Business Start-ups
Chapter Twenty
Syllabus topic 3, "Meaning and concepts of Business Start-ups & UNICORNS"
Pages 47 to 48 of 62
What a start-up is not
It is not simply a new business. A new grocery shop is a new business and is not a start-up.
It is not simply a small business. A start-up may employ hundreds.
It is not simply a technology business, though most are, because technology is what makes an idea scalable cheaply.
What a start-up is
A start-up is a young enterprise built around an innovation, designed to grow fast, and financed in stages by investors who accept a high risk of total loss for the chance of a very large return.
Four features, and each is worth a line in an answer.
1. Innovation. A new product, process or service, or a materially better one. The Indian definition puts it first: G.S.R. 127(E) requires the entity to be working towards innovation, development or improvement of products, processes or services, or to be a scalable business model with a high potential of employment generation or wealth creation.
2. Scalability. The business can serve ten times as many customers without ten times the cost. A software product scales; a restaurant does not, until it becomes a chain.
3. Speed of growth, and with it a period of deliberate loss. A start-up spends ahead of its revenue on purpose.
4. Staged external funding. It does not grow out of its own profits, because it has none. It sells equity in rounds.
The stages of funding
The vocabulary is asked, and the ladder is the same everywhere.
| Stage | Who puts in the money | What it buys |
|---|---|---|
| Bootstrapping | The founders themselves, from savings | The first prototype |
| Friends and family | People who back the founder rather than the plan | Getting to a demonstrable product |
| Angel investment | Wealthy individuals investing their own money | The first customers |
| Seed | Angel networks, early-stage funds, incubators | Proving the business model works |
| Series A | Venture capital | Growth: hiring, marketing, geography |
| Series B, C and onward | Larger venture capital and growth funds | Scale, and often a second product |
| Private equity | Institutional investors | Consolidation, profitability |
| Exit | The public, in an initial public offering, or an acquirer | Cash for the earlier investors |
Two features of the ladder that an answer should name.
Each round is a valuation. The company's worth is what an investor was last willing to pay for a slice of it, and it is not a market price.
Each round dilutes the founders. A founder who owned all of it at bootstrapping may own a tenth of it by Series C, and a tenth of something large is the point.
The supporting institutions
Incubators house a very early start-up, often in a university or an institute, and give space, mentoring and a small grant.
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