What is a start-up? Definition, funding and phases

Definition

A start-up company ("start up" = "to set something in motion") is a young company with an innovative business idea and high growth potential. However, they usually have few financial resources and founding a start-up is also usually a high financial risk.

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Statistically, the lifespan of a start-up is about up to 2.5 years. After this time, the start-up has grown so much that it discards its status as such or is sold. Normally, a startup has between 1 and 5 team members, who are also usually the founding members.

Funding

In most cases, start-ups are not classically financed by banks, but via innovative forms of financing such as crowdfunding and venture capital, with successful start-ups going through several stages of corporate financing with increasingly higher amounts.

Phases

Early Stages:

Features:

• Seed phase, pre-foundation phase: In the seed phase, a business plan is drawn up, as initially there is only an idea of a product or service.
• Start-up phase: In this phase, the company has been in existence for up to one year, as it includes the steps from company foundation to market launch. With a largely finished product or an advanced prototype, the market launch must now be prepared. Conceptualising the production and distribution of the products is also part of this. This is where the acquisition of customers begins.

Funding:

• In the early stages, the capital to be invested is also referred to as venture capital.
• Seed phase: Only a small amount of capital is required for start-up preparations and early product development. The expenses can be very high for research-intensive technologies. Often, state funding and own financial reserves are used to cover the capital requirements.
• Start-up phase: In addition to the actual start-up financing, capital is also needed for product development, preparation for production and the first marketing activities. The founders often take out loans or receive support from friends and family to be able to finance the increasing expenses. In addition, capital consists of existing equity or supplier credits, among other things. Business angels, venture capital companies and subsidies can also be used to cover the investments.

Growth phases, expansion phase (Growth Stages):

Features:

• Growth phase: Sales and production are expanded and rapid market penetration must be achieved. In most cases, the company is not yet in the profit zone at the beginning, despite rapidly increasing sales. In the best case, a firm positioning of the company in the industry follows and a customer base is developed.
• Bridge phase (pre-IPO): The company prepares for a possible IPO and starts diversifying as more competitors enter the market.

Funding:

• Growth phase: With the emergence of competition, the need for capital increases. In this phase, it makes sense and is possible to be financed with outside capital. It is necessary to invest in the further development of products or services, as well as in the development and expansion of sales.
• Bridge phase: Often, bridge financing is necessary in order to obtain the capital for far-reaching expansion through the IPO. Often this financing can be repaid from the proceeds of the IPO.

Final Stages (Later Stages):

• Characteristics: The products or services are further developed and often further diversified. In expansion, it is necessary to enlarge the company by hiring more employees due to the increasing number of customers. In addition, further capital is needed for reorganisations and restructurings.
• Financing: Financing can be provided by investors and debt capital. Financing through the company's own funds, subsidies or profits generated by the IPO is also possible.

Conclusion

A young company with an innovative idea and high growth potential is called a start-up. A start-up is usually financed through innovative forms of financing such as crowdfunding or venture capital. However, since they usually have few resources, start-ups are a financial risk.

A start-up goes through several phases, the early phases, growth phases and final phases. The statistical lifetime of a start-up is about 2.5 years. After this time, it will become clear whether the company will continue to exist.