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Types Of Start-ups
Once upon a time, the humble start-up was treated as a small business. However, this comparison proved to be ineffective because of the many organizational and conceptual differences between the two.
While small businesses run according to a fixed business model, the start-up seeks to identify a scalable and repeatable business model by:
Providing a product vision with defined characteristics.
Creating a series of business models according to customers, distribution, and finances.
Understanding which model is most suitable based on predicted customer behavior.
As start-ups became more fashionable, they were commonly associated with tech companies run by nerds in Silicon Valley. It wasn’t until guru Steve Blank defined six major start-up types that people realized how varied they could be. They are also present in many industries, including marketing, advertising, insurance, education, real estate, and healthcare.
Customer development is a formal process of identifying potential customers and determining how to meet their needs using testable hypotheses. Entrepreneur and business professor Steve Blank highlighted the Customer Development Manifesto principles in The Startup Owner’s Manual as the core principles for modern startups.
With all of that said, let’s take a look at each of the six types below.
As the name suggests, the founders of lifestyle start-ups are those who desire a specific lifestyle. They are the founders who follow their passions and make a living from them.
These start-ups are common in coastal regions, where individuals run surf or dive schools to pay the bills and essentially, achieve a greater work-life balance. Visual artists, freelance programmers, and meditative healers also run lifestyle start-ups.
Small business start-ups
Small business start-ups represent a high proportion of start-up entrepreneurs. Think of your local hairdresser, butcher, baker, coffee shop, travel agent, or electrician. They can also be less traditional. For example, 24 Hour Tees is a “mom and pop shop” bringing improved customer service and automation to the custom t-shirt industry.
Since these start-ups are designed to meet basic living and operating expenses, they are not typically scaled by their owners. Most are founded so they can avoid working for someone else.
Capital is raised from personal savings or in some cases, a bank loan. This suits the small business start-up owner who is happy to grow at their own pace without pressure from investors.
Scalable start-ups
Earlier we mentioned the archetypal image of a start-up based in Silicon Valley. These are typically scalable start-ups or tech companies based in other innovation hotspots such as Shanghai, New York, or Israel.
They are also typically founded by visionaries who want to disrupt the world with innovation and profit accordingly. Elon Musk and Steve Jobs are two classic examples.
Buyable start-ups
In a buyable start-up, a small team builds a business from nothing and then sells it to a bigger industry player. In many instances, the business is unprofitable but has a great product requiring extra funding to build momentum.
Like scalable start-ups, buyable start-ups are also prevalent in the tech industry.
Large company start-ups
Large company start-ups are exactly that – start-ups that are owned by large corporations.
Tech giants commonly restructure or acquire a buyable start-up when they need to enter a new market. Continuous innovation resulting from technological change is also increasing the need for large companies to adopt a start-up mentality to remain relevant.
Google’s Android operating system is a good example of a large company having to adapt to stay relevant.
Social start-ups
These are start-ups founded with the express goal of making the world a better place and are sometimes referred to as social entrepreneurship start-ups. Here, positive social impact is equally as important as turning a profit. In some cases, social startups may be non-profits and scale for the sake of philanthropy only.
Microlending platform Kiva is a good example of a social start-up. The company has crowdfunded more than $1.58 billion in loans to help disadvantaged communities and entrepreneurs thrive.
Key takeaways:
Start-ups were historically compared to small businesses and commonly associated with small tech companies based in Silicon Valley. However, start-up guru Steve Hank defined six main types of start-up encompassing many sizes, industries, and revenue models.
Lifestyle start-ups are run by those who want to monetize their passions, while small business start-ups are arguably the most common. They represent bakers, butchers, cafes, and electricians, among others.
Large company start-ups are becoming increasingly prevalent as corporations adapt to disruption caused by technological innovation. Social start-ups act to make the world a better place and often encompass non-profit organizations.
According to Bill Gross, founder of Idealab, the five key factors influencing startups’ success are the idea, team, business model, funding, and timing. Among them, timing is extremely important but can’t be controlled. That is why startups often need enough funds to keep going until the business becomes viable.
Serial entrepreneur and venture capitalist Paul Graham popularized the term “Ramen Profitability.” As he pointed out “Ramen profitable means a startup makes just enough to pay the founders’ living expenses.”
In the Lean Startup, Eric Ries defined the engine of growth as “the mechanism that startups use to achieve sustainable growth.” He described sustainable growth as following a simple rule, “new customers come from the actions of past customers.” The three engines of growth are the sticky engine, the viral engine, and the paid engine. Each of those can be measured and tracked by a few key metrics.
Growth marketing is a process of rapid experimentation, which in a way has to be “scientific” by keeping in mind that it is used by startups to grow, quickly. Thus, the “scientific” here is not meant in the academic sense. Growth marketing is expected to unlock growth, quickly and with an often limited budget.
When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution or value. A product approach, takes existing alternatives and it offers only the most valuable part of that product. A distribution approach, cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.
Marc Andreessen defined Product/market fit as “being in a good market with a product that can satisfy that market.” According to Andreessen, that is a moment when a product or service has its place in the market, thus enabling traction for the company offering that product or service.
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