- What is a Startup? Isn't just a regular business?
That's a question I get a lot.
In this video I'm gonna explain what a Startup is
and how it's different from any other regular business
or a lifestyle business.
And no, it's not the same as a regular business.
Startups are very, very different.
This is Raw Startup.
I'm the founder of Vivino,
the world's largest wine app and wine community,
with almost 60 million users all over the world.
I've been on this journey for a long time
and I've seen what a Startup is
all the way up to a Scale Up.
We look at the four characteristics of a Startup
and the final one is very important,
so stay tuned for that one.
First, let's look at the differences
between a Startup and a traditional business.
Basically, most businesses are just traditional businesses,
not Startups.
They are lifestyle businesses
that make a good living for whoever is involved.
Startups are something else
and that's what we're gonna look at in this video.
The fundamental difference between a Startup
and any other business is how much you invest
in the business in the beginning.
Let's first take a look at a regular business.
On the horizontal access we have time,
and on the vertical access we have
how much money is invested in the business,
or should I say lost in the early stages.
For a regular business,
you do expect to lose a bit of money in the beginning
as you invest in the business,
but you quickly move into making money
or you just won't survive.
Then if it all goes well, you see steady growth over time.
Great. You make a good living and we're all happy.
Now, a Startup is different.
It's like an extreme of a regular business.
We expect to invest and lose massive amounts of money
before we reach a profit,
and this could be years and years of building
before any money comes back.
So why would you take that risk?
Well, because the upside is massive.
The line for growth and profit is much more steep
than in a regular business.
Should you make it, you could make it really, really big.
I would say for a Startup,
investors also see it differently.
The loss at the beginning is more seen as an investment
and then later when the profit comes hopefully,
that's the return on that investment.
Now, there's one more thing on this.
Now take a look at the graph again.
If you look at the beginning there
where you see the massive loss,
that part has a specific name and it's not a pretty name.
The valley of death.
And yes, it does have that name for a reason.
This is where a lot of Startups die in the valley of death.
All this money is invested,
but for some reason it really doesn't take off.
The Startup dies in the valley of death.
Yes, I know. Not exactly uplifting.
Anyway, with those basics in place,
let's have a look at the four characteristics of a Startup.
A Startup usually raises a lot of money.
You know, or at least tries to raise a lot of money.
So why is that?
Well, because you usually have to build something first.
You have to invest in building something
and then later you can sell it.
But you need funding to build it.
Basically, some technology, some software has to be built
and you need to raise a lot of money
to be able to build that before you can sell it.
Take Vivino as an example.
We have an app that is free,
but I guarantee you it wasn't free to build it.
We have hundreds of employees that built this product,
built a free app that everyone uses for free.
If it's all free, why did smart people invest money into it?
Because they believe that we can build something great
with millions of users on it
and down the line it'll be very valuable
and then they make their money back.
Sometimes it's called a land grab
Build something great and win the market.
You invest a lot of money, win the market
and then you own it.
Take Facebook as an example.
They invested massive amounts of money
into winning that market.
They did, and later they became very, very profitable.
As a lot of Startups fail,
the investors will need big returns on their investment.
They aim for at least 10 times the money back,
and you think, "Hmm, that's kind of greedy,"
but really it isn't.
It's because investing in Startups is a risky business.
And let me explain that in a simple way.
Let's take a very simplified look at that.
Let's say you invest $1 million in 10 different Startups.
The investors actually expects five of them to fail,
so no return on those.
Three get the money back and one does okay
and gives the money back twice,
and one does really well
and actually gets the money back 10 times.
In this scenario, the investor gets 15 million back
out of the 10 million invested, and you think that's okay.
But really that can take years of work,
so it's actually a more mediocre investment.
The investors really need to aim for say, 10X,
because some of the investments will be bad investments.
Now, let's try and do that again
but remove the one Startup that did really well.
Now it's a horrible investment with a loss of 50%.
So yes, it is a risky investment
and you have to hit some of the big ones.
Obviously you can go in the other direction
and you hit one that gives you 100X back.
So that can happen in Startups
and that's what makes an attractive investment.
Sometimes the upsides are huge.
A Startup usually disrupts an industry.
Startups are usually based on some kind of disruption.
Let's have a look at what that means.
Here are the three stages of disruption.
Stage one, a shift in technology, legislation or behavior.
Basically, something changes radically,
usually in technology, and that changes everything.
Stage two, the industry doesn't follow shift.
The industry doesn't follow the shift.
They prefer to do it like they've always done it,
and yes that happens all the time.
And then there's stage three,
a new product comes along that solves the problem
considerably better.
And finally, a Startup comes along,
disrupts it all, changes how we do things.
It's almost always some kind of disruption
that leads to a Startup success.
I have a full video on Startup disruption.
Please check that out also.
A lot of good stuff on the channel.
You should consider subscribing.
A Startup usually grows fast.
In the early days of a Startup,
a Startup can grow, you know,
several hundred percent per year
and in the later stages, maybe in the high tens.
For the investors, this is very important.
They expect you to return on their investment
within a few years, and slow growth doesn't do that.
For the founders, this is also important
because the growth very often determines
can you raise money and at what value?
With little growth, it can be really hard to raise money,
so be aware of that.
Growth is key for a Startup, and if the growth slows down,
you're probably not a Startup anymore.
A Startup usually is scalable.
This is key for a Startup. It has to be scalable.
You really need something that can be sold many times.
You invest in something, build it,
and then you can sell it over and over again.
Let's say you're in consulting and you work very, very hard
and you charge by the hour.
No matter how hard you work, there're only 24 hours in a day
and that by definition is not scalable.
On the other hand,
you have a computer game like Subway Surfers.
They build the game once, but the users keep downloading it
with little or no extra cost per downloads.
Subway Surfers now has over 2 billion downloads.
There's infinite scale.
They can keep selling without any extra cost.
Now that's scale for you.
So scalability is about building something
that can be sold again and again, like a piece of software
or some other service you can sell a million times,
but with very little extra cost for every unit sold.
Being scalable also means being in a big market.
You can't build something scalable
then the market is too small.
Investors do not like small markets.
There has to be a huge opportunity.
Let's take a look at the full list
of what Startups usually are.
If you're all of this, you're probably a Startup.
If you're none of these, you're not a Startup,
you're a traditional business, which is great too.
It is important to know what you are though.
If you're not a Startup, you should probably not be raising
a lot of money from venture capitalists.
Maybe for venture capitalists that think you are a Startup.
If you want more content just like this,
please consider pressing like and subscribe
and you won't miss any future videos.
Thank you very much for watching Raw Startup.
Now stop watching and go build something.
(music)