What is a startup?
Startup is a word we frequently hear. Whether it’s a fantastic new app, a local service company, or a high-tech engineering firm, it seems like there’s a new startup hitting the market every day. But is any new company a “startup?” Can I start a coffee shop and call it a startup, or does it have to be something new?
The simple answer is that a startup is a new business venture that focuses on delivering an innovative product or service in a scalable way that will likely disrupt existing market forces. Peloton is a current example of a startup: they manufacture connected exercise equipment that disrupts both the home-gym and commercial-gym markets and meets the consumer’s needs in a new way.
Truly innovative products or services deliver value to the consumer in a novel manner, often by breaking the boundaries of traditional thinking. Amazon, for example, took a traditional business — a bookstore — and developed it into an online bookstore, letting consumers peruse their inventory and order goods without needing to leave their homes. This simple disruption to an established business model led Amazon to become a global logistics megalith that can deliver almost any product to nearly every consumer in just a day or two. Say what you will about Amazon, but it’s hard to argue that the company has been anything other than massive business success.
Startup culture is not just about entrepreneurship and business success. People who found startup companies have a clear vision for their company. Startups often focus on a singular product or service line that is engineered to solve a specific problem in a disruptive way, which gives them clarity that larger firms with more varied product lines have a hard time finding. For example, a 10-person startup company devoted to developing a new wearable technology may find it easier to focus on their specific mission than a 10,000-person tech company. The small size of startup companies also helps employees see tangible connections between their work and the company’s performance: a programmer in a cubicle working for a large conglomerate may not see any meaningful impact from their work, but a programmer writing code for a small firm with big ambitions has a much more tangible connection to the results of their labor.
Startups also focus less on cumbersome business processes and internal bureaucracies than traditional businesses. Because startup companies tend to be smaller and focused on singular products or services, employees enjoy more freedom to talk to leadership and less siloing than more extensive or entrenched firms. This agility allows the startup to respond to market forces rapidly.
Be that as it may, traditional businesses can do these things too: a bagel company might have a small roster of employees, or a web developer might work closely with five friends in a small, agile business. But a bagel shop is not likely to disrupt the local baked goods market in the same way that Carvana disrupted auto sales. Unless that is their explicit focus, a local web development company is unlikely to emerge as a dominant market leader with new technologies. Startups are lean, ambitious, and looking for growth by disrupting existing market conditions.
In other words, the critical difference between traditional entrepreneurship and founding a startup is in the scope of your business ambition. For example, a conventional entrepreneur might begin a local communications firm or open a plumbing business or a computer repair shop. A successful entrepreneur might even convert a traditional business establishment like an ice cream shop to a national brand. However, when you found a startup, your focus is on using an innovative business approach to disrupt a market and bring a truly new — and ideally, indispensable — product or service to market. In addition, startups aim to grow fast and reach an extensive market, which is often difficult for a traditional entrepreneur. So, while a startup company may well begin as traditional entrepreneurship, the startup differs in being innovative and scalable.
Innovation is a business buzzword that seems to pop up everywhere. We all want to be innovators in our fields, finding the latest and most excellent way to solve a business problem and add value for our customers and shareholders. In other words, innovation is the process of devising new ways of doing business. Innovative ideas can generally be put into three categories: product innovation, process innovation, and business model innovation.
Startups focused on product innovation either build entirely new products or add practical and scalable technology to existing products. The most obvious example of an innovative product is the iPhone. While mobile phones have existed for decades, introducing a touch-screen phone that doubled as a pocket computer completely changed the mobile phone landscape. Indeed, the innovation of one product — the mobile phone — opened the door to countless other innovations, such as app-based services like ridesharing and modern social media. Another contemporary example of product innovation would be Tesla. Automobile manufacturing has been a significant business for over a century, and electric cars have been available for decades. Still, by focusing on delivering a new kind of electric car based on the idea of performance and synchronization with technology, Tesla successfully brought innovation to the automotive market.
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The world of business is ripe with opportunities for startups to disrupt existing processes with thoughtful innovations. Consider Henry Ford, whose innovative idea to build a moving assembly line completely changed the world of manufacturing. Yet, despite the apparent value of process innovation, this kind of innovation is not generally what people think of when discussing innovation.
However, there is a market for process innovation. Many existing business processes are throwbacks to a different time before technology reached most consumers and information was readily available to the average Joe. Consider brokerage firms: even in the early days of the internet, brokerages charged consumers trading fees and frequently failed to offer meaningful market insights or analysis in their web products. The focus of the average brokerage was on profit, not consumer service. This business process was outdated and ready to be disrupted, and the team at stock-trading startup Robinhood took full advantage of this need. The company is now worth approximately $38 billion. Business process innovation is an area ripe for entrepreneurship.
Another way for a startup to innovate is by revamping a business model. Consider ridesharing. Taxi and limo services have been in existence ever since people began hiring horses or buggies. However, the previous business model was often inefficient: people who wanted a taxi would have to wait on a street to flag one down or call ahead to a taxi dispatcher and hope that the cab arrived at the right place and the right time. Further, many cab companies had complex rate structures that left consumers guessing how much their ride would cost. Rather than starting a new taxi business, startups like Uber and Lyft leveraged smartphone technology to connect riders and drivers. Routes were pre-mapped, and consumers have immediate access to pricing information; both parties in the transaction have access to GPS-enabled maps. This has turned the taxi industry upside down and offered consumers a new way to access rides.
Scalability is the ability of an organization to adapt to changing demands. As your startup grows, you will need to have ways of meeting consumer demand. In the case of a traditional business, say a trucking firm, this would mean expanding capacity: adding vehicles, drivers, trailers, warehouse contracts, and so on. In the case of a true startup, this generally means adding technological ability to continue serving your customer’s needs.
Continuing with trucking, let’s say your startup uses an algorithm and several APIs to find excess capacity on lighter-than-load (LTL) truck routes. As your market grows, you will need to scale up your operation to meet demand. You will need additional server capacity and a development team that can keep your business running as your customer base grows — and you’ll need to find a way to do this without eating into the long-term viability of your business.
Even if you are operating in a traditional business environment that requires overhead such as warehousing, the use of efficient business technologies — think CRM software and advanced marketing tools — can help substantially reduce the burden of growth on your company. But, remember, scalability isn’t only about growth: the growth must be structured in a profitable way that ensures business success.
In the absence of a scalable business strategy, your startup is highly dependent on the whims of your investors. Therefore, your startup must incorporate efficient business practices to keep overhead low and maintain viability. This is where the concept of business process innovation once more comes into play. Conversely, if your startup relies on inefficient or out-of-date business practices, it is unlikely to respond well in an environment of rapid change.
So how important is scalability to the success of a startup? Without scalability, your chances of causing market disruption and gaining large market shares are close to zero. For example, suppose your business idea delivers an innovative product or service but can’t scale up when the company grows. In that case, you do not have a startup: you have a traditional business bumping the ceiling in terms of viability. Without a plan to scale your business, it will collapse or hit a maximum size and grow no further.
Strategies for scalability
Since being scalable is key to the business success of a startup company, identifying strategic ways to scale your business is very important. Simply saying that you will grow the company is meaningless unless you have a specific strategy for scaling up. What are your plans for the future? How big do you plan to get, and how soon can you get there? Will you need to involve logistics experts for your company’s expansion, or can you scale digitally or using technology? These kinds of strategic questions are critical when planning to scale up your startup.
One of the first and most important decisions a startup faces is who to hire. While it might be tempting to hire friends and family, this is probably not your best option for long-term success. Your cousin might be an excellent coder, but he might have a lousy business sense or motivation issues. When you cross the bridge from entrepreneurship to founding a startup, you’ll need to surround yourself with people who are experts, people who have relevant experience. In addition, startups are usually small: you want to have people on your team who can help you lead the company.
Similarly, your startup should be willing to partner where it makes sense. Other companies operating in your space may be valuable business partners: if you are pioneering a new kind of health insurance application, why not partner with the local health system? Startups often partner with other firms to help grow their customer base and to support their businesses grow.
Another successful strategy employed by startup companies is not reinventing the wheel. If an existing technology can be utilized to perform some part of your business process, use the current technology. Don’t try to have your dev team recreate something that already exists: just outsource that process. Tactical outsourcing and the intelligent use of technology are standard features of startups.
Start me up
Startups are young businesses trying to fix pain points, fill market gaps, and change how business is done. Traditional companies and business models often have holes that can be exploited with technology or out-of-the-box thinking, and startups aren’t afraid to jump into the gap and change the world. They are innovative in terms of how they do business and the products they bring to market. They are scalable, ready, and eager to grow into whatever proportions the market will support. And they are fascinating: to see the birth of a company that could change the world is a beautiful thing.