What Is a Startup? Types and How They’re Funded

Many successful founders say that launching a startup is one of the most rewarding ventures you will ever take on, with both financial and personal rewards. However, startups also come with considerable risks, including financial uncertainty, demanding workloads, and potential burnout. However, if you have a strong product or offering, financial backing, and a solid support system or team in place, the eventual returns can outweigh the risks.

But what actually is a startup? Read on to learn how startups work and the types of funding that can take them from business plan to scale.

What is a startup?

A startup is an early-stage company with a business model designed for rapid growth. Startups typically pursue an innovative product, technology, or business model to disrupt an industry and rely on outside funding until profitable. Because speed matters, many startups focus on winning market share quickly and generating outsized returns. 

Startup vs. small business

Both startups and small businesses aim for profitability and growth, but their funding sources and operations tend to differ. Small businesses typically rely on business loans from banks or other lenders, pursue growth at a steady pace, and prioritize long-term ownership, stability, and consistent profit. Startups, on the other hand, tend to focus on outside funding, such as venture capital, and rapid expansion, often with the goal of an eventual exit, such as a sale or initial public offering (IPO).

Types of startups

• Startups that IPO
• Startups that are bought
• Startups that drive social impact

Not all startups set the same goals or business model. There are three common buckets of startups, based on their likely growth path and outcome. 

Startups that IPO

Some startups are designed for rapid growth toward an initial public offering (IPO). For example, Ebay disrupted the collectibles resale and auction industry and went public in 1998, only three years after launching under the name AuctionWeb. Amazon and Uber are other examples of rapid-scale startup business models that led to IPOs.

Startups that are bought

Other startups achieve rapid growth in ways that make them attractive acquisition targets. One example is Zappos: it launched in 1999, gained millions of customers by 2008, and sold to Amazon for more than $1 billion in 2009. Strong growth in a short period caught the eyes of investors and companies who were interested in buying the product or service.

Startups that drive social impact

Some startups combine scale, profit, and purpose. A few examples are Tom’s Shoes, which launched in 2006 with a business model where the company donates a pair of shoes to someone in need for every pair bought, and Warby Parker, which opened in 2010 selling affordable glasses while donating a pair for each purchase. 

Ways to fund a startup

• Angel investment
• Venture capital firms
• Crowdfunding
• Bootstrapping
• Marketplace capital
• Startup business loans
• Small business grants

Here are common sources of startup capital:

Angel investment

Angel investors are wealthy individuals who provide early funding to startups, typically investing between $25,000 and $500,000 in exchange for equity. Angel investors are often entrepreneurs or executives of their own well-established companies who can advise founders and open doors to partnerships, media exposure, and future investors. Sometimes, friends and family members can offer angel investment. Angels provide capital at the earliest stage of company development, before a minimum viable product (MVP) has been developed and before venture firms get involved. 

Venture capital

Venture capital (VC) firms usually get involved after angel investors, at the seed or Series A stage. They tend to invest more than an angel and provide additional support and services such as recruiting support, marketing advice, and partnership opportunities. That being said, VC money comes in return for equity and board seats, meaning founders surrender some ownership and control.

Venture capitalists also often have higher expectations for returns than smaller investors. Venture capitalists usually look for proof of product-market fit and a clear path to profitability. 

Crowdfunding 

Crowdfunding platforms, like Kickstarter and Indiegogo, raise small amounts of money from a large number of people, often fans and prospective customers. In return for their investment, these individuals may receive products or other rewards from the company. In equity crowdfunding, investors receive an ownership stake in the company in exchange for their investment.

Crowdfunding can unlock capital without traditional investors, validate the market, and build a community around a product. It requires significant effort to run a campaign and doesn’t guarantee sufficient funding. With equity crowdfunding, founders also distribute ownership across many small investors. Successful campaigns can later attract interest from angels and/or venture capitalists.

Bootstrapping 

Bootstrapping uses personal savings or revenue to launch a business without outside investment. It lets you retain full ownership, but it concentrates risk. You might choose to bootstrap at the beginning, then raise capital later to accelerate growth. 

Marketplace capital

Marketplace capital refers to financing through ecommerce platforms or marketplaces—like Shopify Capital, Amazon Lending, or Etsy’s partnership with YouLend—bypassing traditional bank loans. Thousands of businesses have taken advantage of Shopify’s financing program since 2016, including Boe and Kennedy Brodhun of The Shop, who founded their forestry retail business in 2021 and have since expanded to international markets.

Marketplace funding gives sellers access to capital without requiring equity. However, securing loan approval often depends on your sales history within Shopify and your engagement with the Shopify platform. The user must already be a seller on the platform, so funding is not open to the public.

Startup business loans

A startup business loan is debt financing to launch and expand a new business, whether for product development, hiring, marketing, or inventory. Lenders—such as banks, marketplaces, or corporations—often consider personal credit and experience rather than business revenue, which can make these loans accessible. But founders should keep in mind that debt requires repayment, may require personal guarantees, and typically carries interest or fees.

The Small Business Administration (SBA) is one of the well-known lenders for small business owners. The SBA doesn’t provide loans specifically for startups, but most of its loans can apply to startup ventures.

Small business grants

Federal, state, and local governments, as well as corporations and non-profit organizations, often offer grants to small businesses. Although small businesses differ from startups, many grantors don’t distinguish between them, so startups may be eligible. Grants don’t need to be repaid, but recipients must meet rigorous criteria, which may include business certification.

*Shopify Capital loans must be paid in full within a maximum of 18 months, and two minimum payments apply within the first two six-month periods. The actual duration may be less than 18 months based on sales.