The word startup comes up with an image of high-risk, high-growth, and funded technological companies. While some firms do meet this profile, but they are still a minority. Startups can be characterized depending on their growth potential, funding requirements, and lifestyle demands. An entrepreneur must know the many varieties that it can be categorized into.
Before you determine which type of startup best suits your business concept, personality, and lifestyle objectives, you must grasp the distinctions in investment needs, risk profiles, lifestyle implications, and upside possibilities.
How To Determine The Type Of Your Startup
What you choose to do in response to the following two questions will have the most significant influence on the type of startup you create:
Size & Growth Opportunities
- Will your company develop rapidly to a significant size, or will it grow at a slower but more constant rate? Businesses that are experiencing rapid growth have the following characteristics:
- A big potential addressable market, such as cellphones or search engines, is a good illustration.
- Your clients will quickly accept a novel technology or business strategy if you develop one that is unique.
- The business model has a high degree of scalability. Often, technology is the key to achieving such scalability, which is why most fast-growing businesses are in the technology sector.
- Due to the possibility of competition entering the market, it is necessary to execute very quickly.
Requirements for Financial Support
Are you aware of the amount of external finance you will require to get your firm off the ground, and who will be providing it to you? Your answer will have the most significant impact on the type of startup you create. Startups that require a significant amount of outside finance have several traits in common, including the following:
Their substantial capital requirements are frequently driven by the desire to;
- Execute fast ahead of any competitors
- Establish assets (intellectual property, market share, patents, and so on) that will deter competitors from entering the market in the first place.
- To attract external investors, a business must have an exit strategy clearly outlined from the beginning.
A typical scenario is that the founder(s) will have to share business ownership with external sources such as venture capital firms or private equity firms, which can have significant influence and control over the future direction and growth of the businesses.
It is important to note that the answers to the two questions above have a significant association; high-growth enterprises with enormous prospective markets frequently demand large external expenditures upfront and are consequently venture funded.
What Are The Common Types Of Startups?
Startups fall into five categories. This detail is not exhaustive, but it gives a framework for evaluating your startup and the decisions you will need to make as it grows.
A lifestyle business allows you to work on your terms (choose your hours and location) while paying you enough to make the work worthwhile. A lifestyle business is generally founded by a well-connected person who has retired from a high-profile job or profession. The founder can conduct them online, i.e., via internet-based collaboration and communication technology, without requiring a physical site. Business consulting and financial guidance are two examples.
Traditional Small Business
The vast majority of today’s entrepreneurs are involved in a traditional small firm. Businesses in this category are known for their steady but moderate growth. These include hairdressers, IT consulting firms, consultants, grocery stores, carpenters, insurance agents, plumbers, Internet commerce storefronts, and electricians.
A franchise is another example of this type. An entrepreneur seeking structure, advice, and marketing help can benefit from a franchise. One of the most significant facets of owning a franchise is the ongoing royalty payments. However, a franchise might be an excellent option for an entrepreneur with limited startup expertise but ample capital to invest in a franchise.
It includes businesses that are formed to expand but do not seek outside capital. You cover the launch expenditures with your assets or credit. You shun external stock investment to keep ownership of your company. This type of business is frequently formed by affluent or has already launched successful businesses and wants to expand.
Note that a company in this category may seek external finance after growing to a reasonable level. The critical difference is that the entrepreneur can fund the venture with her funds.
Scalable External Funded Business
This category best depicts Silicon Valley technology startups like Facebook, Uber, and Cloudera. The founders believe their proposal can change the world. They need external funding to implement it rapidly. Unlike small-business owners, these founders want to build a substantial equity stake in a company that will eventually go public or be purchased, resulting in a hefty payout for themselves and their investors.
Scalable businesses need risk capital to find a business plan. They hire the brightest minds. When they find it, their concentration on scale necessitates more venture funding. This type of venture either succeeds tremendously or fails miserably.
These are enterprises built to be purchased by a more prominent firm in the future. These firms have many similarities to the preceding category (Externally Funded Scalable Startup), but their target market is smaller. Businesses in this category often apply a globally successful business model to a local or niche market.
Building a tech firm has become cheaper in the last five years. The crowd or angel funding is used by many of these firms. Because there are no typical venture capital investors (and thus no major exit dynamics), they do not have to “swing for the fences” in terms of liquidity. This type of startup is likely to sell for $5 million to $50 million. Les co-fondateurs et investors encadrent millions but not
The Bottom Line
Types include the above five types. Each style takes varying levels of effort and skill and gives varied financial incentives. An entrepreneur should grasp this dynamic and choose a startup that best suits their strengths and personal aspirations.