We tried to diagnose: what differentiates (risk-capital) startup companies from non-startups? What is the startup DNA? Simply put: what makes startup companies so unique? We analyzed variety of criteria such as: Legal, financial, cultural DNA, manpower, and beyond. Here are our findings!
What is a Startup Company?
Here we try to draw the unique characteristics of risk-capital startups.
Key Differentiators of Risk Capital Startups
- Capital / Funding: startups are not dependent on revenues to cover expenses, but rather on raising funds from investors such as accelerators, angels, super-angels, incubators, micro-VCs, VCs, governmental fund such as incubators or directly from the chief scientist, etc.
- Product: startups develop and promote their own unique product.
- Business Culture: Responsive, fast-paste. Startups are dynamic and quick to react to the market and its trends. Startups change their offerings, vision and go-to-market plan rapidly, and easily adapt to changes.
- Disproportionate R&D Budget (see below)
A differentiating factor of startups is a disproportionate R&D budget. Even early-stage startups may raise many millions of dollars. Then they may allocate most of their budget to R&D, outspending even market leaders! The fact early-stage startups may not be profit-oriented, but rather innovation-centric, gives them an edge.
What Makes Startups So Unique – The Distinctive Characteristics
- Burn Rate: Startups burn their (invested) budget and raise new funds within 18-24 months. By that time they shall achieve a major milestone – the enabler of the next round.
- Goal is either to go public (IPO), sell the company or be acquired. This is referred to as liquidity event, or simply as an exit.
- Financial Success is defined as an exit of at least, let’s say, $50M.
- Profit/Revenues: Until a later stage, startups may focus on growing revenues, rather than on profit. Early revenues demonstrate the business case and execution skills, acting as enabler for the next round.
- Startup Stages are known as pre-seed/seed where the focus is on R&D; Round-A for establishing revenues; Round-B for growth; and Round-C for scaling.
- Lifespan of startups is planned for 5-7 years (or 8-10 including scaling). Many startups die earlier, or live longer, but usually those do not achieve the lucrative exit goal.
- Employees in startups are in the center. They have more of a sense of mission. They are highly looked at, and may even influence strategic decisions.
- Options: Startup have a unique financial tool called Employee Startup Stock Options. In short, those are company shares which have higher perceived value than their real one.
- Organizational Structure: early stage startups are highly flexible. They have little to no structure nor processes in place.
- Accelerators: Many startups start their journey in an accelerator program such as Y Combinator, 500 Startups, Mass Challenge (which also operates in Israel), etc.
When startup companies grow in size (Round-B/C), they shift toward being more similar to mature companies, in terms of structures, business goals, and culture. Within fairly a short time, startups change their cultural DNA from what it used to be just few years ago.
Not only size and stage influence a startup’s characteristics. Startups differentiate from one another, based on variety of factors such as: location, the industry of operation, target markets, whether the goal is to generate revenues or grow user-base, etc.
What Makes Startups Unique – Summary
In conclusion, early stage startup companies differentiate from other businesses in many ways. First and for most, they are dpeendit on investor’s funding to survive and grow. Startups usually put disproportionate focus on R&D during the seed stage. Later on, startups develop a minimal viable product and improve their market validation. As that milestone is achieved, startups raise additional funding (Seed/round-A).
Gradually startups shift and become more like mature companies. This transition usually takes place after closing the Round-B funding. Such a shift reflects in startups becoming revenue (and later profit) oriented; in having processes in place; in a mature and less employee-centric culture, and beyond.
What do you think makes startups stand out? Did we miss any major differentiators? Let us know in the comments below!