When I hear the word “startup,” my mind immediately begins playing a reel of a bunch of twenty-something year old web developers, huddled together in a retro office somewhere in the SF Bay Area. Drinking beer at midday, laughing about the epic, cool culture they’ve got going, and chatting about the fact that they spent the weekend hanging out with their venture capitalist besties.
So, when I hear people use the word “startup” in association with a small businesses—say a restaurant, cafe, hair salon or dental practice—my mind balks.
And I’m not entirely wrong.
The thing is, a tech startup or any type of startup for that matter (doesn’t have to be technology focused) and a traditional, new business venture, are different for a number of reasons, most notably: the way they think about growth.
Key difference #1—How these entities think about growth
Startups are different from traditional businesses primarily because they are designed to grow fast. By design, this means that they have something they can sell to a very large market. For most businesses, this is not the case.
Generally speaking, to operate a business, you don’t need a big market. You just need a market and you need to be able to reach and serve all of those within your market.
This is one of the reasons, most startups are tech startups. Online businesses can more easily reach a large market because they traverse time and space – people can buy from you or use your product regardless of whether you’re awake or not and whether you’re in Cape Town or New York. The distinctive feature of most startups is that they are not constrained by these factors.
The Small Business Association sums it up best:
“In the world of business, the word ‘startup’ goes beyond a company just getting off the ground. The term startup is also associated with a business that is typically technology oriented and has high growth potential. Startups have some unique struggles, especially in regard to financing. That’s because investors are looking for the highest potential return on investment, while balancing the associated risks.”
That said, not all technology companies have a very large market. If you sell software written in Hungarian for Hungarian school teachers, you’ve already got a very select market.
According to investor and angel entrepreneur Paul Graham, “that’s the difference between Google and a barbershop. A barbershop doesn’t scale.”
To grow rapidly, you need to make something you can sell to a very big market.
Key difference #2—The relationship with funding
Apart from having different ways of thinking about “growth,” startups seek financial investment differently than most small business operations. Startups tend to rely on capital that comes via angel investors or venture capital firms, while small business operations may rely on loans and grants.
The interesting thing about venture capital is that those providing it tend to have a more active role in whatever company they are backing. While a small business awarded a grant or loan may occasionally need to report back to their bank, a startup with angel backing will probably be getting a bit more help. They’ll be receiving advice from the investor (after all, the investor is the one taking the biggest risk) and, if you’re young and inexperienced, there’s probably nothing better than a helping hand. This is especially true for those teams or individuals that become a part of an accelerator or incubator program.
Difference #3—Planning for the “end,” or the exit strategy
“Startups looking for angel investors or venture capital (VC) absolutely need an exit strategy because investors require it. The exit is what gives them a return.” – Tim Berry
Another thing you’ll want to keep in mind is your vision for your business. If you’re pitching for VC funding without an exit strategy, you’re unlikely to get it.
Venture capitalists need an exit strategy as they need to maximize their ROI. If you’d still like to be running the company in 10 years time, you’re probably going to want to ensure that exit plan comes in the form of a steady revenue stream that allows you to pay off investors, an IPO instead of a buy-out, or simply opt for a different strategy—your own funds, or loans and grants, either private or governmental.
“Exit strategy” development is a problem you won’t have with your own business, at least not until you’ve made it big or until you change your mind about owning the business. The point is, in a traditional business (not a startup), you don’t need an exit strategy at the start. You’ll be entirely responsible for the future of your company and it will be down to you whether or not you run it for the rest of your life or decide to sell, merge or launch it on the stock market.
Is a startup business right for you?
Given the rise of startup incubators and accelerators, the availability of funding for early-stage startups, and the fact that big companies everywhere are buying startups instead of focusing on in-house innovation, you may want to consider launching a startup instead of a traditional business.
Here are some signs a startup may be the right type of business for you:
1. You like working hard and then moving on
Ever heard of the serial entrepreneur? If you know you’ll get bored or want to see many of your ideas to fruition, a startup may be a better approach. Naturally, this means you need staying power and the ability to work your butt off! For all you know, your startup is going to have a five year lifespan, and it’s going to be down to you to make it work and to make it work fast. If that’s a problem for you, you might want to think twice about starting any type of business.
2. Your product or service has a huge market
In order to grow rapidly you’re going to need to “think big” or, as angel investor Paul Graham says, “to make something you can sell to a big market.” A really big market, ideally in the realm of millions.
This is part of the reason tech startups are the most popular type of startup—it’s easy to reach millions on the internet, regardless of where they live or when they do business. Your local cafe does not have this luxury.
3. You’d like input and guidance from an expert
As I said above, incubators and accelerators are great for those that have never started a business before, or perhaps who have never started a startup. If you’re unsure about what to focus on or how to think about rapid growth, this might be a good place to get started. Hundreds of these organizations are popping up all over the country, so I’m sure you’ll be able to find one close to you.
Blair Giesen, serial entrepreneur and founder of Zambig.com describes the difference between the two:
“Incubators provide guidance and advice to help startups grow and succeed in an unstructured program, with no specific goal or timeframe.
Accelerators provides structured curriculum in a short period to help rapidly grow the size and value of a company to get ready for a specific goal, typically to raise financing.”
If you’d like to understand more on the topic of startups, I recommend reading Paul Graham’s essays on startups. As the cofounder of Y-Combinator—an American seed fund accelerator—he’s a great source of information.
4. You’re an innovator
In the world of startup ventures, the idea is everything, as is rapid innovation. Many companies today have stopped innovating internally and instead spend millions, sometimes billions of dollars acquiring startups that do it for them instead. This is why many startup founders launch with exit strategies that focus on a buy-out.
If you’re an innovator, a startup could be the right option for you.
A word to the wise from the wise
“The problem with the internet startup craze isn’t that too many people are starting companies; it’s that too many people aren’t sticking with it…when these people sell out, even though they get fabulously rich, they’re gypping themselves out of one of the potentially most rewarding experiences of their unfolding lives. Without it, they may never know their values or how to keep their newfound wealth in perspective.” – Steve Jobs, [Fortune, Jan. 24, 2000]
How would you go about deciding which type of business is a good fit for you personally? I’d love to hear from you in the comments below.