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Startup Financing Cycle

A startup company or startup is a company with a limited operating history. These companies, generally newly created, are in a phase of development and research for markets. The term became popular internationally during the dot-com bubble when a great number of dot-com companies were founded. A high tech startup company is a startup company specialized in a high tech industry.

Contents

Evolution of a startup company

Startup companies can come in all forms, including those that are simply life-style companies, but the phrase "startup company" is often associated with high growth, technology oriented companies. Investors are generally most attracted to those new companies distinguished by their risk/reward profile and scalability. That is, they have lower bootstrapping costs, higher risk, and higher potential return on investment. Successful startups are typically more scalable than an established business, in the sense that they can potentially grow rapidly with limited investment of capital, labor or land.

Startups enjoy several unique options for funding. Venture capital firms and angel investors may help startup companies begin operations, exchanging cash for an equity stake. In practice though, many startups are initially funded by the founders themselves. Factoring is another option, though not unique to start ups.

A critical task in setting up a business is to conduct research in order to validate, assess and develop the ideas or business concepts in addition to opportunities to establish further and deeper understanding on the ideas or business concepts as well as their commercial potential.

If a company's value is based on its technology, it is often equally important for the business owners to obtain intellectual property protection for their idea. The newsmagazine The Economist estimated that up to 75% of the value of US public companies is now based on their intellectual property (up from 40% in 1980).[1] Often, 100% of a small startup company's value is based on its intellectual property. As such, it is important for technology oriented start up companies to develop a sound strategy for protecting their intellectual capital as early as possible.[2]

Startup companies, particularly those associated with new technology, sometimes produce huge returns to their creators and investors – a recent example of such was Google, whose creators are now billionaires through their share ownership. However, the failure rate of startup companies is very high. Based on a research, founder CEOs of high-tech companies can typically expect their stock to be worth about $6,500,000 (statistical average) if the company succeeds in going public(in 1997)[3]

When incorporating a new venture, a good rule of thumb is to authorize (or issue) 10 million shares @ 1/10 of cent. 50% of these shares should be issued to the founders (with a vesting schedule). 10% should be set aside for future employees. The remaining 40% will go to future investors. [4]

While there are startup businesses created in all types of businesses, and all over the world, some locations and business sectors are particularly associated with startup companies. The Internet bubble of the late 1990s was associated with huge numbers of internet startup companies, some selling the technology to provide internet access, others using the internet to provide services. Most of this startup activity was located in Silicon Valley, an area of northern California renowned for the high level of startup company activity.

A company may cease to be a startup as it passes various milestones, such as becoming profitable, or becoming publicly traded in an IPO, or ceasing to exist as an independent entity via a merger or acquisition. Companies may also fail and cease to operate altogether. Recently the patent assets of these failed startup companies have been being purchased by what are derogatorily known as "patent trolls" who then take the patents from the companies and assert those patents against companies that might be infringing the technology covered by the patent. [5]

Startupers

Startupers is a term used in the software industry to describe people involved in the creation of high tech startups. Typically, startupers are entrepreneurs, venture capitalists, software engineers, web developers, and others involved in the ground level of a new high tech venture.

See also

Further reading

References

  1. ^ See generally A Market for Ideas, ECONOMIST, Oct. 22, 2005, at 3, 3 (special insert)
  2. ^ For a discussion of such issues, see, e.g., Strategic management issues for starting an IP company, Szirom, S.Z., RAPID, HTF Res. Inc., USA (ISBN:0-7695-0465-5); What Business Owners Should Know About Patenting, Wall Street Journal, available at http://www.wsj.com/article/SB121820956214224545.html (Interview with James McDonough, Intellectual property attorney),
  3. ^ "High Tech Start Up, Revised and Updated: The Complete Handbook For Creating Successful New High Tech Companies", John L. Nesheim
  4. ^ "Startup Rules of Thumb
  5. ^ JAMES F. MCDONOUGH III (2007). "The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy". Emory Law Journal. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=959945. Retrieved 2007-07-27.



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