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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 by a handful of founders or one individual. These companies offer a product or
service that is not currently being offered elsewhere in the market, or that the founders believe is being
offered in an inferior manner.

Startups may be funded by traditional small business loans from banks or credit unions, by government-
sponsored Small Business Administration loans from local banks, or by grants from nonprofit
organizations and state governments. Incubators can provide startups with both capital and advice, while
friends and family may also provide loans or gifts. A startup that can prove its potential may be able to
attract venture capital financing in exchange for giving up some control and a percentage of company
ownership.

What is the difference between a startup and a small

business?

A startup is still thought to be a stage in the business process, which goes like this:

 Pre-start – you are wondering whether business is right for you and you are right for
business.
 Start up – you decide to go for it and start your own business. The legal form of that
business can differ – you can be a sole trader, form a limited company, set up a partnership
(limited liability or not). You can choose to buy a franchise or you decide you'll start a social
enterprise (in whatever form).
 Early-stage business – these are the first few years of your business, when things things
seem to be going OK. Yes, it can be tough at times, but mostly you are doing well. What you
don't realize is that this is sometimes called the 'honeymoon period' when family and friends
buy your products or services and tell their friends about you…
Then reality dawns, your friends and family think that you are OK and can cope alone. The cracks
in any weakness in your business model may begin to show and, one day, you realise with a cold
feeling, that you are going to have to find new customers, keep you staff happy, pay your bills,
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pay your tax and professional advisers, day in, day out, for the life of the business. We then
move to either:

 Growing business – you really 'get' business. You understand how to find and keep happy
customers, you're nicely profitable, you understand marketing and selling, you're on top of
your pricing and breakeven. You've even got some very useful KPIs and metrics going. You're
on the up! (You can then decide whether to grow the business even more and then sell it; or
go public with it. It's up to you. If you've been wise, you'll have held on tightly to its
ownership and will not have VCs breathing down your neck, urging (or forcing!) you to behave
in the way that gives them their return on their financial investment, irrespective of
whether you, as the owner, want to take their chosen path.)
or

 Failed business – you don't have a profitable business model, you neglect marketing and
prospecting, you don't understand pricing and margins and negotiation, you ignore your legal
and financial liabilities, and so on. In other words, you're on the way down (or out!)
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Steve Blank: The 6 Types of Startups

(The 6 types of startups according to Steve Blank’s observations are below)

Lifestyle Startups: Work to Live Their Passion

On the California coast where I live, lifestyle entrepreneurs are like surfers, teaching surfing
lessons to pay the bills so they can surf some more. Lifestyle entrepreneurs live the life they
love, work for no one but themselves and pursue their personal passion. The Silicon
Valley equivalent is the journeyman coder or Web designer who loves the technology and takes
coding and U/I jobs because it is a passion.

Small-Business Startups: Work to Feed the Family

The overwhelming number of entrepreneurs and startups in the U.S. today are still small
businesses. This category consists of grocery stores, hairdressers, consultants, travel agents,
Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who
runs his or her own business.
Small-business entrepreneurs work as hard as anyone in Silicon Valley. They hire local
employees or family. Most are barely profitable. Most small businesses are not designed for
scale — the owners want to own their business and feed the family.

Their only available capital is their own savings, what they can borrow from relatives and banks.
Small-business entrepreneurs don’t become billionaires and don’t make many appearances on
magazine covers. But in sheer number, they are infinitely more representative of
“entrepreneurship” than entrepreneurs in other categories—and their enterprises create local
jobs.
Scalable Startups: Born to Be Big
Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to
build. Google, Skype, Facebook and Twitter are just the latest examples. From day one, the
founders believe that their vision can change the world. Unlike small-business entrepreneurs,
their interest is not in earning a living but rather in creating equity in a company that eventually
will become publicly traded or acquired, generating a multi-million-dollar payoff.
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Scalable startups require risk capital to fund their search for a business model, and they attract
investment from equally crazy financial investors – venture capitalists. They hire the best and
the brightest. Their job is to search for a repeatable and scalable business model. When they
find it, their focus on scale requires even more venture capital to fuel rapid expansion.

Buyable Startups: Acquisition Targets

In the past five years, the cost and time required to build Web and mobile apps has
plummeted. You can get to product/market fit and a million users with $100,000 to $1 million.
Many of these startups bypass traditional VCs by using crowd or angel funding. In some
cases, while they might be able to build a billion-dollar business, the lack of traditional venture-
capital investors (and nosebleed valuations) takes away the pressure of the “swing for the
fences” liquidity goals. This class of startup is likely to be sold to a larger company for $5 million
to $50 million. The founders and investors walk away with millions but not billions.

Social Startups: Driven to Make a Difference

Social entrepreneurs are no less ambitious, passionate or driven to make an impact than any
other type of founder. But unlike scalable startups, their goal is to make the world a better
place, not to take market share or to create to wealth for the founders. They may be organized
as a nonprofit, for-profit or hybrid.

Large-Company Startups: Innovate or Evaporate

Large companies have finite life cycles. And over the past decade, those cycles have grown
shorter. It’s already becoming clear that lean startup practices are not just for scalable and
buyable startups.

Corporations have spent the past 20 years increasing their efficiency by driving down costs. But
simply focusing on improving existing business models is not enough anymore. Almost every
large company understands that it also needs to deal with ever-increasing external threats by
continually innovating. To ensure their survival and growth, corporations need to keep inventing
new business models. This challenge requires entirely new organizational structures and skills.
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What are some startup ideas that frequently fail?

1. Disrupting Craigslist (or eBay)

Hundreds of companies have tried to kill them with vertical and hyper local marketplaces, but
no luck. The best quote I heard about this is: Marketplaces are very hard to build, but
impossible to die. After millions of dollars wasted, As craigslist seems to be on the decline, but
far from being “disrupted”. Yet people try.

2. Dating

Despite more than 5000 dating apps out there, people still try different spins. Most of them fail
to take off, but once in awhile there’s a hit (HowAboutWe, Tinder, etc.) and that creates fresh
energy and excitement. As Andrew Chen notes:

Built-in churn

Dating has a shelf-life

Paid acquisition channels are expensive

City-by-city expansion sucksHard to exit

Demographic mismatch with investors

3. Disrupting Amazon

Hundreds of companies try vertical e-commerce to try and take a slice of Amazon but fail.. As
Scott Galloway says:

We believe that pure play retail is going away, that ecommerce companies are either going to
open stores or go out of business, and retailers need to be excellent in digital or they will go out
of business.
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4. Food delivery

The success of some early companies like Grubhub created many food delivery companies,
most of them failed. From DineIn:

“Despite us being a bit smaller in order numbers to where Deliveroo were at, we had key
restaurant relationships, were growing consistently, great tech but the main driving force was
that funds were frightened of the follow on funding rounds required to scale this consumer
business and having to compete with the larger funds”.

5. Fashion re-sale

The early wave (Poshmark, Threadflip..) of mobile vertical marketplaces for women's fashion
created dozens of companies that raised millions of dollars, but Amazon is threatening them:

"This is an execution business," said Brian O'Malley, a partner at Accel Partners, a venture firm
that has invested in Vinted. "They're all competing over that same closet space."

Investors and analysts agree that the competition is too stiff to ensure everyone's survival. The
consolidation process has already begun. Bib + Tuck, a resale website funded by fashion
entrepreneur Christopher Burch and others, has announced that it's shutting down after being
sold to Crossroads, a national store chain. All buying, selling, and cashouts on the site have
ended.

"I don't even know if there is going to be one winner," said Sucharita Mulpuru, an analyst at
Forrester Research, "This model is never going to take over the world."

6. Photo sharing

I still see a new take on photo sharing, de-duplication, curation... don't know of a single success
story other than Instagram.

7. Ed-Tech

One of the toughest markets to crack, but hundreds of companies keep trying... direct to
consumer, mobile education, a new product for teachers, for schools... only a handful
survive(d). Avichal Garg's Why Education Startups Do Not Succeed:
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 Most entrepreneurs in education build the wrong type of business, because

entrepreneurs think of education as a quality problem. The average person thinks of it
as a cost problem.

 Building in education does not follow an Internet company’s growth curve. Do it because
you want to fix problems in education for the next 20 years.There are opportunities in
education in servicing the poor in the US and building a company in Asia — not in selling
to the middle class in the US.

 The underlying culture will change and expose interesting opportunities in the long term,
but probably not for another 5 years.

8. Proximity marketing

After Estimote started, hundreds of companies went after (and continue to go after) iBeacon
and proximity marketing... hard to get retailers to play...

9. HR / Recruiting

Hundreds of new companies every year... assumption is that talent is a big pain point for
companies... but companies are flooded with new products, it's very hard to sell to HR.

Some general failure themes:

 X for Y… Just because Uber, AirBnB, or Tinder took off, doesn’t mean every Uber for X,
AirBnB for Y or Tinder for Z will take off. From 10000 feet it may look interesting, but
the peculiar dynamics of one market rarely make another work.

 New Markets… it’s a lot harder to create a new market than make an existing market
efficient. Behavior change is hard.

 Consumer mobile… most consumer apps are experiments and don’t take off…

 B2B… efficiently getting to SMBs is hard, selling to enterprises is hard… many B2B
companies fail because the sales model doesn’t work…
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Appendix
A startup is usually a combination of two things: an interesting problem or need, and an
approach for solving that problem. It is easy to come up with big and worthy problems, but
they tend to go beyond the scope of the typical entrepreneur. (If you have a solution for eternal
peace or even just for unlimited clean energy, give me a call. I’m sure we can work something
out.)

The challenge, then, is not just to find a worthy problem, but to also find an approach for
solving it. Sometimes the problem is evident, but the solution is elusive. Many times, it is the
problem itself that is hard to pinpoint, and once it is clearly defined and understood, how to
solve it becomes evident.

We are looking for a problem-solution combination. We can glean insight by looking at different
types of problems, various sorts of solutions and the relationships between them.

There are three primary types of problems or needs: a human need, a business need and a
technical need.

A human need is anything that we, as human beings, perceive as valuable. Most consumer
ventures are addressing a human need. Facebook, Apple and Netflix are some examples of
well-known ventures doing just that.

A business need is anything that would help an organization, usually a company, to perform
better in some sense. Most B2B (business to business) startups fall under this category. IBM,
Salesforce and Slack are some examples of well known companies serving business needs.

A technical need is the need for some system or component to perform better. For almost any
system or component, there is a need for it to perform better in some sense, or for it to be less
expensive. This need is ubiquitous. When Intel develops a CPU with a faster clock speed, or
with lower power consumption, it is addressing a technical need. While it is true that a technical
need will ultimately serve some business or human need, its characteristics are different, so
we’ll consider it a separate category.
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When looking at solutions there are two main categories worth discussing: a technical
breakthrough and a solution that requires solid engineering, but not a major technical
breakthrough.

A technical breakthrough is a capability that did not exist before—perhaps something you can
do and no one else can. That could be a new encryption algorithm that’s harder to break or
easier to use, a battery with a higher energy density and a car engine that does twice the
mileage. It can either take place in an established market or in a new market.

A technical breakthrough may mean that you can produce a superior version of a product for
which there’s already an established market—like developing a cell phone battery with twice the
energy capacity, for example. You could make a spaceship that can fly to Mars, and that would
certainly be a technical breakthrough. But interstellar spaceships are currently not an
established market.

Four Startup Templates

Based on the above classification we can now look at some common templates for startups
based on the needs and solutions they represent.

Human needs and business needs seldom require a technical breakthrough. Solid engineering is
usually sufficient. There are two key questions which must be answered for these kinds of
startups: Is this really a need, and is the proposed solution really solving it?

Those are questions for the domain expert. For a business need, the domain expert is a person
who knows this industry in and out. For a human need the situation is trickier as there is no real
equivalent to the business domain expert. Common wisdom nowadays is that the only way to
answer our key questions is to measure how the market responds to our solution using data
analytics techniques.

The key questions for a tech need in an established market are very different. As this is an
established market there is no real question about the need. The only question is whether it can
be done. This solution will most probably be of the technical breakthrough category. The person
to answer the key questions this time is the researcher or scientist who invented the
breakthrough or designed the solution.
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The case of a technical breakthrough in a new market is probably the most challenging one.
Here we need to ask not only whether it can be done but also what will be done with it. While
the feasibility aspect should obviously get addressed by the inventor of the technical
breakthrough, the business aspect is less clear. We cannot employ a business expert as the
business domain is not determined yet. In this case a business innovator with an
entrepreneurial vision is needed in order to envision the potential of the invention and its
possible uses. A business expert can then validate specific uses of the invention, once they are
defined.

This can be summarized in the following table:

Granted, this is a crude classification, and it has some overlaps. A technological breakthrough
can serve a need in an established market, and at the same time have other implementations in
new markets. This classification is nevertheless useful in helping identify the key questions we
should ask about a startup, and what kind of people should be trusted to provide the answers.

So, if you want to start a type II startup, which includes most B2B startups, you need have a
business expert on hand. For the tech need category, a scientist is always a must. The type IV
startup is a very challenging case, as it requires multiple lead people. It is also the kind of
startup that may have a far-reaching potential.
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The type I startup, which includes most consumer startups, is unique; there’s no lead person
and no need for a technical breakthrough. This combination may explain both the vast amount
of consumer startups we’ve seen in recent years, and the much lower success rates compared
to the other startup categories.

References
o Quora
o Readwrite.com