Start Me Up, I'll Never Stop

What do I love about the future enough to make it happen? is the kind of question driven young start-uppers lie awake nights asking themselves. Whether they seek to change the world as an expression of their idealistic temperament, or to see their vision of an industry’s future become commonplace, savvy startup founders often choose a sector, an approach and an opportunity in which the inputs and outputs are highly disconnected. At root, the stereotypical founder of a startup seeks to give society things it wants but has not found a way to make – and seeks to do so at scale, where the result of his or her actions is highly leveraged. In other words, if the input – the value of the funding they contributed, the time they spent on the proof of concept or a minimal viable product (MVP) as well as the opportunity cost of not having worked on something else or, say, drawn a steady salary in a corporate job – is one, the projected output: the size of their company’s valuation over subsequent investment rounds, all the way to an initial public offering (IPO), is a thousand to a million times one.

What Is a Startup?

A startup is a young company founded by one or more entrepreneurs in order to develop a unique, irresistible product or service, bring it to market, and then make it necessary and irreplaceable in the eyes of its users. Startups are generally rooted in a mindset of constantly innovating on existing ideas with the aim of solving the sore needs – pain points – of those using its product, in the process hacking or disrupting entrenched ways of thinking and doing business for entire industries.

When developing a product, a startup implements, tweaks and re-implements hypotheses, seeks to attain an MVP ASAP, test it on beta users, then get feedback and include it in the next version – this is the core process central to the success of any startup. The make-it-or-break-it goals for a startup are: to create a usable product, determine and achieve product-market fit, obtain funding, scale, generate revenue, increase market share and, eventually, create an opportunity for the founders and investors to cash out or, in start-up parlance – to exit.

How Are Startups Different?

A startup is more often than not a new, small enterprise focused on attaining explosive growth on the back of a service or product provided to customers for the first time – or provided better, faster and cheaper than before.

Whether in transportation, dating, social media, online marketplaces, online education, fintech or myriad other spheres, today’s startups are often at the forefront of emerging technology. This helps them create solutions that put them ahead of others in the eyes of consumers and can draw investors galore and cheerleaders in the media and elsewhere.

The key difference between a small business and a startup is that a regular business seeks mainly to make money via an analogy-based approach – a prospective restaurant owner knows that restaurants of a certain type have succeeded before in a particular neighborhood, and so it makes sense to open a location there, and possibly extend it to a chain a few years down the line. A startup uses first-principles thinking, starting with indisputable truths and assuming nothing, to build up a model. As a result, startups offering meal kits, such as Blue Apron or Dinnerly, offer clients the same thing – a meal prepared by a chef – but with the convenience and breadth of choice that a local restaurant can never match. This leads to scale: tens of millions of potential customers instead of thousands.

The Emergence of A New Breed of Startup

Over the past fifteen years or so, a prevailing philosophy allowed companies with no revenue or any foreseeable way to get to revenue in the short term; just a compelling business model, or solid revenue, but still great losses – we’re driving at you, Uber – to attract hundreds of millions of dollars over multiple funding rounds, with a valuation in the billions – if it promised its investors rapid acquisition and command of market share.

In response to this, a more agile and responsible paradigm of the lean startup has emerged. One example is the smartly named FinText, a UK-based NLP (natural language processing) startup targeting financial marketers. In just two years, working with a technical co-founder, Vered Zimmerman has steered the company to an MVP and paying clients without taking any outside investment.

UK-based for the last 15 years, Zimmerman, 41, is originally from Israel, where she studied machine learning at the Hebrew University of Jerusalem. She credits the mindset prevalent in Israel, popularly known as the startup nation, for giving her the courage “to follow her curiosity – wherever it led”. “Understand what came before,” her mentors instilled in her, “but don’t be afraid to try something entirely different.”

How Are Startups Funded?

Although they are inherently risky propositions, startups can and do attract backers – usually, qualified individual investors and, later on, venture capital firms – on the strength of the scale of their vision, the breadth of their ambition and the force of their drive to succeed.

Many startups are first financed by the founders, their friends and family. Apart from working on its product, the first order of business for a startup is to provide proof of its core concept to investors. One of the startup's next tasks is raising outside money to further develop the product. It needs to present a compelling illustration – usually a prototype, sometimes an MVP – supporting the conviction that what it offers improves on existing solutions sufficiently to warrant the risk, illiquidity and uncertainty their investors take on in search of the sort of outsize returns only available in startupland.

In the summer of 2004, technology investor Peter Thiel gave Facebook, then a plucky startup, $500,000 in return for a 10.2% stake in the company. Not quite eight years later, in February 2012, Facebook offered shares to the public; the markets valued the company at $104 billion. Thiel’s initial investment, worth $10.608 billion at the time of the IPO, had logged an annual pre-tax return of 282,867% – unprecedented in the recorded history of investment and entirely unheard of in any legal line of business outside of modern-era technology startups.

How To Get There

In order for a startup to achieve the sort of outsize success founders tend to dream about, many stars must line up and a few crucial questions must be answered – and answered correctly.

– Is the team obsessively passionate about their idea? It’s all in the execution, and even an outstanding concept can fail to engage its audience if the team behind it isn’t ready to do all it takes to support it.

– Do the founders have domain expertise? The startup should know absolutely everything about the space in which it chose to operate.

– Why this, and why at this moment? Is this idea new (if so, why haven’t people tried it before?) and if it isn’t, what makes your team uniquely able to crack its code?

– The size of a startup’s market defines the scale of the opportunity. Companies that obsess over niche technology may outcompete their rivals, but to what end? Caesar may have preferred to be first in a remote village rather than second in Rome, but for startups, too-small often leads to not-large-enough-to-survive.

A 2018 survey conducted by MetLife and the U.S. Chamber of Commerce found that startup owners log 14-plus-hour workdays. Time pressure and limited resources often result in a loose organizational structure and an unorthodox approach to management. Still, the roles of CEO and CTO for a startup with two founders are standard. Apple’s Steve Jobs and Steve Wozniak were a classic example: Jobs the CEO was the person running the show, taking care of product, marketing and organization, and Wozniak the CTO was in charge of delivering the core technology.

The Startup Ecosystem

In the early stages, startup companies needing to develop, test and market an idea can tap several sources of funding, including small-business loans from banks, government-sponsored SBA loans, and even grants. Startup incubators offer mentoring, office space and seed funding. Finally, angel investors and venture capitalists seek out promising startups to finance, hoping that their equity stake will grow exponentially in value.

Two types of investment instruments are most common: convertible bonds and equity. There is the pre-seed round, known as bootstrapping (funding from self, friends, family) – no outside money; seed fund (angels – $10K to $2M, companies valued at up to $6M), then Series A, B, C, D, led by venture-capital firms, which invest tens to hundreds of millions of dollars into each company. Finally, there is the IPO.

Not all startups set out to bring an existing industry to its knees – we’re still driving at you, Uber – raking in fortunes in the process. Some set lofty goals of positively influencing the future or educating the next generation of thinkers and doers – or both.

Founded in 2016 by Andrey Lobanov – a graduate of the Department of Mechanics and Mathematics at Moscow State University, Russia’s answer to MIT – Algorithmics is a chain of math and programming schools boasting franchises in 37 countries, including Russia, the US, India, Malaysia and Saudi Arabia. Lobanov, 31, had no plans to go into business while at university, instead dreaming of doing “something karmically important: good things, useful things”. Eventually, he hit upon the idea of using math and programming to teach children and teens logic and creative thinking, endowing them with skills and a profession. Then, one thing led to another.

Rolling out a proven model to more and more markets requires serious capital, and as it expands to meet the demand for its particular approach to STEM learning, Algorithmics is about to announce a $10 million Series A financing round. It appears that karma is rich in dividends.

How to Invest in Startups

Qualified (aka accredited) investors can try their hand at the angel investing game. Most major US cities have angel clubs, and AngelList, founded by famed technology investor Naval Ravikant, lists thousands of companies that have received seed funding or are seeking it. Those with specific expertise in a given field – known in the startup ecosphere as smart money – are at an advantage compared with someone who simply throws money at a few ideas alien to them and hopes that it sticks.

Since angel investors are the first outside sources of funding for startups, they bear the greatest risk and, as in the case of Peter Thiel and Facebook, reap the greatest return. To mitigate that risk, they seek out certain qualities in founders. Hustle, dedication, a single-minded obsession with delivering solutions, and resilience in negotiating the inevitable obstacles are some of the traits angel investors look for. The saying in startup investor circles is Bet on the jockey, not the horse. After all, the horse – the specific product, service or company in question – may be brilliantly conceived but poorly timed. At the same time, a founder with perseverance will go on to create another company, or will be able to pivot and change their offering to better suit the emergent environment. As a talented jockey, they will switch horses and ride on to victory.

Personal qualities are important in another way. A founder can be a poet among programmers and otherwise offer outstanding technical expertise, yet without the intrepid resolve necessary to steer their fledgling enterprise past shoals and maelstroms, they are likely to crack under pressure and go down, taking the ship with them.

That’s why angel investors tend to be tough, skeptical, and ask many intrusive questions – as well they should. After all, their money is on the line. Ideas by themselves are not that valuable; it’s the ability to execute on a vision that’s the ultimate prize – the unicorn in a vast field of mottled mustangs.