Many definitions are offered for a startup business by the most renown business people and researchers. I like many of those definitions but I, personally and for the purpose of this article, would like to define a startup in very simple terms, as an entity which is recently formed, to grasp a perceived -but yet to be proved- opportunity, with the hope of future growth.
I, intentionally, try to avoid limiting the definition to the fancy world of technology and IT ventures in Bay Area and Silicon Valley, but expand the term to include all industries. It should however be noted that mature business models that have been tried many times do not qualify as startups, but as micro or small businesses. Their risks, rewards, market and product fit are known already, and their success, financing challenges, capital structures, development phases and exit strategies depend on factors that are different with those of startups.
Some elements are common among all startups, regardless of their product, purpose and location:
- They are newly formed; usually within the past three to five years.
- They are risky; the future of the company is uncertain, and the market and/or the product fit is to be tested and proven.
- Often, they are not profitable. Technically, a startup can be profitable. But in reality, as soon as a business generates profits, it begins its journey towards a more stable and secure standing which doesn’t fit the startup category.
- An opportunity is identified and addressed. Usually if an entrepreneur can not explain the opportunity (value-proposition of their solution) in 30 seconds in very understandable, meaningful and definitive terms, startup is less likely to be on the right track.
- Startups have less than 100 employees, and very often even less than a handful. Board members do not exceed five people, and up to a certain stage, there is no revenue. But of course revenue may even reach to as high as $100 million in the luckiest and most successful cases!
A careful review of the definition of a startup and the common characteristics of all startups shows that the following matters are critical and should be determined and well thought of in advance. The first and foremost, a startup should have a clear definition of the opportunity and the value proposition of the solution. Second, the target market should be well-defined. Third, required resources should be identified. That includes both human and financial resources. Fourth the expected return on investment, and the timeline for the return should be determined. Fifth the external risks and threats on which the startup will have little or no control or influence, should be identified. Sixth is the exit strategy; whether the founder(s team) is planning to grow the business organically, arrange an IPO offering,or sell it to a prospect buyer.
When the founder(s) bring all these information on paper, two documents as well as some ideas will emerge:
-a business plan (or alternatively, a business map canvas),
-an article of association, as well as
-thoughts and ideas of who and how to approach to fund the startup.