Welcome to the 101st edition of Start-up Society! This blog highlights some of the most exciting start-ups in the country striving to keep the American Dream alive.
Make sure you check out the previous issue, if you have not already, here!
Today, we are mixing it up! In honor of issue 101, coinciding with the debut of our new Substack publishing platform, we figured we would bring it back to the basics and brush up on our fundamentals with “Start-ups 101.”
In this feature, we will provide an introduction to the world of start-ups. Perhaps, you could say, this is the magnum opus of START-UP SOCIETY!
What is a Start-up?
Definition
According to Forbes, a start-up is the following: “Rooted in innovation, a start-up aims to remedy deficiencies of existing products or create entirely new categories of goods and services, disrupting entrenched ways of thinking and doing business for entire industries.”
Start-up Jargon
Start-up Statistics
Click Here to Read a Harvard Business Review Article on Why Start-ups Fail
Notable Start-ups
Why join or start a Start-up?
For an entrepreneur, “swept under the rug” is not something they’re familiar with. No matter what the issue is or how grand it is, entrepreneurs will always try their best to tackle a problem from all angles and create innovative, outside-the-box solutions. This is what a start-up and its founders/employees must do in order to survive and excel in today’s dynamic society. It requires them to be ultra-nimble, ferociously curious, highly competitive, and quite frankly, unorthodox and sleepless.
So why do folks want to join or start an environment like the one described above?
Novel approach to problems: Some of the world’s biggest challenges have been tackled by start-ups. Sometimes conventional businesses and methods fail to get us closer to solving a problem, which is where start-ups step in. The impossible is able to become highly possible.
Disruption: Entire companies and even industries can get decimated by one successful idea. Take Uber for taxis or Netflix for television. The world has not been the same ever since. Being responsible for or being a part of a venture that changes the way people live is no small feat.
Culture: Start-ups have a very unique culture in that they’re scrappy by nature, extremely creative, and very passion-driven. Compared to more established institutions, start-ups can oftentimes be less rigid, more agile, and a lot more collaborative.
Equity / Ownership: BYOB! Not Bring Your Own Booze, but Be Your Own Boss! Ultimately, having a start-up means just that. You are your own boss and the fate of your company generally lies on what you do on a day-to-day basis. The upside to this is having ownership of what you do and reaping the true proportionate rewards in doing so. Even if you don’t start your own company and rather join a start-up, your compensation and influence can be tied to having equity in the company, which is atypical for a lot of seasoned corporations.
How can a Start-up achieve Product-Market Fit?
Every start-up strives to achieve something called “product-market fit” - but what does that mean?
Product-market fit describes the strong alignment (or fit) between a product’s value proposition and the underserved needs of the target market.
Venture capitalist Marc Andreessen popularized the term in a 2007 blog post, where he wrote that it “means being in a good market with a product that can satisfy that market.”
“And you can always feel product/market fit when it’s happening,” Andreessen continued. “The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can.”
Finding product-market fit may look different depending on the product, industry and business. That said, Dan Olsen, author of The Lean Product Playbook, offers six steps for a lean product process:
1. Determine the target customer: Finding the right customer means asking who might buy the product and if they do, will it meet a need? You might not know exactly who your target customer is at first, but you can find out through market research. That research can be used to create customer personas to envision your target customer and develop the right products for them.
2. Identify underserved customer needs: Avoid selling in an oversaturated market full of existing solutions that customers are already happy with. Instead, find what customers are unhappy with. What pain does your target customer have? How can you help them solve it?
3. Define the value proposition: How will your product meet your customer's needs better than any of the alternatives currently available? Will it offer better quality? A more affordable price? More exciting packaging? New services?
4. Specify a Minimum Viable Product (MVP) feature set: Identify the minimum features you want to include on your first product rollout. Keep it simple but functional.
5. Create the MVP prototype. No need to create the full concept—instead, just build a bare-bones product. MVPs are meant to help gain consumer feedback that can be applied to the next iteration of a product.
6. Test the MVP with customers. Show your product to a select group of your potential customers. Get feedback from customers. Ask them what they like about it and what they don't. What would they prefer to see instead? This is a crucial step to achieving a product-market fit. Letting consumers test a product helps you understand what’s working and what isn’t.
Following these steps provide founders with a good sense of how the market will react to their product. Before launching, it is crucial to implement important customer feedback. This could entail changing certain features of the MVP, considering a new target market, or even redefining the value proposition.
Why and how to invest in a Start-up?
WHY
Growth Potential
Early-stage start-up investing offers potential for astronomical growth and outsized returns (relative to larger, more mature companies). This potential makes acquiring start-up equity an attractive investment opportunity to prospective investors, despite the additional risk.
While it is estimated over 80% of start-ups fail, those that succeed often deliver a massive return on investment if the company goes public or is acquired by another company. Google, for example, launched as a start-up in 1997 with $1 million in seed money from friends and family. In 1999, the company was growing rapidly and attracted $25 million in venture capital funding, with two VC firms acquiring around 10% each of the company. In August 2004, Google's IPO raised over $1.2 billion for the company and almost half a billion dollars for those original investors, a return of almost 1,700%!
Economic Impact
Investing in start-ups directly helps with job creation. In fact, start-up businesses created over 3 million jobs in 2020 alone.
According to the United States Census Bureau, the job creation rate is notably higher for start-ups than for mature companies — the Net Job Creation Rate (NJCR) has hovered around 15% to 20% for start-ups over the past 40 years but was roughly 0% and often negative for more established firms.
Passion and Fulfillment
People often invest in what they want to see in the world. Start-ups strive to develop products and services that address the needs of the people. Thus, socially conscious investors may be attracted by the opportunity to help power innovation around issues they are passionate about — such as climate change, healthcare, and sustainability.
Similarly, many people invest in start-ups because they want to be supportive of the passion project of someone they know, such as a close friend or family member. Helping uplift an entrepreneur in your network may provide a sense of fulfillment.
HOW
There are two main ways to invest in early-stage start-ups:
investing in a priced equity round: investors purchase shares in a start-up at a fixed price
investing in convertible securities: the investment amount eventually “converts” into equity
Seed and early-stage investors often invest in start-ups via convertible securities. Investors in later-stage start-ups (Series A or later) will more commonly invest in priced equity rounds. However, thanks to the advent of equity crowdfunding, retail investors now have greater access to investing in the equity of early-stage start-ups.
The main advantage of using convertible securities is that they don't have to value the company until the Series A round of financing — when there's more data to base the company's valuation on. Valuations are challenging in a company's early stages because there aren't enough data points to reasonably determine a start-up's value.
There are two main types of convertible securities: convertible notes and SAFE (simple agreement for future equity) notes.
Convertible notes are a form of debt that can convert into equity once certain milestones are met. Because of this, convertible notes usually have a maturity rate and an interest rate. They offer investors the downside protection of a debt instrument and the upside potential of an equity investment, but in return typically offer lower interest rates than straight debt instruments.
Convertible notes can be lengthy documents that contain a lot of variables. Thus, in 2013, Y Combinator invented SAFE notes to simplify the process. SAFE notes are not debt; they’re simply convertible equity. There’s no loan or maturity date involved. SAFE notes are 5-page documents that contain straightforward language and standard clauses. They are rarely modified. Because of their simplicity, it’s usually faster for start-ups to reach an agreement with investors for funding with SAFE notes.
How to scale a Start-up?
What does it mean for a start-up to scale? An example would be if one were running a lemonade stand, that’s not at scale, but if one grew to 100 lemonade stands nationally, that would be scale. The act of going from 1 stand to 100 stands in this case is the act of scaling. Start-ups can engage in scaling in a variety of ways, many of which are determined uniquely by their business model, industry & leadership.
Something that all start-ups need in order to scale is people. If you want to build more products, service more customers, or generate more revenue, it’s more than likely that a team is needed and that the team will need to grow.
How can a start-up hire top-tier talent that will help it scale? It will take money and equity. Many start-ups seek funding from venture capitalists and one of the primary use cases of those dollars is to hire top-tier talent in order to build more products, service more customers or generate more revenue.
Another key factor start-ups must incorporate when scaling is organization. Early-stage ventures are inherently disorganized at first. As the company generates information internally regarding its activities, its customers, its employees, and its plans, these pieces of information need to be organized. As new employees join or new customers need to be introduced to the start-up, there is a degree of knowledge transfer that must take place. The seamlessness of this knowledge transfer is determined over time by how organized the knowledge is. Disorganization is a silent killer of start-ups and often becomes entrenched in a start-up as it scales unless it is made a priority early on.
Start-up Case Studies
Figma
A very recent Start-up success is that of Figma, a graphic editing app, which was recently acquired by Adobe in the largest acquisition of a private tech company EVER at $20 billion. Figma, founded in 2016, was a direct competitor to Adobe and was eating into its market share year after year gaining massive adoption in the start-up ecosystem. Figma’s revenue is expected to grow 100% YoY by the end of 2022.
Netflix
A classic story of the Netflix & Blockbuster Duality. Blockbuster, founded in 1985, was a company that progressed through the 1980s, allowing consumers to rent movies in stores. Netflix, founded in 1997, came in with a mail order centric approach, which only appealed to a few customers. However, with the change in their business model from DVD delivery to a subscription service, Netflix achieved a lot of success. Gradually, Netflix replaced Blockbuster through internet streaming, meeting the needs and wants of its customers and creating a new market for video consumption. Netflix thrived where Blockbuster blundered.
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Authored by Arteen Zahiri, Rumeer Keshwani, Elham Chowdhury, & Julian Ramcharan