what is a startup

How does a startup work? Everything you need to know

There has been a lot of talk about startups for years, but what is a startup and how does it work? Sometimes an innovative company is confused with a startup, but there are many elements that differentiate them, such as the phases they go through in their life cycle or the way they approach their growth.

An online business with an innovative, scalable and innovative proposal that, in addition, is financed by investors who drive its expansion in the market, will indeed be a startup. But to know for sure how a startup works, here is a brief guide with the main points to understand perfectly how a startup works.

What is a startup?

There are many definitions for so-called "startups", but not all of them fit what the term startup really means. This term is given to almost any young company without taking into account whether they meet the characteristics that define them. And, although it is true that it is a somewhat difficult concept, a startup can be defined broadly as a small or medium-sized company that markets products or services based on technology. It should be noted that technology has to be an intrinsic characteristic of a startup, i.e., it is not enough to make use of it to sell online. It has to be the basis of your business.

Its etymology refers to the verb "start" (to begin) and the adverb "up" (up). Thus, the syntagm "start up" shows a business that is newly created (start) and that will have a high impact (up). It began to be used in Silicon Valley in the early 1950s to refer to emerging companies.

These types of companies emerge to respond to a market need with a unique, impactful, digital and innovative proposal. They play a key role in the entrepreneurial ecosystem, as they are exposed to high chances of success, but also of risk. Their way of sustaining themselves is through funding from external investors, thanks to which the survival of the startup is guaranteed.

There are entrepreneurial communities all over the world, especially those in Silicon Valley (USA). In Europe there are some of the best cities in the world to set up a startup, including Berlin, Helsinki and Stockholm. Spain has positioned itself as one of the countries with the highest number of startups in Europe, with the cities of Madrid, Barcelona and Valencia taking prominence.

Characteristics of a startup

Sometimes, differentiating a startup from another type of emerging digital company is blurred by the confusion of the term. What differentiates a startup from another type of company is its ability to adapt to the environment and its growth potential. But understanding what a startup is is easier when you can see if the following characteristics are met.

Digital

As a general rule, a startup is defined as a company with a strong technological component, without which its raison d'être would be meaningless. It not only uses the Internet to function, but also relies on it to function.

A startup is synonymous with digital, so normally without the internet they would not be able to offer their services or sell their products. Their activity is 100% digitized to offer a shopping experience and, sometimes consumption, online.

Scalable

Your goal is to grow as fast as possible, and to do so, your processes must work whatever your size. This means that from the very beginning, they are designed for this purpose: to offer their products and services to more and more customers. In addition, their start-up operating costs are lower than those of other traditional companies.

The work processes they use are as automated as possible in order to avoid manual processes that cannot be carried out with the expansion of a company. Thus, simplifying processes is the basis of their growth.

Innovative

Another of their main characteristics is that they offer new and digital solutions. Startups arise to provide a solution to a problem that has been observed in the market, so the company is based on real problems of consumers or other companies.

So much so, that at first the ideas of startups may even be too disruptive, but over time their value and especially their potential is recognized.

Adaptability

In an uncertain landscape marked by instability, startups differentiate themselves by their high capacity to adapt to the environment. A startup is always in constant evolution. Many of their characteristics make them fluid and mouldable to external needs, which also makes them much more practical when it comes to dealing with unforeseen events.

This is achieved thanks to a horizontal organizational system made up of a highly trained, specialized but at the same time versatile team. It is the human capital that really constitutes the strength of the startup.

startup

How does a startup work?

A startup is made up of a founding team that defines the idea, determines the business model and seeks the necessary investment to carry out the project. On the other hand, it has a team specialized in each of the departments used in a traditional company, but they always work from a customer-centric vision. This means that the main focus of the startup is on the end customer, not on the product it has created nor on its own interests.

Startup business model

It is most likely that no startup will ever be founded with its definitive business model. Given that one of its fundamental characteristics is adaptability, it is most common that over time the startup will have to change its focus and find the business model that best suits the environment in which it finds itself or the changes that have occurred in it, but always maintaining a digital point of view.

The operation of the startup model is decided on the following points:

  • Products or services it offers.
  • How it offers them.
  • Who the customers will be.
  • Company strategy.

Some of the business models most commonly followed by startups are those that offer a product or service on a subscription, per-use, freemium or advertising-based basis.

Startup financing

Once you have defined the idea of your startup, its business model and action plan, it is time to look for the resources that will make the company possible. The financing process is one of the most complex for entrepreneurs, because it requires a great effort and involves the future of the company. For this reason, presenting an innovative idea with high growth projections attracts more investors willing to risk their capital to finance an idea and, of course, recover their investment in a profitable way.

There are many types of investors depending on the objective that the startup needs to cover or the stage it is in. The investment is not only made at a financial level, but also includes other resources such as training and mentoring, or even a physical space where to develop the business idea.

Stages of a startup

The different moments that a startup goes through in its life are called "phases of a startup", and are usually divided into 6. These phases help to differentiate the different types of investment needed and also to understand how to adapt according to the internal circumstances of the startup.

Pre-seed stage

In this first phase, the foundations of the company are laid. An analysis is made of the market, the problem and the solution you want to offer, as well as the direction the startup will take. It is a good time to structure the company and look for the person or persons who will take the idea forward with you. The idea is not fully developed, but it is a first sketch of what it will be.

Seed stage

This phase seeks to validate the initial hypothesis and is the most important in the life cycle of a startup. A prototype of the idea is used to decide on its future development. Through a scientific method called "lean startup", a learning process is initiated to test the main idea. Through experimentation, decisions are made and the course of action is quickly changed. If, against all odds, the idea proposed in the pre-seed phase is not validated, it is time to pivot the business model of the startup.

Early stage

In the early stage of the startup, a first version of the product is launched for testing. This first product is called MVP (Minimum Viable Product), which presents the basic functionalities of the product, but with less development than the final version. This phase is designed to launch the product quickly, get feedback from early adopters and customers and make modifications to the product as soon as possible. It is also a good time to seek funding rounds.

Growth stage

In the growth phase, the goal is to scale in a sustainable manner. This means that the startup will reach profitability with a steady cash flow, growth of customers, sales and team. However, it is also the phase with the highest failure rate. Therefore, it is necessary to remain alert at all times to market changes in order to meet customer demand and attract new customers.

Expansion stage

The expansion stage is when the startup begins the process of growing into other international markets. It is now when the company has grown at an annual rate of more than 20% and has found its stability in the market, so it takes a further step towards international expansion.

Exit stage

This last stage does not occur in all startups, as it is not the goal of all companies. The exit stage occurs in three different ways: either because the shares have been sold to another company, or because the startup has been acquired by another company, or because it is put up for sale through an IPO (Initial Public Offering).

Examples of Spanish startups

Spain has been confirmed in recent years as a great incubator of startups and some of the companies that we use the most today were startups in their beginnings. This shows that no matter how risky the idea may seem at the beginning, if it solves a real market problem and follows a good development, it can achieve success.

  • Wallapop: the leading platform for buying and selling second-hand goods online between individuals.
  • Cabify: transportation company that connects individuals with drivers through an app.
  • Glovo: company that buys whatever you need from any store or restaurant and delivers it to your home.
  • Colvin: online store of fresh flowers with home delivery anywhere in Spain.
  • Typeform: software for creating online forms and surveys.
  • Freshly Cosmetics: natural and sustainable cosmetics brand sold online.
  • Factorial: human resources software to manage documents, payroll and talent.

As you can see, there are digital ventures with all kinds of business models: selling products or services, B2B or B2C, with all kinds of payment models, etc. All of them are considered today as large successful companies, but in their beginnings (not many years ago) were raised with startups.

how to create a startup

How to create a startup

Maybe after reading this article you will have more desire to create a startup on your own because what is clear is that anyone with an idea and desire to move forward with an enterprise can do it. To be even clearer on how to do it, we leave here the key steps followed by the great successful startups to take their first steps.

1. Innovative idea

Of course, the first step is to have an idea. But not just any idea, but a good idea! But what does a good idea mean? It seems very subjective, but it is simply that innovative idea that solves a problem that nobody has stopped to solve so far.

2. Verify the idea

Maybe if no one has come up with a solution to that problem it is because it was not a good idea... or the opposite. When you have the idea you need to verify if that is the most appropriate solution for the problem you have observed. Or if that problem is serious enough to need a solution.

3. Form your team

If indeed the market needs your solution, you must find the people who will accompany you in this process. It is a long and complicated road in some cases, so having the right partners will help you to face the most complicated moments of your startup, but also to celebrate the good ones.

4. Get investors

The goal of every company is to survive in the market. Attracting investors is the best way to do it for digital companies. To do this, you must present a solid idea that meets investors' expectations of profitability.

online payment management

Now that you know all the details of a startup, it's time to think about how to set up your own. Do you already have your idea? Look around you because that's where you'll find the answers you need. The best ideas are not the most complex, but the ones that provide the most solutions.

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