- Startups play an increasingly important part in the US Economy
- Their initial conception and establishment is decisive in determining the future prospsects of startup companies
- While distinct from other types of companies, startups are most likely to succeed when focusing sufficient strategic attention on basic business fundamentals
Creating a successful startup business is a daunting prospect, particularly in context of a global pandemic and economic recession. Despite these challenges, startups continue to play an increasingly important role in the US economy, and employ over 3 million people (an increase of 500 000 jobs in the last decade). Like all new small businesses, startups need to be established on a solid foundation in order to ensure commercial viability and positive growth prospects. This foundation includes six fundamental requirements that play a decisive role in the formation of successful startups.
1. Core concept
The success of a startup begins with a strong concept or idea. A strong startup concept is always based on a clear, focused understanding of three key variables, namely: market opportunities, capabilities, and passions. Finding the right alignment between these three variables is decisive for the overall commercial success of the startup.
i) Market Opportunities
Effective startup concepts respond to market needs and opportunities by clearly conceptualising what the unique value proposition of the business should be. These concepts are invariably based on a clear understanding of market size and structure, competition dynamics as well as past, current, and projected market trends, and market gaps and areas of growth.
The concept has taken strategic account of available or potential resources, knowledge, and skills that the startup founders can reliably access. This is crucial for the feasibility of the concept, and thus for the overall success of the startup.
The most successful startup concepts are informed by, and feed into the passions, interests, and enthusiasm of the individuals involved. This is perhaps unsurprising, given the high costs and risks typically associated with creating a startup company. Founders also need to develop a concept aligned with their passions because of the fact that being disinterest is not conducive to the kinds of creative innovation that generally characterize a successful startup concept.
2. Market research
Beyond the preparatory research needed to develop a strong concept, startups require consistent, diligent market and industry-related research. The success of startup companies is contingent on the accurate assessment of multiple dynamics, including market size and structure, as well as the level of industry competition.
Effective market research is vital for enabling startups to determine potential market opportunities and scope for growth, while also being vital for enabling startups to formulate a value proposition that is superior to that of competitors.
3. Business Plan
The business plan is the third fundamental requirement for establishing a successful startup. Guidance from the Small Business Administration confirms that many startups eschew traditional business plans in favor of a short document that provides a broad overview of the company and its key features, such as:
- unique value proposition,
- market aims and strategy,
- cost structure,
- resources (revenue, internal and external sources of funding),
- strategic relationships (suppliers, contractors, manufacturers, funding, and research institutions),
- customer relationship and communication strategies.
While many startups develop a simplified, high-level business plan as described above, other startups formulate more traditional, highly detailed, and comprehensive business plans. This offers the advantage of providing both the startup founders, partners, and prospective external funders (such as banks) with a clear, specific view of the business, its financial status, and its commercial prospects.
4. The right people
Businesses succeed or fail to depend on the people who are involved in them. This is especially the case with startups, not least because they are generally focused on innovation, and therefore require effective collaboration between multiple individuals with diverse capabilities. Finding the right partners to work with is also vital for given that startups rely so heavily on external sources of funding.
Thus, to create a viable and profitable startup, the founders must clearly identify:
i) which capabilities they need to harness (e.g. funding, skills, knowledge),
ii) who has those capabilities.
Undoubtedly, securing sufficient funding on favorable terms is a fundamental requirement for all startups, and for small businesses in general. However, unlike other small businesses, startups generally depend exclusively on external funding, and are thus need to develop a clear, targeted funding strategy, including determining:
- the amount of capital required,
- and the potential sources of capital (venture capital investments, government, and private loans).
The level of control and risk varies depending on the source of funding. Venture capital offers funding at relatively low risk but at the cost of a significant loss of control for the startup founders. In contrast, government loans and grants offer startup founders relatively low (or no) risk funding, while allowing the founders to retain control of the business.
6. Company structure and establishment
The process of legally establishing a startup is not simply a bureaucratic formality but is instead a vital step in the development of the business. This fact is highlighted by The Really Useful Information Company (TRUiC), which emphasizes the importance of selecting the right name and business structure for a startup company.
A startup’s name is central in defining the company’s identity and should be fully aligned with the company’s market strategy while complying with trademark laws.
It is also crucial that the legal structure is aligned with the startup’s aims, objectives, and phase of development. Initially, sole proprietors and general partnerships are most appropriate for startups, but as the company grows over time, it may become more advantageous to become a limited liability company (LLC).
7. Getting the fundamentals right
As with any other type of business, there is no recipe for establishing a successful startup. What is certain, however, is that executing these six fundamentals effectively is a prerequisite for creating a successful startup with exponential prospects.