Influencers, Tech, and Beyond: Types of Startups
With so much focus on tech startups in recent years, it may be surprising to learn that there are many different types of startups in the marketplace. While technology is a common thread among them in the 21st century, entrepreneurs start businesses for a myriad of reasons, including the pursuit of a passion or as a means of creating a better world.
First, it’s important to gain a better understanding of what a startup is.
What is the Definition of a Startup?
A startup is a young company founded by one or more entrepreneurs, in order to bring a unique product or service into the marketplace. Startups typically have fewer than 30 employees and are financed by bootstrapping owners, investors, or loans. Startups exist at the earliest stage of the business life cycle - they are not mature enough to be attractive to buyers and have not (yet) experienced the kind of revenue growth necessary to be considered stable.
A startup is not a business model, but rather, the name of the beginning stage of a business’s life. Just as with humans, the earliest years in a business’s life are crucial to the development of the business over time and often (but not always), foretell the business’s future success. Startups are characterized by high degrees of uncertainty and risk, factors which founders are often willing to take because they believe they have created a product or service that fills a void in the marketplace or improves upon an existing product or service.
Six Main Types of Startups
Steve Blank famously wrote a blog post in 2011 that established six types of startup businesses. What follows is an examination of the six main types of startups:
Lifestyle startups are created by entrepreneurs who turn their life’s passion into a business, thus creating a lifestyle that supports the founder financially, while the founder is able to retain their independence. An example is a musician who teaches youth how to play an instrument, or an actor teaching acting lessons. The business model is an outcome of the founder’s passion, and the business is less focused on profits than it is on the founder sharing his/her passion with others.
Many influencers or YouTube stars have gained an online following by sharing their hobbies with other enthusiasts, in turn turning their hobby into a well-paid career. Tim Ferris and Gary Vaynerchuck are examples of successful lifestyle startup founders.
Small Business Startups
Many startups have a goal of creating enough value to be a formidable marketplace competitor and thus a target for acquisition, resulting in a lofty payout for the founders. However, there are plenty of small business startups that are quite content to remain small businesses. The goal for these businesses is longevity: they want to serve a small target market well for a long period of time, while providing enough financial stability to support the owners and ensure a smooth operation.
Small business startups are run by solopreneurs, partners, and small, versatile teams. Most small business startups are self-funded - their capital comes from their personal savings or small business loans from their bank, family, and friends. Accordingly, they sidestep pressure to aggressively scale or to meet investors’ ROI expectations. Small business startups are not designed to scale, instead running on a fixed business model.
Small businesses make up 99 percent of all U.S. companies and employ 50 percent of all non-governmental workers. Examples of small business startups include hairdressers, retail boutique owners, and travel agents.
Scalable startups have a repeatable, scalable business model: a high-growth, high-profit new solution to a problem the marketplace is facing. Scalable startups work to rapidly grow the company’s top-end revenue to achieve the highest ROI possible. Tech companies, including consumer and business apps, often fall into this category because they are able to build a product relatively inexpensively that can attract a worldwide user base.
Scalable startups typically require extensive market research, highly capable people, and significant capital to get off the ground with the end goal being to IPO and sell shares of stock in exchange for equity. The founders tend to believe that their business can change the world; accordingly, their interest is in creating equity in a company that will ultimately earn a multi-million dollar payoff.
Scalable startups raise capital from outside investors (e.g., venture capitalists, angel investors, business partners), which in turn supports growth initiatives that land even more customers. At a certain point, the company has created so much value that they become an attractive acquisition target.
Buyable startups are often started by entrepreneurs who excel in coming up with new approaches and concepts. The founder may have an idea with tremendous growth potential but no interest in building the infrastructure necessary to support that idea. Or, the founder may be keen on building businesses but uninterested in operating them long-term. In both cases, the founder has a goal of the business being purchased by a larger company.
Many buyable startups are in the tech industry, where developers need a digital tool, create it, evolve it into an app, then sell it. Product development in tech is relatively inexpensive; tech products can be brought to market quickly, and the barriers to entry for capital for a buyable startup at $5-$100M are much lower than that required to buy in a business with a large operation. Nevertheless, the competition can be fierce; it is common for large tech companies such as Google, Amazon, and others, to quickly buy small tech companies only to make use of its tools (or prevent others from doing so).
Corporate startups are unique in that they are not started from scratch in terms of funding and infrastructure, but rather backed by capital from the parent company instead of outside sources. When corporate customers’ preference changes, new regulations restrain operations, or new competitors introduce new pressure, large companies might spin off a new venture to explore strategies to compete. Corporate companies launch startups that are independent from the parent company to relieve the startup of the parent company’s size, culture, attention and scrutiny. Corporate parent companies want their startups to be free to innovate, test new ideas, disrupt competitors, or enter new markets without affecting the parent company’s brand or disrupting the customer experience.
Founders of social startups channel their ambition, passion, and drive, towards making a positive impact on the world, not towards making a profit. Social startups are often funded through grants, donors, or crowdfunding platforms. Most social startups aim to solve social, cultural, or environmental problems. Ecopreneurship is a new trend in this space, while some corporate social responsibility initiatives may evolve into social startups.
Social startups tend to be the opposite of growth-obsessed startups; while they can become sizable organizations, they tend not to have growth or profit as an objective.
When is a Company No Longer a Startup?
A company stops being a startup when it no longer relies on investor or owner capital to fund its growth. Profitability and revenue, growth, market, and mindset all play a role in a company’s graduation from startup to established business.
While some might expect that a company takes no more than three-to-five years to no longer be considered a startup, market conditions, industry, and access to capital all play a role.
What matters most may not be how long a company is referred to as a startup, but rather that it sustains itself long enough to be considered a viable business that contributes products or services to a marketplace that needs them. With thorough market research, dedication, capital, and a clear vision in mind, startups can stick around for the long haul.
Open Eye has helped many startups grow; if you’re interested in how we do that, please contact us at email@example.com.
- Anne Shoemaker
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