Building Your Business What Is a Startup? Startups Explained By Kristen Rogers Kristen Rogers Kristen works as a freelance writer for The Balance covering small business topics and terms pertaining to entrepreneurship, business finance, and more. She is certified in SEO and has a background in business management, marketing, and news media. Kristen also writes lessons for an education company and has prior experience as a manager for a Fortune 100 company, with experience writing and editing various content for education, news, and business websites. learn about our editorial policies Updated on January 21, 2022 Reviewed by Margaret James Reviewed by Margaret James Twitter Peggy James is an expert in accounting, corporate finance, and personal finance. 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She covers topics such as stock investing, budgeting, loans, and insurance, among others. learn about our editorial policies In This Article View All In This Article Definition and Examples of Startups How Startups Work Types of Startups Photo: Hinterhaus Productions / Getty Images Definition A startup is a business that is currently in its formation stages, or early stages of growth, that works to bring a new product or service to market. A startup is a business that is currently in its formation stages, or early stages of growth, that works to bring a new product or service to market. Startups can be considered risky for investors because they’re not yet publicly known, so they’re often privately funded, usually by the owners or founders. If you’re looking to venture out into the market as a startup with an innovation, it’s important to understand how the process works. Learn about the different types of startups, funding options, and general requirements for running your startup business. Definition and Examples of Startups Startups are new businesses launched by founders who aim to bring a new idea or product to market that can create a significant business opportunity while also making an impact. Businesses are considered startups during their formation and early stages of development or growth as they bring awareness to their brand, purpose, or product. Startup founders focus on different aspects of the business to get it started, including funding, conducting market research, choosing a business structure, and fulfilling any legal requirements for running the business. Note While startup founders can be considered entrepreneurs, there are some key differences. For instance, founders launch startups with the intention to unveil an innovation, to grow, and are very hands-on. Meanwhile, entrepreneurs are typically more financially motivated, eyeing new business opportunities and investments, and figuring out how to make them profitable without directly running operations. Startup businesses can form in various ways as there’s room for innovations in just about any industry. Businesses such as Uber and Airbnb are startups that have generated new concepts and have grown tremendously in the technology and lifestyle sectors. Some other industries that often see startups include business-to-business services, consumer media, and consumer goods. How Startups Work Startups operate just as any other business, the difference being the added barrier of trying to introduce a new idea of a product or service to the market. Startup founders must be able to seek out opportunities, innovative solutions, and ultimately, investors, while minimizing the overall risk. They face the challenges of creating awareness and obtaining the funds necessary to grow the business. Financing Options To cover the startup costs, businesses must determine their funding options. Here are some common methods of raising funds: Bootstrapping: Many startups are privately funded in the beginning. The owners or founders often invest in the business themselves and build it from scratch, a process commonly referred to as bootstrapping. Family and friends: A common financing method is obtaining money from family and friends who are willing to invest in your business. In many cases, it might be best to consider this type of financing as a loan rather than a stake in your business. Loans: Depending on the type of business, entrepreneurs may qualify for a grant or a business loan from the Small Business Administration (SBA) or other organizations. Crowdfunding: Crowdfunding can help startups raise money without the hassle of transferring partial ownership; generally, those who donate funds receive early versions of products or exclusive rewards from the company. Equity: Startups can give up a share of ownership, or equity, in exchange for startup capital. They must prove the worth of their business to investors, a challenging task that could pay off. Note Make sure to accurately calculate your startup costs so you know how much you need when requesting funds. Consider all costs of running your business, including equipment, marketing, licenses, office space, research, and any other costs relevant to your business. Types of Startups Startups form their businesses with various goals and purposes, and may be categorized by their business structures, their industries, or their purposes. Business structures, or business entities, are established when businesses are formed to determine how the business operates, registration requirements, taxes, and legal protections. Depending on the number of owners and liability protection preferences, businesses can form by choosing one of several legal structures, including: Sole proprietorship: Sole proprietorships don’t need to be registered and generally have one owner who is personally liable for costs. Limited liability company (LLC): Whether single- or multi-member, LLCs give liability protection to owners and are treated as pass-through entities, meaning they don’t pay taxes on business income. Instead, the business income is reported on the owners’ personal income taxes. Limited liability partnership (LLP): LLPs have multiple owners and give each owner liability protection. Limited partnership (LP): LPs give an owner unlimited liability while other partners are protected with limited liability. Corporation: A corporation works as a completely separate legal entity, but is generally the most expensive structure to form. Note When choosing a business structure, it’s important to consider whether you’ll be seeking investors. Because limited liability also protects the assets of the investors, it’ll be easier to receive funding if you opt for a structure that offers limited liability protection. Startups may also be categorized by purpose. Some simply aim to make a profit, while others intend to make a difference in their communities. Small Business Startup Small business startups are common forms of entrepreneurship. These are typically local-owned businesses such as restaurants or retailers that are aiming to profit but aren’t looking to expand into other locations or grow a franchise. Scalable Startup A scalable startup is a business that aims to expand much bigger than it first started off. Scalable startups believe their ideas can grow and have the drive to make the businesses succeed. These are commonly funded through venture capital and aim to eventually become publicly traded. Social Entrepreneurship Startup Social entrepreneurships have other goals besides profit. Their goal is to make a change or impact within the community. Many social entrepreneurships are nonprofits driven by specific missions. These startups may also use grants and sponsorships for funding. Large Company Startup Large company startups use innovative approaches to improve their companies. The aim is to expand a company’s already well-known brand through a new entity within that same company, such as a new product line. Key Takeaways A startup is a new business working to launch a new, innovative product or service and bring it to market.Startups are often intertwined with entrepreneurship. However, startups are typically focused on innovation, hands-on work, and scaling for growth, while entrepreneurship can refer to all business ventures and is focused on profitability.Startups can use a variety of funding options, including bootstrapping, crowdfunding, bank loans, and venture capital.Depending on the purpose, startups can be categorized into several different types, including small business startups, scalable startups, social entrepreneurships, and large companies. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. U. S. Small Business Administration. "10 Steps To Start Your Business." Accessed Oct. 27, 2021. U.S. Small Business Administration. "Choose a Business Structure." Accessed Oct. 27, 2021.