions about a larger population using a limited sample. #
Availability biasThe availability heuristic, also known as availability bias, is a mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method or decision. The availability heuristic A heuri ...
: Make judgments about the probability of events based on how easy it is to think of examples. #
Escalation of commitment Escalation of commitment is a human behavior pattern in which an individual or group facing increasingly negative outcomes from a decision, action, or investment nevertheless continues the behavior instead of altering course. The actor maintains ...
: Persist unduly with unsuccessful initiatives or courses of action. Startups use several action principles to generate evidence as quickly as possible to reduce the downside effect of decision biases such as an escalation of commitment, overconfidence, and the illusion of control.


Mentoring

Many entrepreneurs seek feedback from
mentors Mentorship is the influence, guidance, or direction given by a mentor. In an organizational setting, a mentor influences the personal and professional growth of a mentee. Most traditional mentorships involve having senior employees mentor more ...
in creating their startups. Mentors guide founders and impart entrepreneurial skills and may increase the self-efficacy of nascent entrepreneurs. Mentoring offers direction for entrepreneurs to enhance their knowledge of how to sustain their assets relating to their status and identity and strengthen their real-time skills.


Principles

There are many principles in creating a startup. Some of the principles are listed below.


Lean startup

Lean startup is a clear set of principles to create and design startups under limited resources and tremendous uncertainty to build their ventures more flexibly and at a lower cost. It is based on the idea that entrepreneurs can make their implicit assumptions about how their venture works explicit and empirically testing it. The empirical test is to de/validate these assumptions and to get an engaged understanding of the business model of the new ventures, and in doing so, the new ventures are created iteratively in a build–measure–learn loop. Hence, lean startup is a set of principles for entrepreneurial learning and business model design. More precisely, it is a set of design principles aimed for iteratively experiential learning under uncertainty in an engaged empirical manner. Typically, lean startup focuses on a few lean principles: * find a problem worth solving, then define a solution * engage early adopters for market validation * continually test with smaller, faster iterations * build a function, measure customer response, and verify/refute the idea * evidence-based decisions on when to "pivot" by changing your plan's course * maximize the efforts for speed, learning, and focus


Market validation

A key principle of startup is to validate the market need before providing a customer-centric product or service to avoid business ideas with weak demand. Market validation can be done in a number of ways, including surveys, cold calling, email responses, word of mouth or through sample research.


Design thinking

Design thinking is used to understand the customers' need in an engaged manner. Design thinking and customer development can be biased because they do not remove the risk of bias because the same biases will manifest themselves in the sources of information, the type of information sought, and the interpretation of that information. Encouraging people to “consider the opposite” of whatever decision they are about to make tends to reduce biases such as overconfidence, the
hindsight bias Hindsight bias, also known as the knew-it-all-along phenomenon or creeping determinism, is the common tendency for people to perceive past events as having been more predictable than they actually were. People often believe that after an event has ...

hindsight bias
, and anchoring (Larrick, 2004; Mussweiler, Strack, & Pfeiffer, 2000).


Decision-making under uncertainty

In startups, many decisions are made under uncertainty, and hence a key principle for startups is to be agile and flexible. Founders can embed options to design startups in flexible manners, so that the startups can change easily in future. Uncertainty can vary within-person (I feel more uncertain this year than last year) and between-person (he feels more uncertain than she does). A study found that when entrepreneurs feel more uncertain, they identify more opportunities (within-person difference), but entrepreneurs who perceive more uncertainties than others do not identify more opportunities than others do (no between-person difference).


Partnering

Startups may form partnerships with other firms to enable their business model to operate. To become attractive to other businesses, startups need to align their internal features, such as management style and products with the market situation. In their 2013 study, Kask and Linton develop two ideal profiles, or also known as configurations or archetypes, for startups that are commercializing inventions. The ''inheritor'' profile calls for a management style that is not too entrepreneurial (more conservative) and the startup should have an incremental invention (building on a previous standard). This profile is set out to be more successful (in finding a business partner) in a market that has a dominant design (a clear standard is applied in this market). In contrast to this profile is the ''originator'' which has a management style that is highly entrepreneurial and in which a radical invention or a
disruptive innovation In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business ...
(totally new standard) is being developed. This profile is set out to be more successful (in finding a business partner) in a market that does not have a dominant design (established standard). New startups should align themselves to one of the profiles when commercializing an invention to be able to find and be attractive to a business partner. By finding a business partner, a startup has greater chances of becoming successful. Startups usually need many different partners to realize their business idea. The commercialization process is often a bumpy road with iterations and new insights during the process. Hasche and Linton (2018) argue that startups can learn from their relationships with other firms, and even if the relationship ends, the startup will have gained valuable knowledge about how it should move on going forward. When a relationship is failing for a startup it needs to make changes. Three types of changes can be identified according to Hasche and Linton (2018): * Change of business concept for the start up * Change of collaboration constellation (change several relationships) * Change of characteristic of business relationship (with the partner, e.g. from a transactional relationship to more of a collaborative type of relationship)


Entrepreneurial learning

Startups need to learn at a huge speed before running out of resources. Proactive actions (experimentation, searching, etc.) enhance a founder's learning to start a company. To learn effectively, founders often formulate
falsifiable In the philosophy of science, a theory is falsifiable if it is contradicted by ''possible observations''—i.e., by any observations that can be described in the language of the theory, which must have a conventional empirical interpretation. ...
hypotheses A hypothesis (plural hypotheses) is a proposed explanation for a phenomenon. For a hypothesis to be a scientific hypothesis, the scientific method requires that one can testable, test it. Scientists generally base scientific hypotheses on prev ...
, build a minimum viable product (MVP), and conduct
A/B testing A/B testing (also known as bucket testing or split-run testing) is a user experience research methodology. A/B tests consist of a randomized experiment with two variants, A and B. It includes application of statistical hypothesis testing or " tw ...
.


Business Model Design

With the key learnings from market validation, design thinking, and lean startup, founders can design a business model. However it's important not to dive into business models too early before there is sufficient learning on market validation. Paul Graham said "What I tell founders is not to sweat the business model too much at first. The most important task at first is to build something people want. If you don’t do that, it won’t matter how clever your business model is."


Founders/entrepreneurs

Founders or co-founders are people involved in the initial launch of startup companies. Anyone can be a co-founder, and an existing company can also be a co-founder, but the most common co-founders are founder-CEOs,
engineer Engineers, as practitioners of engineering Engineering is the use of scientific method, scientific principles to design and build machines, structures, and other items, including bridges, tunnels, roads, vehicles, and buildings. The dis ...

engineer
s,
hacker A hacker is a person skilled in information technology who uses their technical knowledge to achieve a goal or overcome an obstacle, within a computerized system by non-standard means. Though the term ''hacker'' has become associated in popula ...

hacker
s,
web developer Web Developer is an Mozilla extension, extension for Mozilla-based web browsers that adds editing and debugging tools for web developers. It has been tested to be compatible with Firefox, Flock (web browser), Flock, and SeaMonkey, Seamonkey. The e ...
s,
web designer Web design encompasses many different skills and disciplines in the production and maintenance of websites. The different areas of web design include web graphic design; user interface design (UI design); authoring, including standardised code and ...
s and others involved in the ground level of a new, often
venture Venture may refer to: Arts and entertainment Music *The Ventures, an American instrumental rock band formed in 1958 *"A Venture", 1971 song by the band Yes (band), Yes *''Venture'', a 2010 EP by AJR (band), AJR Games *Venture (video game), ...
. The founder that is responsible for the overall strategy of the startup plays the role of founder-CEOs, much like CEOs in established firms. Startup studios provide an opportunity for founders and team members to grow along with the business they help to build. In order to create forward momentum, founders must ensure that they provide opportunities for their team members to grow and evolve within the company. The language of
securities regulation in the United States Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies, ...
considers co-founders to be "promoters" under Regulation D. The
U.S. Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is a large independent agency of the United States federal government that was created following the stock market crash in the 1930s to protect investors and the national banking system. The pr ...
definition of "Promoter" includes: (i) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; However, not every promoter is a co-founder. In fact, there is no formal, legal definition of what makes somebody a co-founder. The right to call oneself a co-founder can be established through an agreement with one's fellow co-founders or with permission of the board of directors, investors, or shareholders of a startup company. When there is no definitive agreement (like
shareholders' agreement A shareholders' agreement (sometimes referred to in the U.S. as a stockholders' agreement) (SHA) is an agreement amongst the shareholder A shareholder (also known as stockholder) is an individual or institution (including a corporation) that legal ...
), disputes about who the co-founders are, can arise.


Self-efficacy

Self-efficacy refers to the confidence an individual has to create a new business or startup. It has a strong relation with startup actions. Entrepreneurs' sense of self-efficacy can play a major role in how they approach goals, tasks, and challenges. Entrepreneurs with high self-efficacy—that is, those who believe they can perform well—are more likely to view difficult tasks as something to be mastered rather than something to be avoided. Building a startup is like a test match cricket. But execution should be like a T20 cricket match.


Stress

Entrepreneurs often feel stressed. They have internal and external pressures. Internally, they need to meet deadlines to develop the prototypes and get the product or service ready for market. Externally they are expected to meet milestones of investors and other stakeholders to ensure continued resources from them on the startups. Coping with stress is critical to entrepreneurs because of the stressful nature of start up a new firm under uncertainty. Coping with stress unsuccessfully could lead to emotional exhaustion, and the founders may close or exit the startups.


Emotional exhaustion

Sustaining effort is required as the startup process can take a long period of time, by one estimate, three years or longer (Carter et al., 1996; Reynolds & Miller, 1992). Sustaining effort over the long term is especially challenging because of the high failure rates and uncertain outcomes.


Founder identity and culture

Some startup founders have a more casual or offbeat attitude in their dress, office space and
marketing Marketing is the process of intentionally stimulating demand for and purchases of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emphasize in advertising; operation of adve ...

marketing
, as compared to executives in established corporations. For example, startup founders in the 2010s may wear
hoodie A hoodie (in some cases it is also spelled hoody and alternatively known as a hooded sweatshirt) is a sweatshirt with a Hood (headgear), hood. Hoodies often include a Muff (handwarmer), muff sewn onto the lower front, and (usually) a drawstri ...

hoodie
s,
sneakers Sneakers (also called trainers, athletic shoes, tennis shoes, gym shoes, kicks, sport shoes, flats, running shoes, skate shoes, or runners) are shoe A shoe is an item of footwear intended to protect and comfort the human foot. Shoes are ...

sneakers
and other casual clothes to business meetings. Their offices may have recreational facilities in them, such as pool tables, ping pong tables, football tables and
pinball machine Pinball is a type of arcade game An arcade game or coin-op game is a coin-operated entertainment machine typically installed in public businesses such as restaurants, bars and amusement arcades. Most arcade games are presented as primarily ...
s, which are used to create a fun work environment, stimulate team development and team spirit, and encourage creativity. Some of the casual approaches, such as the use of "flat" organizational structures, in which regular employees can talk with the founders and chief executive officers informally, are done to promote efficiency in the workplace, which is needed to get their business off the ground. In a 1960 study,
Douglas McGregor Douglas Murray McGregor (September 1906 – 1 October 1964) was an American management Management (or managing) is the administration of an organization, whether it is a business, a not-for-profit organization, or government body. Managemen ...
stressed that punishments and rewards for uniformity in the workplace are not necessary because some people are born with the motivation to work without incentives. Some startups do not use a strict command and control hierarchical structure, with executives, managers, supervisors and employees. Some startups offer employees incentives such as
stock option In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...
s, to increase their "buy in" from the start up (as these employees stand to gain if the company does well). This removal of stressors allows the workers and researchers in the startup to focus less on the work environment around them, and more on achieving the task at hand, giving them the potential to achieve something great for both themselves and their company.


Failure

The failure rate of startup companies is very high. A 2014 article in ''
Fortune Fortune may refer to: General * Fortuna or Fortune, the Roman goddess of luck * Luck, a chance happening, or that which happens beyond a person's controls * Wealth, an abundance of items of economic value * Fortune, a prediction made in fortune-te ...
'' estimated that 90% of startups ultimately fail. In a sample of 101 unsuccessful startups, the top five factors in failure were lack of consumer interest in the product or service (42% of failures); funding or cash problems (29%); personnel or staffing problems (23%); competition from rival companies (19%); and problems with pricing of the product or service (18%); more than one factor can be cited as a cause for failure so these numbers add up to more than 100%. In cases of funding problems it can leave employees without paychecks. Sometimes these companies are purchased by other companies if they are deemed to be viable, but oftentimes they leave employees with very little recourse to recoup lost income for worked time. More than one-third of founders believe that running out of money led to failure. Second to that, founders attribute their failure to a lack of financing or investor interest. These common mistakes and missteps that happen early in the startup journey can result in failure, but there are precautions entrepreneurs can take to help mitigate risk. For example, startup studios offer a buffer against many of the obstacles that solo entrepreneurs face, such as funding and insufficient team structure, making them a good resource for startups in their earliest phases.


Re-starters

Failed entrepreneurs, or restarters, who after some time restart in the same sector with more or less the same activities, have an increased chance of becoming a better entrepreneur. However, some studies indicate that restarters are more heavily discouraged in Europe than in the US.


Training

Many institutions and universities provide training on startups. In the context of universities, some of the courses are entrepreneurship courses that also deal with the topic of startups, while other courses are specifically dedicated to startups. Startup courses are found both in traditional economic or business disciplines as well as the side of information technology disciplines. As startups are often focused on software, they are also occasionally taught while focusing on software development alongside the business aspects of a startup.Chanin, R., Sales, A., Pompermaier, L., and Prikladnicki, R. (2018). Startup software development education: a systematic mapping study. In proceedings of the 40th International Conference on Software Engineering (ICSE ’18), pp. 143-144. ''“The best way of learning about anything is by doing.” – Richard Branson'' Founders go through a lot to set up a startup. A startup requires patience and resilience, and training programs need to have both the business components and the psychological components. Entrepreneurship education is effective in increasing the entrepreneurial attitudes and perceived behavioral control, helping people and their businesses grow. Most of startup training falls into the mode of experiential learning (Cooper et al., 2004; Pittaway and Cope, 2007), in which students are exposed to a large extent to a real-life entrepreneurship context as new venture teams (Wu et al., 2009). An example of group-based experiential startup training is the Lean LaunchPad initiative that applies the principles of customer development (Blank and Dorf, 2012) and Lean Startup (Ries, 2011) to technology-based startup projects. As startups are typically thought to operate under a notable lack of resources, have little or no operating history, and to consist of individuals with little practical experience, it is possible to simulate startups in a classroom setting with reasonable accuracy. In fact, it is not uncommon for students to actually participate in real startups during and after their studies. Similarly, university courses teaching software startup themes often have students found mock-up startups during the courses and encourage them to make them into real startups should they wish to do so. Such mock-up startups, however, may not be enough to accurately simulate real-world startup practice if the challenges typically faced by startups (e.g. lack of funding to keep operating) are not present in the course setting. To date, much of the entrepreneurship training is yet personalized to match the participants and the training.


Ecosystem

The size and maturity of the startup ecosystem is where a startup is launched and where it grows to have an effect on the volume and success of the startups. The startup ecosystem consists of the individuals (entrepreneurs, venture capitalists,
angel investors An angel investor (also known as a business angel, informal investor, angel funder, private investor, or seed investor) is an individual who provides capital for a business Startup company, start-up, usually in exchange for convertible debt or owne ...
, mentors, advisors); institutions and organizations (top research universities and institutes, business schools and entrepreneurship programs and centres operated by universities and colleges, non-profit entrepreneurship support organizations, government entrepreneurship programs and services, Chambers of commerce) business incubators and business accelerators and top-performing entrepreneurial firms and startups. A region with all of these elements is considered to be a "strong" startup ecosystem. One of the most famous startup ecosystems is
Silicon Valley Silicon Valley is a region in Northern California Northern California (colloquially known as NorCal) is a geographic and cultural region that generally comprises the northern portion of the U.S. state of California. Spanning the state's nort ...

Silicon Valley
in California, where major computer and internet firms and top universities such as
Stanford University Stanford University, officially Leland Stanford Junior University, is a Private university, private research university in Stanford, California. The campus occupies , among the largest in the United States, and enrolls over 17,000 students. Stan ...

Stanford University
create a stimulating startup environment.
Boston Boston (, ), officially the City of Boston, is the capital city, capital and List of municipalities in Massachusetts, most populous city of the Commonwealth (U.S. state), Commonwealth of Massachusetts in the United States and 21st List of Unite ...

Boston
(where
Massachusetts Institute of Technology Massachusetts Institute of Technology (MIT) is a private land-grant research university in Cambridge, Massachusetts Cambridge ( ) is a city in Middlesex County, Massachusetts, Middlesex County, Massachusetts, and part of the Greater Bos ...
is located) and
Berlin Berlin ( , ) is the Capital city, capital and List of cities in Germany by population, largest city of Germany by both area and population. Its 3.7 million inhabitants make it the European Union's List of cities in the European Union by populat ...

Berlin
, home of
WISTA The WISTA Science and Technology Park in Berlin-Adlershof was founded in 1991 after the dissolution of the Academy of Sciences of the German Democratic Republic at the same place. Today it covers an area of making it the largest science park i ...
(a top research area), also have numerous Economy of Berlin#Creative industries, creative industries, leading entrepreneurs and startup firms. Basically, attempts are being made worldwide, for example in Israel with its Silicon Wadi, in France with the Inovallée or in Italy in Trieste with the AREA Science Park, to network basic research, universities and technology parks in order to create a startup-friendly ecosystem. Although there are startups created in all types of businesses, and all over the world, some locations and business sectors are particularly associated with startup companies. The internet bubble of the late 1990s was associated with huge numbers of internet startup companies, some selling the technology to provide internet access, others using the internet to provide services. Most of this startup activity was located in the most well-known startup ecosystem -
Silicon Valley Silicon Valley is a region in Northern California Northern California (colloquially known as NorCal) is a geographic and cultural region that generally comprises the northern portion of the U.S. state of California. Spanning the state's nort ...

Silicon Valley
, an area of northern California renowned for the high level of startup company activity: Startup advocates are also trying to build a community of tech startups in New York City with organizations like NY Tech Meet Up and Built in NYC. In the early 2000s, the patent assets of failed startup companies were being purchased by people known as patent trolls, who assert those patents against companies that might be infringing the technology covered by the patents.


Investing

Startup investing is the action of making an investment in an early-stage company. Beyond founders' own contributions, some startups raise additional investment at some or several stages of their growth. Not all startups trying to raise investments are successful in their fundraising. In the United States, the solicitation of funds became easier for startups as result of the JOBS Act. Prior to the advent of equity crowdfunding, a form of online investing that has been legalized in several nations, startups did not advertise themselves to the general public as investment opportunities until and unless they first obtained approval from regulators for an initial public offering (IPO) that typically involved a listing of the startup's securities on a stock exchange. Today, there are many alternative forms of IPO commonly employed by startups and startup promoters that do not include an exchange listing, so they may avoid certain regulatory compliance obligations, including mandatory periodic disclosures of financial information and factual Financial statement#Management discussion and analysis, discussion of business conditions by management that investors and potential investors routinely receive from registered public companies. Investors are generally most attracted to those new companies distinguished by their strong co-founding team, a balanced "risk/reward" profile (in which high risk due to the untested, disruptive innovations is balanced out by high potential returns) and "scalability" (the likelihood that a startup can expand its operations by serving more markets or more customers). Attractive startups generally have lower "bootstrapping" (self-funding of startups by the founders) costs, higher risk, and higher potential return on investment. Successful startups are typically more scalable than an established business, in the sense that the startup has the potential to grow rapidly with a limited investment of capital, labor or land. Timing has often been the single most important factor for biggest startup successes, while at the same time it's identified to be one of the hardest things to master by many serial entrepreneurs and investors. Startups have several options for funding. Revenue-based financing lenders can help startup companies by providing non-dilutive growth capital in exchange for a percentage of monthly revenue. Venture capital firms and angel investors may help startup companies begin operations, exchanging seed money for an Stock, equity stake in the firm. Venture capitalists and angel investors provide financing to a range of startups (a portfolio), with the expectation that a very small number of the startups will become viable and make money. In practice though, many startups are initially funded by the founders themselves using "bootstrapping", in which loans or monetary gifts from friends and family are combined with savings and credit card debt to finance the venture. Factoring (finance), Factoring is another option, though it is not unique to startups. Other funding opportunities include various forms of crowdfunding, for example equity crowdfunding, in which the startup seeks funding from a large number of individuals, typically by pitching their idea on the Internet. Startups can receive funding via more involved stakeholders, such as startup studios. Startup studios provide funding to support the business through a successful launch, but they also provide extensive operational support, such as HR, finance and accounting, marketing, and product development, to increase the probability of success and propel growth.


Necessity of funding

While some (would-be) entrepreneurs believe that they can't start a company without funding from VC, Angel, etc. that is not the case. In fact, many entrepreneurs have founded successful businesses for almost no capital, including the founders of Mailchimp, MailChimp, Shopify, and Shutterstock, ShutterStock.


Valuations

If a company's value is based on its technology, it is often equally important for the business owners to obtain intellectual property protection for their idea. The newsmagazine ''The Economist'' estimated that up to 75% of the value of US public companies is now based on their intellectual property (up from 40% in 1980). Often, 100% of a small startup company's value is based on its intellectual property. As such, it is important for technology-oriented startup companies to develop a sound strategy for protecting their intellectual capital as early as possible. Startup companies, particularly those associated with new technology, sometimes produce huge returns to their creators and investors—a recent example of such is Google, whose creators became billionaires through their stock ownership and options.


Investing rounds

When investing in a startup, there are different types of stages in which the investor can participate. The first round is called seed round. The seed round generally is when the startup is still in the very early phase of execution when their product is still in the prototype phase. At this level angel investors will be the ones participating. The next round is called Series A round, Series A. At this point the company already has traction and may be making revenue. In Series A rounds venture capital firms will be participating alongside angels or super angel investors. The next rounds are Series B, C, and D. These three rounds are the ones leading towards the IPO. Venture capital firms and private equity firms will be participating.


History of startup investing

After the Great Depression, which was blamed in part on a rise in speculative investments in unregulated small companies, startup investing was primarily a word of mouth activity reserved for the friends and family of a startup's co-founders, business angels, and Venture Capital funds. In the United States, this has been the case ever since the implementation of the Securities Act of 1933. Many nations implemented similar legislation to prohibit general solicitation and general advertising of unregistered securities, including shares offered by startup companies. In 2005, a new Accelerator investment model was introduced by Y Combinator (company), Y Combinator that combined fixed terms investment model with fixed period intense bootcamp style training program, to streamline the seed/early-stage investment process with training to be more systematic. Following Y Combinator, many accelerators with similar models have emerged around the world. The accelerator model has since become very common and widely spread and they are key organizations of any Startup ecosystem. Title II of the Jumpstart Our Business Startups Act (JOBS Act), first implemented on 23 September 2013, granted startups in and startup co-founders or promoters in US. the right to generally solicit and advertise publicly using any method of communication on the condition that only accredited investors are allowed to purchase the securities. However the regulations affecting equity crowdfunding in different countries vary a lot with different levels and models of freedom and restrictions. In many countries there are no limitations restricting general public from investing to startups, while there can still be other types of restrictions in place, like limiting the amount that companies can seek from investors. Due to positive development and growth of crowdfunding, many countries are actively updating their regulation in regards to crowdfunding.


Investing online

The first known investment-based crowdfunding platform for startups was launched in Feb. 2010 by Grow VC, followed by the first US. based company ProFounder launching model for startups to raise investments directly on the site, but ProFounder later decided to shut down its business due regulatory reasons preventing them from continuing, having launched their model for US. markets prior to JOBS Act. With the positive progress of the JOBS Act for crowd investing in US., equity crowdfunding platforms like SeedInvest and CircleUp started to emerge in 2011 and platforms such as investiere, Companisto and Seedrs in Europe and OurCrowd in Israel. The idea of these platforms is to streamline the process and resolve the two main points that were taking place in the market. The first problem was for startups to be able to access capital and to decrease the amount of time that it takes to close a round of financing. The second problem was intended to increase the amount of deal flow for the investor and to also centralize the process.


Internal startups

Internal startups are a form of corporate entrepreneurship. Large or well-established companies often try to promote innovation by setting up "internal startups", new business divisions that operate at arm's length from the rest of the company. Examples include Bell Labs, a research unit within the Bell System and Target Corporation (which began as an internal startup of the Dayton's department store chain) and threedegrees, a product developed by an internal startup of Microsoft. To accommodate startups internally, companies, such as Google has made strides to make purchased startups and their workers feel at home in their offices, even letting them bring their dogs to work.


Unicorns

Some startups become big and they become unicorns, i.e. privately held startup companies Valuation (finance), valued at over US$1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures. According to ''TechCrunch'', there were 452 unicorns as of May 2019, and most of the unicorns are in the USA, followed by China. The unicorns are concentrated in a few countries. The unicorn leaders are the U.S. with 196 companies, China with 165, India with 65 and the U.K. with 16. The largest unicorns included Ant Financial, ByteDance, DiDi, Uber, Xiaomi, and Airbnb. When the value of a company is over US$10 billion, the company will be called as a Decacorn. When the company is valued over US$100 billion, Hectocorn will be used.


See also

* Business incubator * Business plan * Deep tech * Innovation * Liquidity event * Platform cooperative * Small business * Unicorn bubble *Brand management


References

{{DEFAULTSORT:Startup Company Entrepreneurship Private equity Types of business entity Business incubators