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Entrepreneurship 25 Apr 2018

What is a startup?

Adapt or die. An emphatic statement, but one that perfectly captures the spirit that drives startups. The search for innovation is often what characterizes these entrepreneurs, who now how to seize the opportunities enabled by new digital technologies linked to an innovative business idea.

A startup can be defined as an emerging company, normally with a core technological component and high growth potential. Generally, these companies champion an innovative idea that stands out in the general line of the market.

Given the increasing relevance of this type of emerging businesses, which has spawned some of the titans that now dominate the market (Facebook, Amazon or Google, for instance), it is not surprising that the startup phenomenon is drawing more and more attention and that the number of entrepreneurs willing to take a chance and venture outside their comfort zone to try their luck with an innovative business model is growing.

Types of funding

Compared to other types of more traditional companies, startups also represent a big change in terms of the economic component linked to the creation of a new company. Given that initial development costs are much more modest than the ones traditional businesses require, funding needs are also going to be lower.

Although these companies attract a broader variety of investors, these are some of the typical players that startups tap to fund their projects:

  • FFF (Family, friends and fools)

Although some don’t see them as actual investors, they play a key role in the earliest stages of a company. These are people that are close to the entrepreneur, that contribute with a limited amount of capital at the beginning when the idea is not developed enough to convince anybody else to invest.

  • Business angels

These angels are people that decide to back the project and invest their own money to get involved in a new business. With capital contributions that rarely exceed €50,000, these investors usually become involved in the project at other levels, contributing with their experience, connections or customers.

  • Seed capital

Seed capital usually appears in the early stages of a company’s funding cycle, before it becomes profitable. The more seeds the company attracts, the more likely to succeed it will be. According to seed capital expert Carlos Guerrero, investments usually range from €200,000 to €700,000.  The decision to invest, in this case, is not based on the company’s current profits, but more on the potential of the idea and the team behind it.

  • Venture capital

This type of investor normally appears when the startup is in a more advanced stage, but still is considered a risky investment. However, in contrast with business angels, venture capital does not come from individuals, but from specialized investment funds that invest much larger amounts, usually in different funding rounds, to ensure that the company does not run out of money in covering its future needs.

  • Private equity

As a general rule, this type of funding is reserved for already or nearly established companies that need a substantial amount of money to continue growing their business.

When is a company no longer a startup?

Google, Facebook, Twitter, Privalia… these are all hugely successful corporations that have become household names. These companies, once startups, outgrew their ‘emerging business’ label a long time ago.

While there is no rule of thumb to determine when a startup can be said to have become a conventional company, there are several factors that can give an indication the company has completed, or is on the verge of, making this transition. A startup becomes a conventional business if:

  • It goes public.
  • It is seen as an inspiration by other companies and starts having competitors in the market.
  • Employees no longer need to work more than 8.5 hours per day.
  • Employee leave (vacations, medical..) doesn’t affect the running of the company.
  • It is no longer an independent entity, but has merged or been acquired with/by another company.

What can be learned from the startup spirit?

It is evident that startup, as a concept, has stretched beyond its original meaning (which simply refers to a certain type of companies when they are in their initial phase), and that is now is also being used to describe a specific management approach.  In his book ‘The Startup Way‘ (2017)’, author Eric Ries identifies the five basic principles of a startup that every company should adopt, regardless of their size and their degree of maturity:

  • Continuous innovation

The point is not to make an innovative idea come to fruition, kick back and just start living off it, but to, through creativity, identify a method that will allow the company to grow and generate new ideas constantly.

  • The startup as an atomic unit of work.

The idea is to create work teams within large companies, enabling them to operate as if they were small internal startups, avoiding the sluggishness typical of traditional established businesses.

  • Entrepreneurship as the missing function in the organization.

In some companies, as they carve a more comfortable position in the market, the notion of entrepreneurship, understood as the continuous exploration of new business models, falls by the wayside.  These companies tend to focus too much on capitalizing on their tried and trusted profitable activity, and too little on developing new methods or ideas.  In his book, Eric Ries, argues that this typical startup function should become a core part of every company, on par with marketing or finance.

  • The second founding

The scale of the changes required to take the foregoing steps is such that it would lead to some sort of “second founding” of the company. This would require the company to rewrite its DNA, as it would be defining its whole corporate purpose around innovation, which would probably require restructuring the existing work methods. In other words, breaking away from traditional models and trying to replicate the flexibility that startups have when adapting to market demands.

  • Continuous transformation

This point could be summed up with the expression “and back to the beginning”.  According to Ries, companies must instill into their corporate DNA the ability to constantly reinvent themselves, so that once a change or transformation has been achieved, they are ready to take on a new challenge.

Knowing the relevance that startup ecosystem is acquiring in the business world, BBVA continues its work supporting these emerging companies with its tenth edition of BBVA Open Talent 2018. This time, in addition to the three main categories, 12 additional categories have been added and the winners will be able to participate in the BBVA Immersion Week, where the startups will be given the opportunity to connect with potential clients at the bank.

 

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