The growing outpost is considered to have a single population unit of a 'generic' species, with no traits, whose only purpose is to grow. This comes from two sources: from the natural production value that a single generic pop unit (and any raw output bonuses) would give from a planet, and from periodically-departing small (visible in-game) civilian supply ships which will depart from a nearby colonized system you own. To transform into a colony, the outpost needs to accumulate enough to grow a single pop unit (300 on normal speed). Once an outpost becomes a colony, it is possible to start building system improvements and colonize other planets in the system. It is possible-but-rare for a tie to actually form, at which point the outposts in a system will be in a stalemate until one faction breaks the tie by weakening an opponent's colony (see notes below).

Note that if you do 'decolonize', you will receive a free replacement colony ship at that system, albeit with only one engine equipped. Upon winning this, all planets with outposts (including those of opponents) will be considered colonized by the winner, so it might be desirable, if it's clear that you're going to lose a race for a colony, to deliberately 'decolonize' to deny the opponent the benefit of trying to colonize the extra planet you were going for. Several players can establish outposts at the same time (which makes an action to leech some of the contestants' available) with the first player to reach the target amount winning control of the system. Once the outpost has been established, it needs to be fed a certain amount of (or for Riftborn) before it becomes a proper colony. Once the colony ship has reached its destination, it can establish an outpost on any of the habitable planets.

It is recommended to upgrade the ship blueprint with better engines once the player have researched them. These ships have very limited attack and defense capabilities and should be escorted to their destination if there's any risk of attack by pirates or a hostile faction, which is quite low early game. A colony ship is its special civilian ship type, with no other being capable of utilizing the module. Beyond that point, they needed to be built. Every faction that utilizes colony ships starts with one immediately.

Endless space 2 over colonization