“Start-up”, “new business”, “entrepreneurship” – these are all hyped up terms that are sometimes mixed up or confused. Based on our experience, not every new business is a start-up in the narrower sense, and not every start-up is suitable for an investment by a VC fund – even if the business model is great and a lot of money can be made with it.

First and foremost, this means that the distinction between start-up and a new business is not a distinction between good and bad or right and wrong. Start-ups simply have a few characteristics that not every new business has. Admittedly, however, the lines are blurred and the differences aren’t black and white.

With a start-up, the rule is that its business idea is characterised by a high degree of uncertainty. This is because of the very high degree of innovation that a start-up brings with it. The innovation can relate to the product, the business model, or both. Here, innovation means that something new is created and problems are solved in completely new ways – neither are known beforehand. This is precisely what the high risk lies in for a start-up based on innovation: it is not guaranteed that a new solution, a new product or a new service will be accepted and sold.

One of the fundamental laws of economics is that where there is a high level of risk, there is also great potential. The same applies to a start-up: it has above-average growth potential due to its novelty, since it is taking a path that does not yet correspond to the norm. However, it has the opportunity to help define this norm and to be among the first.

In summary, a start-up is a new business that combines high uncertainty with strong innovation and strong economic potential. For this unique opportunity/risk profile, a start-up needs special investors who are willing to take high risks with their equity in order to achieve high profits. By contrast, new businesses that address existing markets, offers and customer relationships, such as a new engineering office or a cafe, are not considered start-ups in the narrower sense. The risks for such new businesses are manageable if the team is diligent and well prepared. This is why new businesses that are not start-ups can often be financed via debt capital.

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