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Startups are the latest trend in the biz-world we all have heard of. But do we actually know what a startup is?

“Startup is a state of mind,” says Adora Cheung, cofounder and CEO of Homejoy, one of the Hottest U.S. Startups of 2013.

According to Merriam-Webster, start-up means “the act or an instance of setting in operation or motion” or “a fledgling business enterprise.”

But technically a startup is a newly launched business that aims to attain a marketplace through a viable business model. A startup is an entity designed to scale over a period of time. We can say that a startup is a new business entity which has just started business. Startup is a like a baby which takes birth to do business. It needs nourishment during early days of birth such as funds, human resource, team, time and other resources, and slowly and gradually it starts turning into a self sustaining business model. There are a lot of challenges which a startup face during its operations. These challenges always put threat to the existence of the Startup.

Startups are widely known for three things 1) Huge amount of investment; 2) Huge Returns; and 3) Quick failure/Closure.

• Why huge amount of investment?

In order to run and scale up a business, investment is required. Startups are basically formed to scale up as it brings economies of scale which in turn leads to higher earnings. Thus, the founders seek huge amount of investments initially to make a startup capable of achieving economies of scale. The investment amount is utilized in capital expenditure (CAPEX) i.e buying assets etc and operating expenditure (OPEX) such as Salaries, Advertisements, Rents, etc. Due to low or no revenue initially, a startup needs funds to meet the expenditure in order to survive. Thus, investment is required to keep the startup running.

• Why Huge Returns?

Since Startup involve risk and there are very less chances of survival in future, investor demand and expect huge returns.Startup companies, particularly those associated with new technology, sometimes produce huge returns to their creators and investors—a recent example of such is Google, whose creators became billionaires through their stock ownership and options. Investment is always done to earn something, and investing in a viable startup may generate high returns. Possibility of loosing all the investment and no returns is equally very high.

• Why Quick failure/Closure ?

The failure rate of startup companies is very high. According to an article in Fortune, 90% of startups result in failure. The top five factors of failure are :

• Lack of consumer interest in the product or service (42% of failures)
• Funding or cash problems (29%)
• Personnel or staffing problems (23%)
• Competition from rival companies (19%)
• Problems with pricing of the product or service (18%).

There are many other factors that contributes to the failure of a startup such as

• It is difficult to find and launch a product that would be in high demand among consumers.
• Startups sometimes do not get funds on time.
• Startups fail to change or evolve according to the market.
• Entrepreneurs fail to notice their competitors.
• Customer care and satisfaction are sometimes ignored.
• Develop a costly or low quality product that leads to disinterested consumers.
• Launching too quickly or too slowly.

Read more about mistakes that a startup make