How a Startup Works | A Detailed Look

Startups have become the hallmark of the modern era. Everyone yearns for a success story like that of Mark Zuckerberg, founder of Facebook, and dreams of creating a company that will revolutionize the world and make them millionaires.

However, it is essential to understand the difference between a startup and a conventional company.

In this article, we will explore in depth how startups work and what are the key elements that distinguish them from traditional companies.

The Growth of a Conventional Company

Let's imagine you have a conventional business, such as a restaurant, a web development agency, a digital marketing consultancy or a bakery.

In 2014, you achieved sales of one million dollars, which was a great achievement. Over the years, you worked hard, opened new stores, and increased your efforts to grow your business.

In 2015, sales increased by 20%, reaching $1.2 million. With that growth, you were able to hire more employees and expand your market presence.

The following years followed a similar trend, with a steady but gradual increase of 20% per year. Finally, in 2018, you managed to double your company, reaching $2.1 million in sales.

This is an example of how a traditional company grows at a percentage rate, increasing steadily year after year.

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The Explosive Growth of a Startup

Now, let’s shift our focus to startups. A startup is differentiated from a conventional company by its ability to achieve multiplier growth. Instead of growing at a percentage rate, startups experience exponential growth.

Let's say that in 2014, a startup started out with revenues of $1 million a year. What makes a startup unique is its ability to grow at a dizzying pace.

In 2015, this startup managed to double its revenue, reaching two million dollars. Then, in 2016, they doubled their revenue again, reaching four million dollars. This pattern of doubling was repeated in the following years.

In just a few years, the startup vastly outperformed the traditional company that was still growing steadily. While the conventional company needed four years to double its revenue, the startup did it in one year.

This illustrates the fundamental difference between percentage growth and the multiplier growth that characterizes startups.

The Key: Innovation in a Big Market

Now that we understand the difference in growth, the question arises: how do startups achieve this explosive growth? The answer lies in the combination of two key elements: innovation and a sizable market.

Innovation: Startups must introduce significant innovations to an existing market or create a new one. This innovation can be related to products, services, or processes. For example, a startup can revolutionize the way a product is created and sold, like Tesla did with software-based electric cars instead of following the traditional approach.

Sizeable Market: To achieve explosive growth, the startup must operate in a market large enough to accommodate its rapid growth. If the innovation is applied to a small market, the startup may reach a growth ceiling quickly. Therefore, it is essential that there is a sizeable market to support the expansion.

Examples of Market Differences

To illustrate this difference in markets, let's compare two economies, such as Spain and Mexico:

Spain's economy: Spain exports a variety of products, from vehicles and vehicle parts to pharmaceuticals, foodstuffs such as oranges and olive oil, and other manufactured goods. Spanish companies tend to operate in traditional market segments.

Mexico's economy: Mexico relies heavily on exports of automobiles, electronics, and oil. Mexican companies focus on established industries and tend not to innovate significantly.

Startups seek to identify markets that can be disrupted through radical innovations, creating opportunities for exponential growth.

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Sources of Financing for Startups

Explosive startup growth is not possible without adequate funding. Startups can obtain funding from a variety of sources, and some of the main ones are highlighted here:

Self-financing: Founders can invest their own financial resources to start the company. This is often the starting point for many startups.

Angel Investors: Angel investors are wealthy individuals who invest their personal money in startups in exchange for equity in the company. They often provide expertise and networks in addition to funding.

Venture Capital: Venture capital firms invest in startups in exchange for a stake in the company. They are usually investment funds with money from third parties, such as pension funds.

Strategic Investors: Some companies may partner with strategic investors who can bring industry-specific resources and expertise.

Initial Public Offering (IPO): When a startup grows large enough, it may choose to conduct an Initial Public Offering (IPO) and go public. This allows it to raise capital by selling shares to the public.

The Importance of Innovation and Entrepreneurial Mindset

In the startup world, innovation is the engine that drives growth. Successful startups are those that manage to create revolutionary products or services that fill a gap in the market or significantly improve the way things are done.

It is important to note that a startup's success story does not necessarily depend on the economic background of its founders. While it is true that some entrepreneurs come from well-off families, many founders of successful startups have diverse life stories, including those who grew up in poverty or in the middle class.

An iconic example is Steve Jobs, co-founder of Apple, who faced numerous obstacles before he was able to launch his company. He even had a hard time finding investors willing to fund him due to his unconventional appearance and lifestyle.

The Structure of a Startup

As for the organizational structure of a startup, it tends to be more flexible and flat compared to traditional companies. While conventional companies often follow a rigid hierarchy with a CEO at the top and a well-defined leadership structure, startups adapt to the changing needs of the market.

In many startups, teams work more collaboratively and horizontally. The focus is on agility and the ability to pivot quickly in response to market demands.

The Importance of Boards of Directors

A crucial but often overlooked aspect of startups is the board of directors. The board of directors is typically comprised of the company's founders and investors. This board makes high-level strategic decisions that affect the direction of the company.

A common example of a board decision is whether to award stock to employees as part of compensation. This decision can be critical to attracting and retaining talent at the startup.

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The Search for Liquidity Events

Finally, startups look for liquidity events to reward their investors and provide additional funding for growth. These events can take several forms, but three of the most common are:

1. Acquisitions: Another company acquires the startup, providing a profitable exit for investors and often additional resources for the startup.

2. Mergers: Two startups may merge to combine resources and capabilities and accelerate growth.

3. IPO: The startup can choose to go public through an IPO, which allows it to raise capital by selling shares to the public.

Conclusion

Startups are known for their ability to achieve explosive growth through innovation in large markets. This contrasts with the gradual growth of conventional companies.

For a startup to be successful, it is essential to have adequate financing, an entrepreneurial mindset and an agile organizational structure.

If you are interested in starting or investing in startups, it is essential to understand these concepts and learn how to make strategic decisions. The world of startups is exciting and full of opportunities, but it is also full of challenges.

The ability to adapt and learn from every obstacle is what differentiates successful startups from those that are not.

Written by Moises Hamui Abadi : I am an entrepreneur, founding partner of Viceversa and SoyMacho. After leading several digital businesses and advising several other businesses, I decided to form MHA Consulting, a digital marketing consultancy dedicated to growing and empowering digital businesses in more than 7 countries and generating more than 1,500 million pesos.


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