What is a 'Startup'

A startup is a company that is in the first stage of its operations. These companies are often initially bankrolled by their entrepreneurial founders as they attempt to capitalize on developing a product or service for which they believe there is a demand. Due to limited revenue or high costs, most of these small-scale operations are not sustainable in the long term without additional funding from venture capitalists.

BREAKING DOWN 'Startup'

In the late 1990s, the most common type of startup company was a dotcom. Venture capital was extremely easy to obtain during that time due to a frenzy among investors to speculate on the emergence of these new types of businesses. Unfortunately, most of these internet startups eventually went bust due to major oversights in their underlying business plans, such as a lack of sustainable revenue. However, there were a handful of internet startups that did survive when the dotcom bubble burst. Internet bookseller Amazon.com and internet auction portal eBay are examples of such companies.

Startups Legal Structure

Startups need to consider what legal structure best fits their entity. A sole proprietorship is suited for a founder who is also the key employee of a business. Partnerships are a viable legal structure for businesses that consist of several people who have joint ownership; they are typically straightforward to establish. Personal liability can be reduced by registering a startup as a limited liability company.

Considerations for Startups

Startups need to invest time and money into research. Market research helps determine the demand of a product or service. A startup requires a comprehensive business plan outlining mission statement, future visions and goals as well as management and marketing strategies.

Startups must decide whether their business is conducted online, in an office/home office or store; this depends on the product or service being offered. For example, a technology startup selling virtual reality hardware may need a physical storefront to give customers a face-to-face demonstration of the product's complex features.

Funding for Startups

Crowdfunding allows people who believe in a startup to contribute money via a crowdfunding platform. Startups often raise funds using venture capitalists. This is a group of professional investors that specialize funding startups. Silicon Valley in California is known for its strong venture capitalist community and is popular destination for startups.

Startups may use a small business loan to commence operations. Banks typically have several specialized options available for small businesses; a microloan is a low interest, short-term product, tailored for startups. To qualify, a detailed business plan is often required.

A startup may be funded using credit. A flawless credit history may allow for a line of credit to fund a startup. This option carries the most risk, particularly if the startup is unsuccessful.

RELATED TERMS
  1. Startup Capital

    Startup capital refers to the money that is required to start ...
  2. Diluted Founders

    A slang term often used by venture capitalists to describe the ...
  3. Venture Capital

    Money provided by investors to startup firms and small businesses ...
  4. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  5. Pledge Fund

    A special type of fund in which members of the fund work toward ...
  6. Venture Capital Funds

    An investment fund that manages money from investors seeking ...
Related Articles
  1. Small Business

    Investor Info for Internet-Based Tech Startups 

    With all the empty startup hype and vast number of options out there, how do you sift through the noise to find the best startups to consider for investment? Start here.
  2. Small Business

    5 Questions to Ask Before Investing in a Startup

    Investing in start-ups can be profitable but investors need to do their homework before diving in.
  3. Small Business

    Declining Venture Capital Offset by Digital Economy

    While the amount of venture capital may be on the decline this new trend certainly does not seem to present a problem for tech startups in today's growing digital economy.
  4. Small Business

    Germany Tech Startups: Keep Them On Your Radar

    Many German companies, which are eager to catch up with the rest of the world by entering the digital age, are investing in tech startups.
  5. Small Business

    The Risk And Rewards Of Investing In Startups (GOOG)

    Investing in startups is a very risky business but can reward investors greatly if and when they do pay off.
  6. Retirement

    Retirement Funds To Fund Startups

    Retired entrepreneurs who have "played it safe" and retirees who want to stretch their dollars are looking to invest here.
  7. Managing Wealth

    How Startup Ventures are Valued

    It’s difficult to value a company in its infancy, but it’s important to determine a startup’s worth, whether you’re a founder or an investor.
  8. Investing

    Will Tech Stocks Survive Higher Interest Rates? (AAPL, GOOG)

    Learn why large tech companies such as Apple and Google are likely to not be impacted by interest rate increases, but newer tech startups could have problems.
  9. Small Business

    Why Are Startups Going International?

    Expansion into international markets, if it occurs, is the final stage of a startup's evolution. Lately, though, the opposite has been happening; international expansion now occurs fairly early ...
  10. Small Business

    How Venture Capital Will Change in 2016

    Venture capitalists face a tech bubble on the horizon, along with an influx of new non-traditional investors via Wall Street and crowdfunding platforms.
RELATED FAQS
  1. What exactly is a startup?

    A startup is a young company that is just beginning to develop. Startups are usually small and initially financed and operated ... Read Answer >>
  2. How do venture capitalist investors view sustainable growth in a startup?

    Discover how venture capital investors view sustainable growth in a startup. Venture capitalists look to identify startups ... Read Answer >>
  3. How important is sustainable growth for the long-term future of a startup?

    Understand the importance of sustainable growth to the long-term future of a startup. Learn the benefits and drawbacks of ... Read Answer >>
  4. In the context of a startup, what is sustainable growth?

    Understand what sustainable growth means for a startup. Learn what a startup needs to do if its growth rate is above or below ... Read Answer >>
  5. What are examples of products and companies that rely on protective tariffs to survive?

    Discover the best way for a startup to have sustainable growth. Startups that fail burn too much cash and are unable to respond ... Read Answer >>
  6. How is venture capital different from other kinds of equity financing?

    Learn how venture capital equity financing differs from other funding options and what companies need to be aware of prior ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center