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 a 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. Death Valley Curve

    The death valley curve is a phrase that refers to the time from ...
  2. Value Network

    The connections among individuals or organizations that benefit ...
  3. Drive-By Deal

    A drive-by deal is slang referring to a deal in which a venture ...
  4. Incubator Firm

    An incubator firm is an organization that fosters early-stage ...
  5. Drip Feed

    A drip feed is the process of slowly advancing funds or capital ...
  6. Series B Financing

    Series B financing is the second round of financing for a business ...
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

    Angel Investing vs. Crowdfunding: How to Raise Money for Your Startup?

    Angel investing and crowdfunding are two very different options startups can use to get the funding they need.
  3. Small Business

    Europe Startups' Surge Is Aided By Silicon Valley

    Spotify, valued at $8 billion, shows that European startups can become major players
  4. Small Business

    Startups: Tech Giants' Next M&A Targets? (AAPL, GOOGL)

    Watch for large-cap tech sector companies to announce acquisitions of startups, as valuations for unicorns and other overvalued startups continue to decline.
  5. Tech

    Why Tech Startups are Taking Sweden by Storm

    Investors searching for the ideal place to funnel their venture capital might be surprised to find that Sweden is home to a strong tech startup community.
  6. 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.
  7. Small Business

    VC Funding for Tech Startups is Slowing: Here's Why

    Two reports released last week provide further proof that the VC funding market for startups is slowing down.
  8. Insights

    Is Venture Capital Slowing in the U.S.?

    Venture capitalists are more selective in 2016, turning away from U.S. startups in an era of big business and slow growth prospects.
  9. Small Business

    Looking To Invest In U.S Start-Ups? Better Try...

    A surge in investment in tech startups in Asia is driving incredible expansion and innovation on the continent, which is becoming a new tech frontier.
RELATED FAQS
  1. What type of funding options are available to a private company?

    Understand how private companies can obtain financing for startup, growth or expansion projects, and learn how this differs ... Read Answer >>
Trading Center