What is a Startup? How to Found One in 9 Steps?
According to the Oxford dictionary, a startup is a "newly established company." But does this mean that every newly formed company is a startup? What's the reality of the startup world?
In one sense, yes, every newly established company is theoretically a startup, but it might be more appropriate to call these companies "new generation startups". When you open a clothing store, you establish a new company, but this may not be a startup in the sense we understand today.
Let's consult our new generation dictionary, the famous Wikipedia: it defines a startup as a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model.
In one of its articles, Forbes defines startups as young companies that are established to develop a unique product or service, introduce it to the market, and make it irresistible for customers.
What distinguishes startups from any other newly established company?
Any company could continue doing the same business from generation to generation, but startups are, in a way, temporary. This may not sound appealing, but it's actually one of the features that make startups significant. A startup focuses on a problem and tries to solve this problem in a way that hasn't been done before. Once the problem is solved, and this solution is disseminated to the masses, the startup is considered to have completed its mission of introducing a new solution and scaling it. It then transitions into a growing company. Traditional ventures generate predictable profits in areas proven to be successful, whereas startups operate under a more unpredictable and innovative business model. A startup develops innovative solutions to specific problems, and rapidly grows by presenting these solutions to its customers through a sound business model. Startups aim to reach large audiences rapidly.
These companies generally have high initial costs, while their revenues are limited. Therefore, they seek capital from various sources, such as investors and venture capitalists (VCs). Their growth objectives and scalability make them highly suitable for raising financing through investments. The founders generally possess the vision to meet the needs of the masses and to solve their problems using unprecedented methods. They have harmonious, competent, and creative teams. While a startup doesn't necessarily have to be a tech company, a significant portion of them are indeed tech companies. For instance, Nuvio, a fintech company that solves an unmet but crucial need of SMEs, is a startup.
Why are Startups Important?
They Play a Crucial Role in Economic Growth and Support the Global Economy
There are numerous theories and methods related to growth. The most relevant aspect to our topic is this: since the 1980s, views about investments in human resources, intellectual capital, innovation, and technology supporting economic growth have become stronger. In today's world, these investments are considered indispensable. When we look at today's startups, we see that the startups that grow especially with solutions based on innovation and technology, have the potential to play a critical role in supporting economic growth. With large-scale investments, these startups contribute greatly to the growth of the economies they become part of. Startups, which solve problems with their creative products, services, business models, and technologies, essentially form a massive innovation habitat. In short, a growing startup is one of the main players in the relationship between technology, innovation, and the growth of country economies.
In addition, the economy is becoming globalized. Within the scope of our topic, this means that a startup can be supported by investors from different regions, can receive investments locally or from other regions, and can create significant economic value by growing rapidly. Startups and investors now represent a separate economic structure. This economic structure, commonly referred to as an ecosystem, has grown so much that it has surpassed many national economies around the world. These companies' nurturing of creativity, contribution to dynamism, creation of new job fields, job creation, formation of new competitive dynamics, and offering of new perspectives to society, all influence the transformation of society and the global economy, in addition to their financial values.
They Develop Technology and Grow New Industries
We've mentioned that startups develop technology. The development of technology is not limited to finding new solutions in specific areas. The use of new technologies increases the productivity of one or more sectors, contributes to their growth, and accelerates their growth momentum. The faster growth of sectors and industries contributes not only to economic growth but also to job creation policies, the regulation of economic activities, production, and the generation of new services.
They Develop Vision, Offer Society a New Perspective
One of the strengths of startups is their creativity and courage in many areas, such as business ideas, business plans, management, and leadership. This creativity contributes to the development of new ideas by others and acts as a driving force. New industries, job fields, and a new world emerge from these contributions.
In conclusion, a startup both supports economic growth and contributes to societal structures. A growing startup is an essential player in the relationship between technology, innovation, and the growth of national economies.
How to Found a Startup in 9 Steps
Startups are no longer just buzzwords. They're a vital part of the modern economy, contributing to innovation and creating job opportunities. But having a great business idea is only the beginning. An idea that isn't executed well can end up gathering dust on a shelf. So, how do you go from an idea to a flourishing startup? Let’s dig into it with these 9 steps.
1- Focus on Solving a Problem
The raison d'être of a startup is to solve a problem that hasn't been effectively tackled before. Start by clearly identifying and analyzing the problem. You might have heard of the 5W1H method, which stands for: What, How, Where, Why, When, and Who.
- ❓What: What problem are you solving?
- ❓How: How did this problem arise? How will you solve it?
- ❓Where: Where does this problem occur? Where will your solution begin and end?
- ❓Why: Why is this problem there and why is it important to solve?
- ❓When: When did this problem arise? When will your solution be effective?
- ❓Who: Who are your target customers who will benefit the most?
Asking and answering these questions helps to lay down the roadmap for the next steps. Always keep an open mind; sometimes the audience who needs your solution the most might not be the one you initially targeted.
2- Create and Validate the Solution
After analyzing the problem, it's time to come up with one or several potential solutions. Whether it’s sketched on paper or a simple prototype, start small. Next, test your hypotheses with your target audience as soon as possible. You might be solving a legitimate problem, but will people pay for your solution?
The testing phase can be revealing. Often you'll find that what you considered crucial isn't that important to your potential customers, or conversely, what you underestimated turns out to be vital. The initial customer interviews are a low-cost way to test your hypotheses. The key here is to listen and learn, not to lead the conversation.
3- Conduct a Competitive Analysis
You might think you’re the first to come up with this brilliant idea, but chances are someone else has thought of it too. Research your competition thoroughly, both direct and indirect competitors. Never underestimate anyone; they might have good reasons for doing things a certain way.
Several approaches are available for competitive analysis, like SWOT (Strengths, Weaknesses, Opportunities, Threats) or PESTEL (Political, Economic, Social, Technological, Environmental, Legal). During this phase, try out your competitors’ products and even consider interviewing their customers to get insights into their strengths and weaknesses.
4- Do Market Research
How many people do you think will use or buy your solution? To answer this, you need to have a deep understanding of the market you’re entering. What are the annual sales figures for your competitors? Where are their products being used the most? Are there switching costs involved for customers if they were to move to your solution?
Being cautious and realistic at this stage is essential. It's unlikely that your solution will be adopted by the entire market. Therefore, you should be prudent in your market projections.
5- Create a Business Plan
You've validated your solution, scoped out the market size, and set your goals. Now it's time to clarify how you'll achieve these goals with a business plan. What is a business plan? Essentially, it's a summary document outlining how you'll bring your solution to market, what channels you'll use, your value propositions, budget, and revenue models. Taking the time to consider and document all these aspects will also prompt you to focus on some issues you may have overlooked so far. The process of preparing your business plan is actually more valuable than the document itself, as this will be your roadmap. Remember, plans can change, so your business plan should be flexible. A simple approach we suggest is to use the Business Model Canvas created by Alex Osterwalder. Click here to download it.
6- Company Formation
You’re ready now. If you’ve made it this far, it’s time to form a company. Now you move onto steps like seeking investment, building a team, and making small inroads into the market. It’s time to move beyond just having a startup idea. At this stage, you will likely need to become a legal entity. You should decide on your type of company and account for the ongoing costs in your financial planning. We’ve written about how to choose your type of company in Nuvio Academy. You can read it here.
7- Build a Team
The right team is invaluable for any company but especially critical for startups. Success for startups is tied directly to the talents and efforts of the team members. You'll need people for product development, strategy, and sales and marketing. The challenge often starts here. How do you move forward without a full founding team when the product is still an idea? You could seek pre-seed or angel investments for cash influx, or find a co-founder willing to work for equity.
8- Develop an MVP
If you’re in the early stages, you probably don’t have the resources to develop a full-fledged product. Most importantly, doing so without customer feedback could result in wasted resources. So, focus on developing a Minimum Viable Product (MVP). This could be a simplified product with only the essential features, or even a prototype.
Remember Reid Hoffman's quote:
“If you are not embarrassed by the first version of your product, you've launched too late.”
Don’t aim for perfection! Get to market quickly and adapt based on what you learn.
9- Track Your Metrics
So, you've launched your product and gained some customers. But that's not the end; it's more like a new beginning. Are users actually engaging with your product? How are their purchasing behaviors evolving over time? What's the cost of acquiring new customers? Is your company maintaining a healthy cash flow and overall financial health? These are questions you'll need to keep an eye on as you journey from being a startup to scaling up. Changes in these metrics should inform your strategies dynamically.
We can broadly categorize these metrics into product metrics and financial metrics.
📊 Product Metrics:
For a startup, it's essential to track metrics such as Customer Acquisition Cost (CAC), Customer Retention Rate, Churn Rate, Life Time Value (LTV), the ratio of LTV to CAC, and Monthly Active Users (MAU). Keeping tabs on these metrics will give you a comprehensive understanding of customer satisfaction, your costs, and the long-term profitability of each product.
📊 Financial Metrics:
On the financial side, key metrics include Capital Expenditures (CapEx), Operational Expenditures (OpEx), your Monthly Burn Rate, Runway (how long your current capital will last), Profit Margin, Conversion Rate, and Monthly Recurring Revenue (MRR). These metrics will help you understand the impact of income and expenditures on your cash flow.
As the amount of data you need to track increases, manually keeping up with it becomes increasingly challenging. Sifting through pages of spreadsheets can create complications and lead to errors. Instead, you can track all your financial metrics with Nuvio. You'll have instant access to all the financial data you need—profitability, cash flow, average collection period, bank account activity—without having to make any calculations yourself.
So, make tracking your metrics a priority. It'll give you the insights you need to steer your business in the right direction.