Spotlight on Start-ups
Start-ups have grown in popularity in recent years, with many entrepreneurs looking to develop innovative solutions to solve existing problems or offer unique services using technology and the internet. However, the world of start-ups can be challenging and unpredictable, with a high risk of failure. This article examines the key differences between start-ups and traditional businesses, the stages of start-up growth, the sources of their funding, and the significant obstacles and challenges they face. It emphasizes the importance of having a thorough understanding of the unique aspects of start-ups from an investor's perspective to avoid surprises later on.
In his book "Shortcut for a Better Life", the writer Ziad Rayess mentions: All companies and projects start as initiatives. Some are destined to succeed, while others will not be so fortunate.
Start-ups, in particular, are unique from several aspects, positive and negative, and it is important, from an investor’s perspective, to have a clear picture so there are no surprises later.
A variety of sources discuss this, including from lecturer Ghazi Al Mahayni’s, as follows.
The differences between start-ups and traditional companies are:
1- The idea:
If the project is something like opening a new sewing workshop, food factory, or other traditional industry or the like, it’s a traditional company. If the company uses a creative foundation to solve a particular problem or offer creative ideas and solutions, or if it provides new solutions like restaurant delivery apps or taxi services, it’s called a start-up.
2- Capacity for growth:
If productive capacity is limited and cannot be expanded geographically or in terms of production, then it’s a traditional project. If the project can meet customer demands like taxi and restaurant delivery orders, then it’s a start-up company or project.
3- Scalability:
If the project cannot be copied and activated in other geographical areas and various markets and segments while also making new products, then it’s a traditional project. If it can do all this, it’s a start-up project.
4- Profitability:
If the project aims to earn profits in its first year, like a restaurant or the like would, then it’s a traditional project. If the vision is to expand the project and get more customers regardless of profits from operations, then it’s a start-up project.
5- Funding:
For traditional projects, funding may come from individuals, family, or loans. For start-up projects, the funding may come from individuals or family at the beginning, but later, it depends on investor funding through the different stages.
6- Chance of failure:
Traditional projects have about a 60% failure rate, whereas start-ups have a failure rate of over 90%. Other estimates indicate the success rate is no more than 1–2%.
7- Technology and the internet:
Start-up projects fundamentally depend on technology and the internet, while traditional projects use technology and the internet in a limited way.
How do start-ups work? What are the main stages in their growth?
- It begins with a new, creative idea to solve an existing problem or offer a distinctive new service using technology and the internet. In this stage, it is determined whether the new idea can be implemented and accepted in the market and whether clients can be found to pay for this product or service.
- As soon as the product meets the minimum requirements for implementation viability, the project is launched in a practical and simplified form. This allows the managers to experiment with implementing the idea in real life. At this point, the products or applications may not be entirely complete. But the goal at this stage is to determine clients’ needs and desires through initial implementation. They can then arrive at a final product that is in demand in the market. After identifying the necessary changes to be made to the product and familiarizing themselves with the additions and developments, they will unveil the project in its final form. At this point, the project will have clients from various population segments and a knowledge of the new challenges the project will face in its journey of growth and expansion.
- The growth and expansion stage. This stage is exemplified in the transfer of the product to new geographical markets and different client populations while rounding out expertise and knowledge of the project’s challenges.
- The final stage: maturity and stability. In this stage, the company and its products will have become well-known and widespread. The company will be profitable and will have an extensive presence and constant growth. In this stage, the company will transform from a start-up to a traditional company that earns operational profits on a regular basis.
Where do start-ups get funding from?
Most of these companies finance their own projects in the beginning or get funding from investors who believe in the concept and hope to get capital gains later on. Then they need to form an investment portfolio for the first, second, and third stages to complete the project, cover the expenses to make it self-sufficient, and start to progress and gain financial stability.
One of the most significant obstacles or challenges for these companies is the ability to secure the investment portfolio so they can be sustainable and stand on their own. It should be mentioned that it is risky to invest in these start-ups without sufficient research. But in return for the amount of risk, there’s a huge return if they succeed.
What are the most significant obstacles and challenges that start-ups face?
There are a number of challenges that companies face generally, whether they’re traditional companies or start-ups. There are also some challenges that affect start-ups in particular.
1- Competition:
Competition is very high for services that rely on the internet, because the target customer group can easily be expanded and accessed.
2- Unrealistic expectations:
When they start, all companies are built on certain expectations of sales and expense figures, along with other operating expenses. But because most start-ups offer entirely new products or services, these expectations are based on probability estimates with a large margin of error that may be subject to surprise reductions or increases compared to what was initially planned for.
3- Acquisition:
Start-ups receive many opportunities for acquisition or mergers, an accomplishment for one party and a challenge to other parties in the market. There’s another challenge, too: agreement and cohesion between the new partners.
4- Acceptance of the product in the market and quality preservation:
As the market and customer base grows, companies must either preserve the quality of the product or service they offer or develop and refine it. This requires management redoubling their efforts in every area, including financial management, to protect cash flows and achieve the requisite financial discipline.
Lastly, there are millions of start-ups every year and very few of them can be successful, but they are uniquely capable of unlimited expansion if they are.
Conclusion
In conclusion, while start-ups offer great potential for innovative solutions and high returns, they also come with a high level of risk and uncertainty. Before investing in a start-up, investors should do their homework, and entrepreneurs should be aware of the difficulties they may encounter. Entrepreneurs and investors can better position themselves for success in the start-up world by understanding the unique aspects of start-ups and the stages of their growth.