What is a startup and how to develop it into a successful business

Some create startups to make money, and some dream of changing the world with their idea. Trends figure out how to find what the market really needs

A startup in the usual sense is a new company or business that has been created recently. The most complete definition of this phenomenon has come from Steve Blank, an entrepreneur and professor at Stanford, Berkeley, and Imperial College. According to him, this “a temporary organization created to find a business model that is repeatable and scalable”.

This difference between a start-up and a company affects the nature and needs of both types of organizations.

Another entrepreneur, Eric Rice, invested in by the same Steve Blank, developed the “lean startup method,” which consists in finding a business model based on testable hypotheses, testing them, and analyzing the results. Startups that experiment quickly are more likely to succeed because they quickly gain insight into their future business model. Blank noted that it was most important to focus on “customer discovery” and “customer validation,” i.e., “product/market fit.”

How a startup differs from a small business

In addition to the fact that a startup does not have a ready-made business model, industry analysts highlight a number of other features of such a project:

• Novelty – sometimes startups do not even have a registered organizational form;
• Minimal start-up costs — start-ups may not have their own capital, and development takes place at the expense of third-party investments;
• Unique idea – a startup will be successful only if its idea has not been used before and at the same time will be useful for customers and profitable for investors;
• Rapid growth – a startup does not have time to build up, it needs to find an effective market promotion strategy as soon as possible.

Stages of development startups

Each startup goes through several stages before entering the market. However, in some cases, the author of the idea may deliberately skip several stages, if the situation allows. The main thing is to determine before the launch what will happen to the startup after it attracts investments. It could be going into a traditional business, selling it, or launching it on the stock market. Such information is especially important for potential investors to understand the risks and return on investment.

There are several main stages that a startup goes through:

• Problem/Solution Fit – confirmation of the problem and that the proposed product will solve it;
• Minimum Viable Product (MVP) – development of a working prototype with minimal functionality to solve a problem; release of the alpha version and testing of its shortcomings;
• Product / Market Fit – confirmation that the product has a sales market (closed beta version of the product);
• Scale – scaling the business model (open beta and release of the consumer version of the product);
• Maturity is the transition from startup to business.

How to find an idea for a startup?

Many startups fail because they are poorly copied ideas or do not meet real market needs.

There are several ways to help you choose the right solution for a startup:

• Be in trend. Read about market innovations and inventions, try to predict in which industry they can be applied;
• Become an expert. Being a market insider is always more profitable than entering it from outside. At the same time, you can combine knowledge in several industries at once in order to invent something at the intersection of technologies. For example, an employee of the investment bank Salomon Brothers, Michael Bloomberg, after his dismissal, decided to create his own financial agency Bloomberg. As a result, he became one of the richest and most powerful people in the world;
• Solve your problem. Come up with a solution that is not on the market, but which will make life easier for you personally. This is how Flickr photo hosting came about, as the development of the multiplayer online game “Game Neverending” needed somewhere to store images;
• Look for weak points. Being able to understand where other people are wasting their money and time sometimes helps to come up with a useful solution;
• Improve an existing one. A particularly successful way will be to work with those goods and services that are now causing negativity due to an unfinished interface or for other reasons. Richard Branson created Virgin Atlantic to overtake British Airways in terms of service, but went much further;
• Link unrelated. Startups work on this principle, which have found a successful combination of cheap goods and services and wealthy customers who need them. For example, the Odesk exchange helps companies find freelancers from the other side of the world;
• Copy with improvements. An unsuccessful clone will quickly fail, and a successful one, as practice shows, develops into an independent company and is no longer associated with its predecessor. So in our country, a start-up of printing on clothes UniFashion appeared, which borrowed the idea of ​​American student merchandise;
• Travel and experience. Cases of successful business from another country can work at home as well. American Howard Schultz spied on the idea of ​​coffee shops in Milan. That’s how Starbucks was born;
• Work with new markets. If you keep track of new products from companies, you can quickly offer additions and improvements for them. Bill Gates began to earn money by writing a BASIC interpreter for the first Altair 8800 home PC;
• Hang out with smart people. You can use other people’s ideas, and sometimes you need to. Many people cannot bring something worthwhile to life, but would like to delegate this function.

Investment in a startup

Investors usually either sell their shares in a successful startup or keep them for a stable passive income. The parties agree on the division of profits in advance. At the same time, the share of the investor sometimes makes up a large part of the income, and the share of the creator does not exceed 10%. In our country, 42% of founders retain a share in the company from 76%, 29% – from 51% to 75%. This is due to the fact that most of them raise their own capital or take out loans.

To find a good project for investment, an investor needs to do some serious work. It includes not only searching for and obtaining information about startups, but also the formation of one’s own image in the eyes of the authors of ideas.

Five steps to building the right investment strategy:

How to interest an investor

Before attracting investments, you need to determine for yourself the ultimate goal of financing and, depending on it, calculate the amount of investments, sources and timing of their receipt.

After that, you need to decide on investors. If it is not possible or not desirable to attract money from the inner circle, then it is necessary to draw up a list of suitable funds or business angels for the purposes of the project. Funds can be found in business media or specialized messenger channels. Investors can be contacted on LinkedIn, after preparing warm letters with the necessary information. You can also use acquaintances to achieve a personal meeting.

In personal communication with an investor, it is important to immediately interest him. This requires an attractive business plan, as well as a concise and visual presentation or pitch. Advantages over competitors and the uniqueness of your idea must be identified first. You also need to indicate clear material benefits and the expected result. For this, statistics based on the results of a prototype test or any other one that justifies the need for a given product or service are suitable.

Short pitch plan:

• description of the problem and its solution;
• project stage, metrics and achievements;
• business model;
• stages of development and what has already been done;
• market and competitors;
• command;
• investment proposal.

In order for the presentation to be successful, you need to learn how to speak the same language with the investor – briefly and succinctly. It is necessary to prepare for all possible objections on his part.

Where to look for money and what is funding

Startup authors seek funds on specialized platforms, forums, as well as in investment competitions and corporate accelerators. Some of them launch projects with capital already, but there are also startups without a budget.

A startup can offer investors several types of participation. It all depends on how independent the startup is and what the plans of its organizer for the future are.

A startup usually goes through several stages of financing:

• Pre-seed (pre-seed round)

The project exists at the idea level, and the development of the first prototype is just being prepared. As a rule, at this stage, a startup raises funds from his close circle – family and friends (FFF-investing). Or the author of the idea uses his own money, takes loans or credits (boostrapping).

• Seed (seed round)

The round is considered the most difficult and can last more than a year. At this stage, the business model is tested. If it is promising, then business angels and early-stage venture funds can support the project with money.

• Round A

A startup becomes a company with a working business model, team and clients. The company attracts direct investors.

• Round B

If the company has not yet started earning on its own, then it needs to continue to raise funds for scaling. At this stage, she will need several business angels or participating funds.

• IPO

The final stage of startup development. The company enters the stock market and begins the initial sale of shares. The list of potential investors expands dramatically, and the business receives a status that allows it to grow and develop further.

How to create a successful startup

About 90% of startups fail due to a bad business model, inefficient investment allocation, legal errors, or high competition.

To minimize the risks when organizing a startup, you need to follow the simple principles that businessman Steve Blank described:

• understand the problem and needs of the target audience of the product;
• explore the market;
• create your own solution using innovations or a new approach to organizing business processes;
• find a motivated and professional team;
• determine the way to implement the idea at the stage of testing and presentations to investors;
• do not wait for rapid success, act in accordance with the plan.

From startup to successful company

Here are some examples of successful startups that have been able to develop into a world-class company:

• Slack. The corporate messenger attracted $350 million at the creation stage.
• Uber. The taxi service has raised about $11,5 billion in 14 rounds from venture capitalists and private equity funds.
• Airbnb. The pre-IPO rental service raised $6,6 billion from 57 investors, including Andreessen Horowitz, Sequoia, Founders Fund, Silver Lake, Sixth Street, DST and other funds.
• Porch. Craftsman Recruitment Platform Raises Nearly $100M in Three Investment Rounds
• Pinterest. The image storage service has raised more than $1 billion in total.
• Whatsapp. The messenger received the first investment from the venture fund Sequoia Capital in the amount of $60 million.
• groupon. The coupon service raised $1 million from business angels Eric Lefkofsky and Brad Kewell.
• Alibaba. Japanese giant SoftBank has invested $20 million in the marketplace.
• Semiconductor Manufacturing International. The semiconductor maker raised $100 million from New Enterprise Associates.