Since 2021, the United States has witnessed a start-up boom. There are massive business creations and job generations, which are contributing to the strong employment numbers, apart from emboldening the stats related to productivity and wage growth.
As per the Centre for American Progress, between January 2021 and January 2023, American entrepreneurs filed 5.2 million “likely employer” business applications, slightly over a one-third increase compared with the number of applications filed between 2017 and 2019.
Also, entrepreneurs filed 450,000 likely employer applications in the fourth quarter of 2023, a 37% increase over the fourth quarter of 2019. The number of start-ups and businesses under one-year-old surged in 2022 and 2023, surpassing the pre-Great Recession levels for the first time.
Since we are talking about start-ups, we also need to remember that the former is different than businesses, as Joel Mier, Lecturer of Marketing, University of Richmond, states, “All start-ups are businesses, but not every business is a start-up.”
Why the term is so special?
The term start-up refers to a company in the first stages of operations. Start-up founders normally finance their ventures and may attempt to attract outside investment before they get off the ground. Some of the funding sources include family and friends, venture capitalists, crowdfunding, and loans. The initiative, despite the risk of starting with high costs and limited revenue, also brings unique opportunities to work with great minds, while focussing on innovations and learning things during the process.
Start-ups focus on a single product/service that is disruptive. These companies don’t possess a fully developed business model and undergo multiple rounds of capital raising to sustain and move into the net round of their operations.
Talking about start-ups and innovation, we have a great example in the form of OpenAI, whose artificial intelligence (AI)-powered chatbot called ChatGPT has disrupted both the tech sector and the broader economy.
Since ChatGPT’s market entry in 2023, more tech start-ups are undertaking research and development work in the field of generative AI (AI that can create new content and ideas, including conversations, stories, images, videos, and music) to make the latter a transformative force for the 21st century socio-economic order.
Despite the risk of failing to be higher in the start-up field, we have examples of Microsoft, Apple, and Meta (formerly Facebook) beginning as start-ups and ending up becoming publicly traded companies.
A business, on the other hand, refers to an organisation/enterprising entity engaged in commercial, industrial, or professional activities. The purpose of a business is to organise some sort of economic production of goods or services, while ranging in scale and scope from sole proprietorships to large, international corporations.
“On a high level, a start-up works like any other company. A group of employees work together to create a product that customers will buy. What distinguishes a start-up from other businesses, though, is the way a start-up goes about doing that. Regular companies duplicate what’s been done before. A prospective restaurant owner may franchise an existing restaurant. That is, they work from an existing template of how a business should work,” Forbes explained further.
While start-ups can chalk out their operational nitty-gritty during the fundraising round, businesses don’t enjoy this advantage as they have to file a formal document that outlines the company’s goals and objectives and lists the strategies and plans to achieve these goals and objectives. Only then, they can borrow capital from the market and begin their operations.
Also, businesses need to determine their legal structure before entering the operations, as they need to secure permits and licenses, apart from following other registration requirements. Corporations are also considered to be juridical persons in many countries, meaning that they can own property, take on debt, and be sued in court.
Talking about what differentiates a start-up from a full-fledged business, this article will break down things in a simplified manner.
Vision and funding
Let’s start with “Company Visions.” Start-ups are there to innovate stuff that will change the face of an industry vertical and the overall economy, in the best-case scenario. These ventures want to be the most innovative, creative and disruptive forces within an industrial set-up.
And talking about funding and start-ups, it’s a stage-by-stage process. First, there is a preliminary round known as bootstrapping, when the founders, their friends and family invest in the business. Then you have seed funding from so-called “angel investors,” high-net-worth individuals who invest in early-stage companies.
Following that, we have Series A, B, C and D funding rounds, primarily led by venture capital firms, which invest tens to hundreds of millions of dollars into companies. Finally, a start-up may decide to become a public company and open itself up to outside money via an IPO (Initial Public Offering), an acquisition by a special purpose acquisition company (SPAC) or a direct listing on a stock exchange.
Businesses, on the other hand, are more focused on being profitable within an industrial ecosystem. While they are scalable, they can serve either local or foreign markets (or both at the same point of time). Start-ups get most of their funding from venture capitalists (VCs), who make major investments in these businesses, in exchange for which they get equity in the business. If the venture tastes market success, the VCs profit along with the start-up owner.
Businesses usually take out loans from traditional banks/online lenders (fintech companies) to begin their operations. The business owner (call the person CEO as well) only needs to pay the interest amount over time, while he/she gets to keep all the equities in the company.
Growth
Start-ups want to grow as quickly as they can, increasing the top-line revenue (sales or the revenues of a company which is the total income generated during a particular period) through a business model that can be easily replicated and scaled. When we say replicable, it means the start-up founder can play the game safe by opting for a business model which has already found market success with another industry peer. For example, after OpenAI’s ChatGPT success, there are tech start-ups who are trying to introduce generative AI-powered chatbots into the market, realising the tool’s potential to change the 21st century socio-economic order.
“There’s another key factor that distinguishes start-ups from other companies: speed and growth. Start-ups aim to build on ideas very quickly. They often do this through a process called iteration in which they continuously improve products through feedback and usage data. Oftentimes, a start-up will begin with a basic skeleton of a product called a minimal viable product (MVP) that it will test and revise until it’s ready to go to market,” Forbes continued.
“While they’re enhancing their products, start-ups are also generally looking to rapidly expand their customer bases. This helps them establish increasingly larger market shares, which in turn lets them raise more money that then lets them grow their products and audience even more. All of this rapid growth and innovation is typically, implicitly or explicitly, in the service of an ultimate goal: going public. When a company opens itself up to public investment, it creates an opportunity for early investors to cash out and reap their rewards, a concept in start-up parlance that is known as an exit,” it added further.
On the other hand, businesses use a slower and cautious growth strategy focused on building profits before expanding. Since they envision themselves to stay in the market for a prolonged period, they opt for a stable growth route. In this way, the risk tolerance (the amount of loss an investor is prepared to handle while making an investment decision) remains lower.
Profits
Since start-ups are not built as profit-generating machines, they run with the risk of venture capitalists pulling the plug upon their investment flow, in case their investments are not getting converted into profits. Start-up founders, however, have the option of taking their businesses to the public and profit from there.
“Successful start-ups eventually receive additional funding from lenders or other sources like venture capitalists and angel investors. The start-up can offer investors (and employees) something the small business might not be able to: equity in the company. Typically, founders offer equity to investors in rounds (seed funding, then Series A, B, C, etc.)—each with specific goals, terms, and pricing. Each round of funding erodes the start-up founder’s equity and diversifies the company’s ownership. Notably, shareholders and board members generally have voting rights,” online HR (Human Resources) platform Gusto commented.
Talking about raising money from the public, the start-up founder can opt for the initial public offering (IPO) route. He/she can also sell the business, or merge it with another company to scale growth and capital.
Businesses don’t possess that above risk, as they don’t get their capital from investors and venture capitalists. By following an already successful business model, they end up generating profit from the very first year of their operations.
Risk Factor
While there’s some degree of risk with any new venture, a start-up faces it more than a small business. Start-ups are formed by creative minds who want to disrupt the market with a new product/concept. However, the uncertainty here is how the consumers will respond to the product/concept. And then add the headache of undergoing several funding rounds and testing several product iterations before finding what works and even then, success is never guaranteed.
On the other hand, businesses tend to use profit-generating business models, which can’t be tinkered/refined further. In that way, the risk factor remains low, thus providing entrepreneurs with the assurance called “longevity.”
Can start-ups become full-fledged businesses?
Yes, but after a lot of hardships. While we have inspiring examples like Amazon, Netflix, Uber and Airbnb, industry data suggest that 90% of start-ups fail. And even after a start-up becomes an established market player, they face the challenge of staying efficient and profitable.
“Start-ups may be able to rely on funding from different kinds of outside investors while they gain their footing. But an established business needs to run smoothly to make a profit from what it’s selling,” said Joel Mier, Lecturer of Marketing, University of Richmond, thereby giving a reminder that once the start-up transitions into a big business, it faces challenges like how to manage workers better and run the operations in a way that solves the customers’ problems while enabling the company to meet all of its business goals.