The Growth of the Start-Up Economy
A May 2022 report from the World Economic Forum declared that start-ups are crucial in bringing about societal change and driving economic recovery and responsible growth. Entrepreneurs are founding and building new companies all over the world. The American start-up ecosystem, for example, has spread outside of the coasts and high-profile tech hubs, such as San Francisco, Boston, and New York City, to other parts of the country. Start-up activity is happening everywhere in cities and towns across the United States. The Progressive Policy Institute (US) highlighted that fast-growing start-ups offer the highest potential for job growth in our nation, creating jobs much faster than older companies.
In March 2020, start-ups’ prospects looked bleak. Consumer demand stagnated, travel ceased, and struggling businesses became forced to shed workers. Global venture capital spending dropped 17% in the first quarter compared to the preceding one.
Following the height of the pandemic, start-ups are leading the way back to economic vitality as we learn to live in a world different from three years ago. Governments have increasingly been paving the bumpy terrain for start-ups. Those efforts accelerated during the pandemic, as countries sought to protect small businesses vulnerable because of their size—and start-ups vulnerable because of their youth. For example, with anxious eyes on the United States and China, the European Union recently proposed rules to encourage tech start-ups across its member countries (Start-Up Genome).
In this article, we are shining a light on start-ups to understand better how we define them, their unique characteristics, and some examples of successful start-ups that have become global enterprises.
What is a Start-Up?
A previous article from Forbes highlighted that over the last three years, entrepreneurship has soared, which has, in part, led to an increase in the number of new business start-ups. While the terms entrepreneur and start-up are regularly referenced in the business world, there often needs to be greater clarity about what constitutes an entrepreneur and a start-up.
Investopedia defines a start-up as a company in the first stages of operations. Start-ups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. These companies generally start with high costs and limited revenue, so they seek capital from various sources, such as venture capitalists.
Steve Blank defines a start-up as a temporary organization designed to search for a repeatable and scalable business model. Start-ups can maximize their time searching for a repeatable and scalable business model by employing a methodology of customer development that helps them identify the market for their product.
Understanding Start-ups
Start-ups are companies or ventures focused on a product or service the founders want to bring to market. These companies typically don't have a fully developed business model and, more crucially, lack adequate capital to move on to the next phase of business. Most of these companies are initially funded by their founders.
Many start-ups, however, also turn to others for more funding, including family, friends, and venture capitalists. Silicon Valley, for example, is known for its strong venture capitalist community and is a popular destination for start-ups, but it is also widely considered the most demanding arena.
Start-ups can use seed capital to research and develop their business plans. Market research helps determine the demand for a product or service. At the same time, a comprehensive business plan outlines the company's mission statement, vision, goals, and management and marketing strategies.
Telefonica identifies the following key characteristics of a start-up
Scalability: These companies seek to increase their size and income within a short period of time and improve their production and sales without the need for a rise in their costs. On the other hand, SMEs have more traditional visions and are in the market to follow a more linear course.
Technology and innovation: these companies are based on innovative ideas to satisfy a new need in the market. They rely on digital technologies to evolve, while SMEs may employ state-of-the-art technologies without necessarily establishing their business model on innovation.
Global approach: The goal of a start-up is to grow and expand rapidly but with a broader and more international focus, as opposed to SMEs, which target a local or national market.
Youth: These emerging companies have reached the early stages of brand management, sales, and employee recruitment. They have no prior positioning.
Reduced initial costs: Start-ups are created with low production costs to grow faster and thus increase their profit margins. They begin with a small workforce and without their own premises.
As well as having unique characteristics, we can also categorize six different types of start-up organizations:
Lifestyle start-ups are founded by entrepreneurs who wish to begin or continue to work for themselves in an area they are passionate about. Examples include freelancers or web designers who have a passion for their work.
Small business start-ups are small, family-run businesses with little or no ambition to scale. Examples are hairdressing salons, grocery stores, and bakeries, among others.
Scalable start-ups are businesses founded by entrepreneurs who believe from the beginning that they can change the world with their business idea. Their main concern is finding a scalable and repeatable business model to draw investors' attention to boost their business.
Buyable start-ups are businesses that are sold to large companies after achieving positive results that catch their attention. This particular type of start-up is prevalent in web solutions development companies and mobile.
Large company start-ups have the main objective of innovation and change. A business in this category develops products or services that revolutionize the market and quickly become recognized. However, these businesses must continually innovate and evolve to attract new users and markets.
Social start-ups are comprised of individuals who are focused on making the world a better place. Thus, the main objective is not to gain profit but rather to contribute positively to the community. Examples are charities and other not-for-profit organizations.
Examples of successful start-ups
Every large company was once a start-up, founded in somebody’s kitchen, workshop, or storefront. History shows that even the fastest-growing new companies take years or even decades to achieve economically significant scale.
For example, General Motors used strong management and the adoption of new production techniques to become the dominant player in the most significant new market ever created, with peak employment of over 800,000 (Progressive Policy Institute). Some other examples include the following:
Facebook. It began at Harvard University as Facemash and is now one of the wealthiest companies in the world.
Twitter. Founded in 2006, it is a popular networking site globally. It was most recently in the news due to being bought by the business magnate Elon Musk.
Brainly. It is a Polish e-learning platform that is ready to conquer the world.
Revolut. Although it started in 2015 as a travel card, it has revolutionized international payments.
Glovo. The company enables customers to purchase, pick up, or receive any product online and deliver it in less than sixty minutes.
Vinted. Established in Lithuania, Vinted has successfully developed its business across Europe.
Start-ups can catalyze economic growth both globally and locally. However, they will only ever be successful if they either address an unmet need, find a better way of doing something, or can do something better than an existing product or service.