What Is A Startup?
A startup is a business structure powered by disruptive innovation, created to solve a problem by delivering a new product or service under conditions of extreme uncertainty.
Many entrepreneurs and renowned business magnates define startup as a culture and a mentality of building a business upon an innovative idea to solve critical pain points.
Paul Graham, the founder of Y Combinator, has further simplified the definition of the startup and associated it with growth. According to him-
A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.
Therefore, the key points to note while categorizing a business as a startup are:
That difference is why there’s a distinct word, “startup,” for companies designed to grow fast. If all companies were essentially similar, but some through luck or the efforts of their founders ended up growing very fast, we wouldn’t need a separate word. We could just talk about super-successful companies and less successful ones. But in fact startups do have a different sort of DNA from other businesses. Google is not just a barbershop whose founders were unusually lucky and hard-working. Google was different from the beginning. – Paul Graham
One thing that differentiates startups from other businesses is the relationship between their product and its demand. Startups have products which target a largely untapped market. Startup entrepreneurs know the perfect strategy to create a product what the market wants and to reach and serve all of them. This triggers the fast growth.
How Startup Investing Works on TV
A panel of investors lean back in large leather chairs. Enter: the startup founder, dressed in Silicon Valley chic-casual (jeans, t-shirt, hoodie, flip-flops).
The startup founder delivers an enthusiastic, if somewhat shaky pitch, ending with the figure he needs to keep his company afloat: $500,000 for 10% of his startup. The investors nod approvingly at the bags under the founder’s eyes and his or her rumpled attire, noting the signs of sleep deprivation and lack of self-care as devotion to the business.
They ask a few questions, confer with one another, and make a counteroffer: 55% of the business for a $500,000 investment. The founder tries to negotiate to no avail, paces back and forth a little, steps outside to phone a trusted friend for advice. Eventually, the founder decides that he or she needs to take the deal, even if it means giving up majority control of the company. If the founder doesn’t take it, the business will go under.
This stereotypical display of the hopeless founder and money-hungry, rich investors is highly dramatic and an example of poorly negotiated equity investing.
How Startup Investing Really Works
A few people get together and come up with an innovative solution to a common problem. They test out their new solution, iterate a little, and find something that works and that a sizable group of people actually want to use.
Inspired, this band of innovative thinkers decide to turn that early idea into a company. But to fulfill that dream, they’ll need advice from seasoned entrepreneurs who have built successful companies before. And money.
This is where startup investors come in.
In Silicon Valley and beyond, early-stage startups can raise venture capital from VC firms and angel investors in various ways (and, in reality, they happen very differently than in the theatrical scene above).
We’re going to explore the different types of early-stage investments that give promising startups the cash flow they need to start chugging toward that IPO, and when investors are likely to encounter each investment type.
Equity investments and convertible investments are both securities, or non-tangible assets; for example, shares of stock in Apple or a government bond. (Tangible assets refer to physical investments, like diamonds or real-estate.)
There are two main ways to invest in early-stage startups:
Seed and early-stage investors often invest in startups via convertible securities, such as convertible notes and Y Combinator’s SAFE documents. Investors in later-stage startups (Series A or later) will more commonly invest in priced equity rounds.
Why do startups raise venture capital?
Venture capital is an ideal financing structure for startups that need capital to scale and will likely spend a significant amount of time in the red to build their business into an extraordinarily profitable company. Big name companies like Amazon, Facebook, and Google were once venture-backed startups.
Unlike car dealerships and airlines – companies with valuable physical assets and more predictable cash flows – startups typically have little collateral to offer against a traditional loan. Therefore, if an investor were to issue a loan to a startup, there’s no way to guarantee that the investors could recoup the amount they’ve lent out if the startup were to fail.
By raising venture capital rather than taking out a loan, startups can raise money that they are under no obligation to repay. However, the potential cost of accepting that money is higher – while traditional loans have fixed interest rates, startup equity investors are buying a percentage of the company from the founders. This means that the founders are giving investors rights to a percentage of the company profits in perpetuity, which could amount to a lot of money.
Early-stage startup investing offers potential for astronomical growth and outsized returns (relative to larger, more mature companies). This potential makes acquiring startup equity an attractive investment opportunity to prospective investors, despite the additional risk.
For the Founders, taking VC money can also come with huge benefits – startup investors can offer valuable support, guidance, and resources to new founders that can help to shape their company and increase its chances of success.
Venture Capital financing is also ideal for startups that can’t get very far by bootstrapping. Although many founders self-fund their startups while operating out of a cramped apartment until they’ve reached profitability, bootstrapping doesn’t work for companies that require a lot of capital up-front just to build and test their MVP (minimum viable product).
What is equity?
Equity essentially means ownership.
Equity represents one’s percentage of ownership interest in a given company. For startup investors, this means the percentage of the company’s shares that a startup is willing to sell to investors for a specific amount of money. As a company makes business progress, new investors are typically willing to pay a larger price per share in subsequent rounds of funding, as the startup has already demonstrated its potential for success.
When venture capital investors invest in a startup, they are putting down capital in exchange for a portion of ownership in the company and rights to its potential future profits. By doing so, investors are forming a partnership with the startups they choose to invest in – if the company turns a profit, investors make returns proportionate to their amount of equity in the startup; if the startup fails, the investors lose the money they’ve invested.
What is the difference between stock, shares, and equity?
The terms stock and equity are often used interchangeably. Stock is a general term that refers to an unspecified amount of ownership interest in a company. Shares represent the way that a company’s stock is divided. A company’s stock can be divided into a potentially limitless number of shares, each worth exactly the same value.
In a priced equity round, shares in the startup have a fixed price, and investors can purchase equity in the company by buying shares at the price during that round.
StartupRunner, a management consulting firm with an early stage investment arm. Over the past 36 months we’ve run diverse experiments developing a repeatable process for finding investable startups amidst the 1000’s seeking investment:
While I can’t share the proprietary results…the crux of our learnings can be distilled into 3 laws you can use to help build a portfolio of high performing startup investments.
Law 1: An entrepreneur’s actions must demonstrate their commitment to build a profitable business
As an active investor you’ve spoken to countless entrepreneurs claiming their product is the next big thing that will be acquired. Preoccupation with product demonstrates a lack of consideration for the voice of the customer and business required to return your investment. Startups seeking investment rarely have accountability to profitability. The importance of a dollar invested generating more than a dollar for re-investment or withdraw can’t be quickly taught. A commitment to profit efficiency, like integrity, forms overtime with each business decision an entrepreneur makes. On the surface profitable businesses might not appear compelling investments compared to get rich quick opportunities advertised by startups sacrificing profits for hyper growth. The cemetery of unicorns in Silicon Valley and mass graves of wannabe unicorns outside the Valley convey a clear lesson. Lack of accountability to profitability is not innovative or a way to get rich quick – its wasteful. If you can’t instantly tell an entrepreneur is in it for the long haul, they’ve violated the first law of startup investing: an entrepreneur’s actions must demonstrate their commitment to build a profitable business.
Law 2: An entrepreneur must perform the key activities of their business with skills they’ve mastered
Fortune 500 companies don’t generate returns for shareholders hiring in-experienced professionals to do highly specialized jobs. Startup investors shouldn’t expect returns when an entrepreneur has a steep learning curve in the core domain expertise of their business. Precious time and resources are wasted as they educate themselves making mistakes that should have been avoided. Mastery isn’t a pre-requisite for friends and family, but if you invest in the equivalent of a student loan expecting a return you’re doing entrepreneurship a great disservice. Shortcuts don’t exist for entrepreneurs to acquire the experience and expertise needed to turn a startup into an investable business. If it isn’t instantly clear how an entrepreneur is using skills they’ve mastered in their startup, they’ve violated the second law of startup investing: an entrepreneur must perform the key activities of their business with skills they’ve mastered.
Law 3: An entrepreneur must be a servant leader
Great entrepreneurs know how to employ listening, empathy, commitment, and insight while sharing power and authority with team members. They create a sticky work culture and achieve extraordinary results by helping their people focus on the needs of their customers. A rare ability, servant leadership can be found woven into the fabric of many startup successes. Servant leadership is often overlooked by investors because it doesn’t show up in a pro forma and it’s impact can’t be projected in a spreadsheet. Even more important than the impact on investment performance, an entrepreneurs lack of servant leadership will exponentially increase your risk of lost time and stress. What is the worst startup investment you ever made? Look beneath the lost money and you’ll find an entrepreneur that lacked this leadership philosophy. If it isn’t instantly clear an entrepreneur is a good listener, empathetic and without ego, they’ve violated the third law of startup investing: an entrepreneur must be a servant leader.
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Design is about solving problems. It’s a process of constantly finding problems and creating solutions for them.
There are many areas of design: UI, UX, product designers, graphic designers, interaction designers, information architect, and the list goes on. Start by figuring out which specialty interest you more.
For now, let’s focus on the most common type: a mix of interface and experience: UI/UX designer.
1. Familiarize yourself with UI principles.
Before practicing design, the first thing you need to do is learn some design principles. From this, you’ll be able to enter the design world and start thinking “creatively”. You will learn the psychological aspects of design: why it can look good and why it can fail.
Here are some basic principles you should know about.
Color vocabulary, fundamentals and the psychology of colors.
Symmetry and assymetry.
Using contrast to organize information, build hierarchy and create focus.
Choosing fonts and creating readable text on the web.
The most important principle, creating intuitive and usable designs starts here.
Here are some great do’s and don’ts to design a good UI.
2. Learn the creative UX process.
The next thing is to understand the creative process. UI/UX design is a process of specific phases that every creative person goes through.
Divided into four distinct phases — Discover, Define, Develop and Deliver — the Double Diamond is a simple visual map of the design process.
This is the start of the project. Designers start researching, getting inspired, and gathering ideas.
This is the definition stage, where designers define an idea extracted from the Discover phase. From this, a clear creative brief is created.
This is where solutions or concepts are created, prototyped, tested and iterated. This process of trial and error helps designers to improve and refine their ideas.
The final phase is the delivery stage, where the final project is finalised, produced and launched.
Check out my article How to streamline your UI/UX workflow with Figma.
3. Develop your eye for design
Knowing design principles is great, but sometimes it’s not enough, you also have to train your eye to see good design and bad design and to identify strengths and weaknesses in designs.
The most effective way to train your eye for design is through inspiration.
Before opening a blank canvas and staring at it for half an hour, know that the only way to be creative is through research. Sometimes the mind can’t create ideas on its own, you have to first look at other designs to start creating your own, especially when you’re a beginner.
Browse portfolio websites
So look at what other designers are doing on Dribbble, and whenever you come across pretty designs or something relevant to your project, save it in your notes and mention what you like about it, you can also take screenshots. This way, you will have a collection of inspirational designs for you to start from.
Here are my favorite websites for inspiration:
4. Read design articles everyday
To make ourselves get familiar with design, the best way is to read a few articles each day.
Make reading design news and blog an everyday habit. There are millions of articles available online for us to discover about new trends, use cases and tutorials. All we have to do is find them. There’s nothing better than learning from other people’s experiences.
So start your day with a cup of coffee and a few inspirational articles on Medium or Smashing Magazine. Learning new things in the morning will broaden your mind and will make room for creativity during the day.
Then, every now and then during your day, take a few breaks to read more. Taking breaks is very important for creativity, especially when you get stuck and feel unproductive. Bookmark the website you like as your browser homepage or subscribe to a design newsletter.
5. Learn the latest web design tools.
There are tons of design tools out there, but you don’t need to know all of them. Get to know the best ones out there, choose your favorites and stay updated with the newest features and trends.
Here are the latest tools that I use in my design process:
6. Mentor and get mentored.
Another great way to learn design is to find a design mentor or designer friend who is willing to help. They will help you speed up your learning process.
The designer would review your work and give their comments whenever possible. It’s like a shortcut. They would also give you tips and tricks they learned from their experience. So go ahead and e-mail a designer, ask questions and discuss your concerns.
Also, from the few years that I taught design and front-end, I learned more than I taught. When you’re ready to start talking about design with people, you can mentor or educate someone about design. You will learn to see it from a different perspective and you will get feedback and questions that you might’ve never thought about.
Whenever you’re talking about design with other people, your mind will be in “brainstorm” mode all the time and you will find yourself getting interested in design more and more.