Start-up, Scale-up, Business Angel, Unicorn, Venture capital – What do all these terms describe? Let’s have a guess… maybe “start-up” or “scale-up” is a kind of a call to action? No, it is not. “Business angel” and “unicorn”, maybe these are two creatures one can find in a fantasy novel? No, they are not. So, what do these terms refer to? We all have heard at least one or two of these terms already because we encounter them almost every day when scrolling through news websites, newspapers and the business press. They are used in articles about young, innovative and ambitious companies in the IT industry. We tend to use these terms in a way which suggests that we are absolutely familiar with their meaning. But one can imagine that in truth it is not clear for everybody what for example “scale-up” describes. That is why in the following lines I will spend some time to explain what a start-up is, what scale-up requirements are and where one can find business angels, unicorns and venture capital.
Let’s start with a company called “start-up”. Investopedia defines a start-up as a young company that is in the first stage of its operations. Such companies are often initially bankrolled by their founders as they attempt to capitalize on developing a product or service for which they believe there is a demand. The first thought that comes to mind when reading about or hearing of a start-up is very often that the young company could be located somewhere in or near the famous start-up area called Silicon Valley. But in reality there are several cities which are appealing for founding a company – in Germany for example metropolises like Berlin and Munich are the favorite cities for young entrepreneurs and founders to start successful businesses.
Now that we have talked about start-ups, we will take a closer look at the term scale-up because scaling up is kind of the next step for a start-up in the process of growing. As a start-up you want to grow and become a serious competitor at the market. Because of start-ups being a serious part of today’s economy, even the European Commission initiated a program called The Startup and Scaleup Initiative to support start-ups to grow and as a result to become scale-ups. So, a scale-up can be seen as a development-stage business that is aiming for growth in terms of market access, number of employees, and revenues. Regarding the financials, the goal for a scale-up can be described as the strive to reward its investors, for example by being acquired via an M&A or via an IPO. To sum up, a start-up can be called a scale-up after it solved all the start-up challenges and seriously starts to grow. And if a start-up is located in Europe, its founders should take a look at the initiative of the European Commission because the main proposals of that initiative are 1) to remove barriers for startups to scaleup in the Single Market, 2) to create better opportunities for partnership, commercial opportunities and skills, and 3) to facilitate the access to finance.
Another term we can read often in combination with success stories these days is “Unicorn”. The Business Insider describes a “unicorn” as a company that is based in the Silicon Valley and has a billion-dollar valuation. The term itself was created by venture capitalist Aileen Lee who wrote the article “Welcome To The Unicorn Club: Learning From Billion-Dollar Startups”. Lee looked at software start-ups which were founded in the 2000s, and she estimated that only 0.07% of them ever reach $ 1billion valuation. As a result, she says that those which do reach the magical $1 billion mark would be so rare that finding one of them is as difficult as finding a unicorn. However, over the last few years, a prominent trend gained in popularity: pouring more and more money in start-up companies which is responsible for the increase of the occurrence of unicorns.
As we talked about unicorns, we learnt that the term itself has been created by a woman who was described as a venture capitalist. So, now the question comes up: What exactly is venture capital? The term implies that it has something to do with money, but it is a special kind of money. In detail, venture capital is financing that is provided by investors to start-ups and small businesses that are expected to have long-term growth potential. Venture capital can be an essential source of money for start-ups which don’t have access to capital markets in general. Venture capitalists are investors who are aware of the fact that investing in start-ups can be a risky business. If investing, they usually get a say in company decisions, and that is the crux for start-ups because they have to make a decision: If they decide to take venture capital, the loose control. If they don’t take the money they will stay independent but could struggle with funding. If you are a lucky founder you possibly don’t have to decide between using venture capital or not because there might be another opportunity to have access to funding. And that opportunity will be described in the last paragraph of my blogpost.
The business angel or angel investor
So, let’s finish the article with talking about a character called the business angel. That character is a person who is willing to give financial support to a business and receives a share of any profits from it. Usually, the business angel does not expect to be involved in the business’s management. Besides with money a business angel (can also be called angel investor) sometimes helps also with business contacts and advice. To sum up, in contrast to venture capitalists, business angels usually operate alone or in very small groups and play only an indirect role in the businesses they invest in.
Fancy names for daily business
Unicorns which arose from start-ups financed by business angels – now we know what it is all about. All these fancy names are just expressions for terms in a special world of business. They sound special and in a way magical, but as soon as you know what’s it all about they become usual terms in your daily business. And their existence and the necessity to understand their meaning are proof for the importance of the proper language in the proper economic environment.