Startup or a small business?

I was recently contacted by a ‘startup’ wanting to leverage my following to sell their product. After a bit of digging, I discovered it most definitely is not a startup, but a value-added service to sell their existing product. 

I want to be clear here: I am all for startups and small businesses, and I work with both in my business. The goals, intention and workflow is just different. 

What are the similarities between a startup and a small business?

Fundamentally, business is business. A company is doing something to make money. 

In the long run, no business can survive without making money. The fundamentals of forms of value are still adhered to. Whether it is playing agent, selling, offering a product or service – the principle of making money stays the same. 

A small business and startup can have founders, employees, shareholders and can get business loans/cash injections. 

Most small businesses and startups have a target market and an ideal customer, but in some cases, they have neither. Having neither is a dangerous place for any company!

Startups and small businesses can have a business plan with their financial projections, business aims and a roadmap, though the actual plan might not fit the standard, expected structure. Check this external link here for lean planning.

There may be fundamental differences though in the purpose, day to day operations and financial structures.

What makes a startup different?

I love the way Eric Ries defines a startup. Let’s unpack that for a second. 

A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.

– Eric Ries (The lean startup)

So, generally with a startup, the uncertainty is caused by doing something new, innovative or groundbreaking. There is no formula that a startup can follow to ‘copy’ another company. They generally use the build-measure-learn cycle to test their assumptions – or what we would call “beliefs” and “perceptions” in our business. For example, I once had a client tell me “I am 100% sure that this will change the way we do business” – do you have proof of this?

Startups and funding

Due to this high level of uncertainty, the founders oftentimes have difficulty getting finance for their ideas from traditional banks and institutions. They tend to opt for venture capitalists (VCs) and angel investors.

There are also various funding rounds where the startup tries to get more cash injections to scale their business.

The above image with an explanation of funding rounds is sourced from here.

Economies of scale

Investors want serious ROI, not just 10-100%. For this reason, a startup needs to be able to scale its offering. They leverage economies of scale. For example, let’s say you make frozen dinners. If you make one, it takes 20 minutes. If you make a hundred, it takes 40 minutes more. 

For leveraging economies of scale, startups tend to function well within the technology sphere. For example, they write the code once and the server costs/running expenses tend to be very low. This is why we have buzzwords such as machine learning, fintech and biotech.  

Startups and exit strategies

Startups tend to define an exit strategy early on in the process: they want to be either acquired or go for an initial public offering (IPO)/float on the stock market. 

The idea is to build, find a product/market fit as soon as possible, scale their offering and exit the business. The business could  be exited either by acquisition or floating it on the stock market (IPO).

What makes it a small business?

Innovation is not only for startups. Small businesses can come up with amazing solutions to their customers’ problems.

The purpose of a small business tends to be different. Startup is looking to find a product market fit, build, scale and exit. Small businesses on the other hand might have different goals, depending on the type of small business that you’re running.

The formula of a small business

Let’s say you want to start a guest house. You know that other people have done it before. And you can find people to guide you on the journey. You might even be able to find books to give you the magic formula on “how to run a successful guesthouse”.

These formulas help small businesses, in the same way, that franchisors help franchisees to make sales and be profitable. 

Now imagine building a groundbreaking product that no one has ever heard or seen – you won’t be able to get a formula for this, right? There might be methods for testing your idea, but you won’t be able to copy someone else’s success. 

Small businesses have a formula – startups don’t.  

Small businesses objectives

Not all small businesses have the aim to scale, grow and disrupt the market. Some people aim to create lifestyle businesses – something that fits into the owner’s lifestyle, more than making money. These types of businesses tend to not be a 9 to 5 job – the owner works when it suits him. And if they want to take the day off, then they can.

Some businesses need staff to make them work. Though exponential growth is not the aim, the business grows organically – staff, locations and turnover. I like to call this a detached business. Detached businesses are seen as businesses, not an extension of the founder’s personality. For example, someone might have a printing business with multiple sites – but it doesn’t mean that they are attracted to printing technology.

There are also small businesses that grow from hobbies or side hustles. These tend to be businesses where there is a high level of emotional attachment. These small businesses tend to scale well, as dedication and passion are followed by action. 

From the above, we can see that a lifestyle, passion or detached small business could have different goals and different day to day workings.

Conclusion

There are very defined goals, processes and expected outcomes from both startups and small businesses. 

However, one could possibly argue that startups are a type of small business – though the process that drives them might be different.

A small business could be done on your own, whereas a startup will imply that you build with others – you need economies of scale!

Happy investing!


Money Local

Frugal Local runs his own company (Effectify). He does software development and helps small businesses and startups with digital solutions. He enjoys writing articles and simplifying complex things - such as the article you're reading!