# Understanding Startups: How to Successfully Launch a New Business

![Startup](https://www.investopedia.com/thmb/0-b8q29XnECvBF8pQ8nywjJ4jEg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/startup-53e4843c1edb49dd99492d4cc9802e83.jpg)

*— Investopedia / Laura Porter*

## What Is a Startup?

The term "startup" refers to a company in its early stages of operation. Startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. Startups typically require several years to make a profit, so significant, [high-risk investments](https://www.investopedia.com/investing-in-startups-through-roth-ira-5221736) are typically needed to get one off the ground.

These companies often face high costs and limited revenue early on, so they seek capital from sources like [angel investors](https://www.investopedia.com/terms/a/angelinvestor.asp) and [venture capitalists](https://www.investopedia.com/terms/v/venturecapitalist.asp).

### Key Takeaways

*   Startups are grounded in innovation, often focusing on a single product or service, and require substantial capital to overcome high initial costs and limited early revenue.
*   Securing funding from diverse sources like angel investors, venture capitalists, and crowdfunding is crucial for startups to progress, as many are founded with limited initial capital.
*   The success and survival of startups depend on strategic decisions regarding location, legal structure, and the ability to execute a well-developed business plan.
*   While startups offer exciting opportunities, they come with high risks, including potential failure, intense competition, and the pressure to achieve profitability.
*   Working for a startup can be rewarding due to the opportunity for increased responsibility, learning, and flexible work environments, though it often involves long hours and stress.

## Key Elements of a Startup

Startups are companies or ventures that are focused on a single product or service that the founders want to bring to market.

These companies typically don't have a fully developed business model and, crucially, lack adequate capital to move on to the next phase of business. Most of these companies are initially funded by their founders.

Many startups turn to others for additional financing, including family and friends. [Silicon Valley](https://www.investopedia.com/terms/s/siliconvalley.asp) is known for its strong venture capitalist community and is a popular destination for startups. However, it is widely considered the most demanding arena, as well.

Startups can use [seed capital](https://www.investopedia.com/terms/s/seedcapital.asp) to invest in research and to develop their business plans. Market research helps determine the demand for a product or service. A comprehensive business plan outlines the company's mission statement, vision, and goals, as well as management and marketing strategies.

> **Important**
>
> The first few years are very important for startups. Entrepreneurs should use this time to concentrate on raising capital and developing a business model.

## Critical Factors for Startup Success

There are a number of different factors that entrepreneurs must think of as they try to [get their new business off the ground](https://www.investopedia.com/how-to-start-a-business-7970202) and begin operations. We've listed some of the most common ones below.

### Location

Location is crucial for business success and is a major consideration when starting a new business. Startups must decide whether their business will operate online, in a brick-and-mortar office or home office, or in a store. The location depends on the product or service being offered.

For example, a technology startup selling virtual reality hardware may need a physical storefront to give customers a face-to-face demonstration of the product's new and perhaps complex features. Working with people in person can also help develop the relationships that can drive the purchase of what may be expensive items.

### Legal Structure

Startups need to consider what legal structure best fits their entity. A [sole proprietorship](https://www.investopedia.com/terms/s/soleproprietorship.asp) is suited for a founder who is also the key employee of a business.

Partnerships are a viable legal structure for businesses that consist of several people who have joint ownership, and they're also fairly straightforward to establish. Personal liability can be reduced by registering a startup as a [limited liability company (LLC)](https://www.investopedia.com/terms/l/llc.asp).

### Funding

Startups often [raise funds by turning to family and friends](https://www.investopedia.com/terms/l/lovemoney.asp) or by using venture capitalists. Venture capitalists are professional investors that specialize in funding startups.

[Crowdfunding](https://www.investopedia.com/terms/c/crowdfunding.asp) has become a viable way for many people to get access to the cash they need to move forward in the business process. The entrepreneur sets up a crowdfunding page online, allowing people who believe in the company to donate money.

Startups also may use credit to commence their operations. A perfect credit history may help you get a line of credit. Of course, as this is debt that needs to be repaid and often comes with a sizeable interest rate, this option carries the most risk, particularly if the startup is unsuccessful.

Other companies choose small business loans to help fuel growth. Banks typically have several specialized options available for small businesses. For instance, a [microloan](https://www.investopedia.com/articles/personal-finance/040715/what-microlending-and-how-does-it-work.asp) is a short-term, low-interest product tailored for startups. A detailed business plan is usually needed to qualify.

### 49.2%

The percentage of new businesses that survive within five years of launch.

## Pros and Cons of Launching a Startup

### Advantages

There are a variety of advantages to working for a startup:

*   You may have more responsibility and greater opportunities to learn. As startups have fewer employees than large, established companies, employees tend to wear many hats, which leads to more work experience and chances to build knowledge.
*   Startups tend to be more relaxed in nature, making the workplace more of a communal experience.
*   Many offer flexible hours and increased employee interaction.
*   Since startups tend to be cash-poor, they often provide a large amount of delayed compensation in the form of stock options, which can gain significant value if the company [goes public](https://www.investopedia.com/ask/answers/what-does-going-public-mean/).
*   Work can be rewarding as innovation is welcomed, and managers allow talented employees to run with ideas with little supervision.

### Disadvantages

One of the primary disadvantages of a startup is increased risk. This primarily applies to the success and longevity of a startup.

*   New businesses must prove themselves and secure capital before making a profit.
*   It's crucial to keep investors satisfied with the startup's progress. The [risk of shutting down](https://www.investopedia.com/articles/personal-finance/041315/risk-and-rewards-investing-startups.asp) or not having enough capital to continue operations before turning a profit is ever-present.
*   Long hours are characteristic as everyone is working toward the same goal—to see the startup succeed.
*   Employees may experience high levels of stress and compensation that isn't commensurate with the hours worked.
*   Competition between startups may be intense because more than one company may be working on the same ideas.

Pros

*   More opportunities to learn
    
*   Increased responsibility
    
*   Workplace benefits
    
*   Innovation is encouraged
    
*   Flexible hours
    

Cons

*   Risk of failure
    
*   Having to raise capital
    
*   High stress
    
*   Competitive business environment
    
*   Low compensation
    

## Examples of Startups

[Dotcoms](https://www.investopedia.com/terms/d/dotcom.asp) were a common startup in the 1990s. Venture capital was extremely easy to obtain during this time due to a frenzy among investors to speculate on the emergence of these new businesses.

Unfortunately, most of these internet startups eventually went bust due to major flaws in their business plans, such as lacking a path to sustainable revenue. However, a handful of companies survived when the dotcom bubble burst. Amazon ([AMZN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=amzn)) and eBay ([EBAY](https://www.investopedia.com/markets/quote?tvwidgetsymbol=ebay)) are just two examples.

Many startups fail early, so the initial years are vital. Entrepreneurs must secure funding, develop business models, hire key staff, and plan long-term, including details like equity stakes.

Many of today's most successful companies—Microsoft ([MSFT](https://www.investopedia.com/markets/quote?tvwidgetsymbol=msft)), Apple ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=aapl)), and Meta ([META](https://www.investopedia.com/markets/quote?tvwidgetsymbol=META)), formerly Facebook, to name a few—began as startups and ended up becoming publicly traded companies.  

## How Do You Start a Startup Company?

The first step is to have a great idea. From there, market research is the next step to determine how feasible the idea is and how it may fit in the current marketplace. After the market research, you'll need to create a business plan that outlines your company structure, goals, mission, values, and objectives.

One of the most important steps is obtaining funding. This money can come from savings, friends, family, investors, or a loan. After raising funds, make sure you've handled all legal matters and paperwork. This means registering your business and obtaining any required licenses or permits. After this, establish a business location. From there, create an advertising plan to attract customers, [establish a customer base](https://www.investopedia.com/how-to-start-your-own-bookkeeping-business-11720480), and adapt as your business grows.

## How Do You Get a Startup Business Loan?

A startup can [obtain a loan from a startup business loan provider](https://www.investopedia.com/the-best-startup-business-loans-8780884), a bank, certain organizations, or friends and family. One of the best and first options should be working with the U.S. Small Business Administration, which provides microloans to small businesses. These loans are usually from nonprofit community lenders and can be easier to obtain than traditional loans from banks.

## What Are the Benefits of Working for a Startup?

The benefits of working at a startup include greater opportunities to learn about your specific business and business in general, increased responsibility, flexible work hours, a relaxed work environment, increased employee interaction, good workplace benefits, and innovation.

## How Do You Value a Startup Company?

Valuing a startup can be difficult as startups don't usually have revenue to show or the marketplace longevity by which to measure success. They usually don't generate profits for a few years after starting. As such, using the traditional financial statement metrics for valuations doesn't apply. Some of the best ways to value a startup include the cost to duplicate, market multiples, discounted cash flow, and valuation by stage.

## The Bottom Line

Startups are early-stage companies that require substantial capital and have limited revenue. They typically utilize venture capitalists, angel investors, and crowdfunding sources to overcome their financial challenges. Startups require a strong business model and detailed plans to survive the first years of operation, with few making it beyond five years.

While working for startups requires long hours and increased responsibilities, it can provide significant job satisfaction, learning opportunities, and the possibility of a lasting legacy.

When considering starting your own business, it's imperative to conduct thorough market and legal research and do your due diligence to ensure a chance of success.  

> **Article Sources**
>
> 1.  U.S. Small Business Administration. "[Choose a Business Structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure)."
>     
> 2.  U.S. Small Business Administration. "[Frequently Asked Questions About Small Business, 2024 Factsheet](https://advocacy.sba.gov/wp-content/uploads/2024/07/Frequently-Asked-Questions-About-Small-Business_2024-508.pdf)." Page 2.
>     
> 3.  U.S. Small Business Administration. "[Microloans](https://www.sba.gov/funding-programs/loans/microloans)."