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
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.
market-types
market-types-why-it-matters

With all of that said, let’s take a look at each of the six types below.

Lifestyle start-ups

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.

Read Next: Business Model Innovation, Business Models.

Related Innovation Frameworks

Business Engineering

business-engineering-manifesto

Business Model Innovation

business-model-innovation
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.

Innovation Theory

innovation-theory
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.

Types of Innovation

types-of-innovation
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).

Continuous Innovation

continuous-innovation
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.

Disruptive Innovation

disruptive-innovation
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Business Competition

business-competition
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Technological Modeling

technological-modeling
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Diffusion of Innovation

diffusion-of-innovation
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.

Frugal Innovation

frugal-innovation
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.

Constructive Disruption

constructive-disruption
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.

Growth Matrix

growth-strategies
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Innovation Funnel

innovation-funnel
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.

Idea Generation

idea-generation

Design Thinking

design-thinking
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.

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