How a Startup Works | A Detailed Look
Startups have become the hallmark of the modern era. Everyone longs to have 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 that you have a conventional business, such as a restaurant, a web development agency, a digital marketing consultancy or a pastry shop.
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 dollars. With that growth, you were able to hire more employees and expand your presence in the market.
The following years followed a similar trend, with a constant but gradual increase of 20% annually. Finally, in 2018, you managed to double your company, reaching 2.1 million dollars in sales.
This is an example of how a traditional company grows at a percentage rate, increasing year after year constantly.
The Explosive Growth of a Startup
Now, let's shift our focus to startups. A startup differs 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 in 2014, a startup started with revenue of one million dollars 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 doubling pattern was repeated in subsequent years.
In just a few years, the startup far surpassed 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 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 in 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.
Considerable 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, it is possible for the startup to reach a growth ceiling quickly. Therefore, it is essential that there is a sizeable market to support expansion.
Examples of Market Differences
To illustrate this difference in the markets, let's compare two economies, such as Spain and Mexico:
Economy of Spain: Spain exports a variety of products, from vehicles and vehicle parts to pharmaceuticals, foods such as oranges and olive oil, and other manufactured goods. Spanish companies tend to operate in traditional market segments.
Economy of Mexico: Mexico is mainly based on the export of automobiles, electronic products 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.
Funding Sources for Startups
Explosive growth of startups is not possible without adequate financing. Startups can obtain financing from various sources, and here are some of the main ones:
Own Financing: Founders can invest their own financial resources to start the company. This is usually the starting point of many startups.
Angel Investors: Angel investors are wealthy individuals who invest their personal money in startups in exchange for participation in the company. They often provide expertise and networking in addition to funding.
Venture Capital: Venture capital companies 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.
Going public (IPO): When a startup grows enough, it can choose to carry out an Initial Public Offering (IPO) and go public. This allows you to raise capital by selling shares to the public.
The Importance of Innovation and the Entrepreneurial Mentality
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 highlight that the success story of a startup does not necessarily depend on the economic background of its founders. While it's true that some entrepreneurs come from wealthy families, many successful startup founders have diverse life stories, including those who grew up poor or middle class.
An iconic example is Steve Jobs, co-founder of Apple, who faced numerous obstacles before he could launch his company. He even had difficulty finding investors willing to finance him due to his unconventional appearance and lifestyle.
The Structure of a Startup
Regarding 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 changing market needs.
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 usually made up of company founders and investors. This board makes high-level strategic decisions that affect the direction of the company.
A common example of a decision the board of directors makes is whether to award stock to employees as part of compensation. This decision can be essential to attract and retain talent in the startup.
The Search for Liquidity Events
Finally, startups look for liquidity events to reward their investors and provide additional financing for growth. These events can take various forms, but three of the most common are:
Acquisitions: Another company acquires the startup, providing a profitable exit for investors and often additional resources for the startup.
Mergers: Two startups can merge to combine resources and capabilities and accelerate growth.
Going Public: The startup can choose to go public through an IPO, which allows it to raise capital by selling shares to the public.
Startups stand out for their ability to achieve explosive growth through innovation in considerable 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 undertaking or investing in startups, it is essential to understand these concepts and learn to make strategic decisions. The startup world is exciting and full of opportunities, but it is also full of challenges.
The ability to adapt and learn from each 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 enhancing digital businesses in more than 7 countries and generating more than 1,500 million pesos.
If you want more information on this topic or are looking for other options to profile your ideal client, at MHA you will find the solution you need. Schedule a call.