What is a Startup? How They Work & Grow

Four startup employees around two laptops.

Whether despite the significant economic and workforce issues over the past few years due to the COVID-19 pandemic or because of them, the United States Census Bureau recently noted that more applications were filed for new businesses in 2021 than in any other year on record. Nearly 5.4 million startup business applications were submitted, marking a 53% increase from 2019. 

With the launch of so many new startups, you may be wondering what startups are, how they work, and more. How do they compare to other businesses? And how do they work and grow in such a competitive market? Our team of experts here at TaxRobot is here to help explain the essential information you should understand about startups, so please keep reading for more details. Also, please consider exploring our wide selection of other educational resources covering critical topics for startup businesses. 

Related: Startups Can Get $250,000 From The IRS: Here’s How

Understanding Startups: The Basics to Note

In short, the term “startup” refers to a new company or business that’s currently within its first essential stages of operations. They’re typically developed by one or more entrepreneurs who aim to create a specialized service or product that they believe there’s a legitimate, profitable demand for. These fledgling companies typically start functioning with high costs and limited revenue. They also need to seek capital from various sources, such as venture partners and angel investors

Generally, the goal behind startups is to disrupt industries and create a significant change in the market- or even the world. Founders typically aim to provide society with something it needs, but that isn’t yet available. As you can imagine, creating a new and successful innovation is very tricky, and it can be even tougher to convince people that said innovation is worth their time and money. This issue makes the development of startups a gamble, which is apparent in the way that most startups tend to fall flat.

According to research, 21.5% of startups fail in their first year, 20% fail in their second year, and 50% close by their fifth year. By their tenth year, as much as 70% of startups go out of business. In 2019 the overall startup failure rate sat at about 90%. These high failure rates are primarily due to a range of common issues, including;

  • A lack of funding
  • Targeting the wrong industry market at the wrong time
  • Bad marketing
  • Bad partnerships
  • Lack of research

Despite these harrowing odds, more and more small businesses are still coming onto the scene every year, and there have been a wide array of notable success stories. Small businesses also make up approximately 99.9% of all businesses in the United States, making them one of the most critical sources of the country’s economic stability and growth.

How Do Startups Work?

On a basic level, startups work much like any other company, business, or organization. A group of employees come together to create and sell products and services that customers will- hopefully- purchase. The key differentiating feature of startups is how they go about that specific process. While regular companies duplicate what’s been done before, startups intend to create an entirely new and innovative template.

For example, most prospective restaurant owners either franchise an existing restaurant or work from an established, well-known template of how traditional restaurants typically operate; people come in, sit down, order, eat, pay, and leave. On the other hand, a startup aims to establish an entirely new template to frame its business operations. 

That’s how new food industry operators like Home Chef, Blue Apron, and Hungryroot started offering meal kits to customers. These kits provide people with restaurant-quality food that they can make quickly and easily from the comfort of their kitchen and for a fraction of the price of visiting a regular restaurant. 

Growth and Speed: The Two Key Startup Aims

One other key factor that separates startups from other companies is their specific aims toward speed and growth. Typically, startups aim to quickly build on their ideas through iteration and continual product improvement using feedback and usage data. Generally, startups will start with the basic skeleton of a product- also called a minimum viable product (MVP)– that they will repeatedly test and improve until it’s ready to hit the market.

While enhancing their products and services, startups also focus on rapidly growing their prospective customer base and increasing their market shares. These practices can help startups raise significantly more money and help them focus on growing their audience and products even further with the ultimate goal of going public. If the startup is successful, it can continue growing its customer base, developing new products and services, and steadily expanding its operations to meet new market demands.

Related: Business Startup Costs & Tax Deductions

The Advantages and Disadvantages of Startups

Startup employees using sticky notes to plan a project.

Like with any business or company, launching a startup or working with one comes with a wide array of distinct advantages and disadvantages that people should consider carefully before making any career moves into the overall startup realm. Below, we’ll explore some of the most apparent pros and cons of startup ownership and employment for you to keep in mind.

Advantages

Startups tend to have relatively few employees, so those working for one will likely have to play several different roles and have many responsibilities. However, this also creates more of an opportunity to learn, making the work very rewarding. Startups also tend to offer a more relaxed and communal work environment and typically allow for more flexibility regarding hours and employee interactions. While there’s still a hierarchy of who is in charge and who isn’t, things are often quite casual.

Other key advantages of startups are that they typically provide better workplace benefits than larger, more well-established companies and businesses, including shorter workweeks, free food, PTO, in-house childcare for parents, and more. Additionally, startups are often more welcome to new ideas and innovations, allowing employees to leverage their creativity and run with ideas.

Disadvantages

The primary disadvantage of starting or working for a startup business is the increased risk, which isn’t present when one works with a more well-established company. The success and longevity of a startup are not guaranteed, after all. In fact, as we noted in the section above, success is relatively unlikely in the long term for most startups. Additionally, startups need to raise a lot of capital before they can ever start making a profit and need to keep their investors happy. Otherwise, they run the risk of having to shut down operations due to insufficient capital.

Another disadvantage is the long hours typical for most startup employees. This can create many stressors for people who aren’t always compensated, which can be especially problematic since startups typically can’t pay their employees as much as other companies to begin with. Sometimes they can’t even meet standard market rate payments

Taxes can be difficult and time-consuming to complete, especially if you’re the owner of a new startup struggling to take its place in the market. Thankfully, our AI-powered R&D tax credit software at TaxRobot is specifically designed to help make the process easier while earning you bigger refunds!

Special Considerations for Startup Development

Now that we’ve covered the essential advantages and disadvantages of startup ownership and employment let’s take a step back and examine the various special considerations that startup developers need to factor into their business approach. While this is not a full list, it does cover some of the most common and essential elements to keep in mind.

Legal Structure

Startups need to consider the legal structure that fits their business operations. For example, a sole proprietorship is a good choice for founders who also serve as critical employees of the startup. At the same time, partnerships are a viable legal structure for startups with many people who have joint ownership. 

Physical Location

Locations can make or break a business, especially if it requires the operation of a physical facility to sell goods and attract customers. The best location for a startup will largely depend on the business it’s conducting and the products and services it sells.

Online Presence

Even in-person retail stores need a secure online presence in the current day and age to help attract customers, reach a wider audience, and stay relevant amid the sea of market competition. An online presence can involve everything from an online store page where people can buy goods or social media accounts to help connect with customers.

Funding

Funding is arguably the most critical element of consideration for startups since it determines whether or not a startup can even begin to get its baseline products and services off the ground. Startups typically have to raise money through a range of methods, such as;

  • Online crowdfunding 
  • Business loans
  • Business credit cards
  • Personal loans
  • Equipment financing
  • Venture capital
  • Angel investors

Critical Elements to Startup Success

Two startup employees discussing content on a laptop.

There’s never a guarantee that a startup will succeed as a business, and only one in ten startups are likely to go beyond their first decade of operations without needing to close down. However, a list of critical questions can help a startup better determine its odds for long-term success.

  1. Are the employees and teams highly passionate about the business and its key ideas?
  2. Do the startup founders have any market, domain, or industry expertise to help them succeed?
  3. Are all parties involved willing to put in the time and effort needed for success?
  4. Why is the startup’s idea important, especially in the current market climate?
  5. How big is the market the startup is trying to break into?
  6. How much market competition is there?

Answering these critical questions can help startup developers and employees know if their operations have a better chance of succeeding. However, everyone needs to remember that nothing is guaranteed. 

Starting and Growing a Successful Startup

We could go into a massive amount of detail regarding how people could start to develop and grow their own startup business, but that would require an entirely new article just to cover all of the basics we believe people should know. To help draw things to a close, we’ll briefly explore some of the most critical steps to successful startup creation and growth. 

  1. First, you need to have an excellent idea for a new product or service that people need and want to buy.
  2. Next, you need to do extensive market research to determine if your idea is feasible. 
  3. You then need to develop an effective business plan that outlines your goals, mission, objectives, company structure, and next operation steps.
  4. You’ll also need to obtain enough funding and get all the correct legal paperwork done.
  5. Finally, you’ll need an effective marketing plan to attract customers and establish a client base.

From there, you should be able to launch your business and adapt things as needed once operations expand.

Related: 5 Best Startup Business Tips You Need to Know

Final Factors You Need to Consider

As their name suggests, startups essentially serve as the vital starting phase of any new business. And while the majority of startup businesses are destined to go under within a decade of beginning operations, they still serve as a critical element that helps keep the economy afloat. Our financial experts at TaxRobot sincerely hope that the above article has given you all of the essential information you’ll need to understand what startups are, how they operate, and even how to get started on the path towards developing your own. 

If you’d like access to even more information on how you can start moving forward towards startup creation and beyond, please don’t hesitate to explore our wide selection of other expertly written articles. Also, be sure to contact us to learn about how our specially designed AI-powered tax software can help your startup navigate the complicated world of R&D tax credits to earn more extensive returns. 

As a startup owner, you may be struggling to overcome the various tax-related obstacles you encounter each year. Thankfully, our team of specialized tax experts at TaxRobot is here to help make the process easier by providing access to our AI-powered R&D tax software at value-based pricing!

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