STARTUP
Startup or Small Business — What Is Better for You
This story is about the main differences between starting a small business vs. starting a start-up.
Not all businesses are created equal.
The guys that started Airbnb, or the guys that started Slack- set out to build a multi-billion dollar company that would IPO or get acquired for an insane amount of money. Those are the entrepreneurs that we (mostly) hear about, and that we look up to, and that’s fine. Who doesn’t want to build a business that transforms the world? But the story of how they built their businesses doesn’t necessarily apply to everyone.
Not all businesses are Amazons.
Not all businesses are Facebooks or Twitters.
While these companies started in garages and dorm rooms, they were able to raise multiple rounds of venture capital (mostly from Silicon Valley investors) and were able to fuel their exponential growth because they were tackling an insane marketing opportunity- with a new, nonexistent, or highly innovative approach.
The problem we often see is that many small businesses try to follow the exponential-growth-VC-funded approach, simply because it’s the stuff that we hear about, and we assume ‘that’s the way things work.’ But it’s not.
I like to draw a line here between the blockbuster, unicorn Silicon Valley-type of a startup, and the smaller startup, the company that could become a $10–20 or even $50 million company. But not a $1 billion unicorn.
There are different rules for each one of them: from fundraising, type of investors, recruiting team, and co-founders… Terminology is confusing here.
They are both startups. They are both small businesses, at least at some point. But I’m just going to call one group — startups, and another group — small businesses.
Startup vs. Small Business — Launching
Many tech companies are dealing with this reality check today.
A great example here is Slidebean, which was started as the ‘startup’ kind of company.
In case if you don’t know them, Slidebean is an AI-powered presentation platform, that built an algorithm that turns a provided bunch of images and text, into a fully designed slide.
Back in 2014, the Slidebean team felt the presentation market was up for the taking. They thought we had what it took to take PowerPoint down: aspiring to 500,000,000 PowerPoint users worldwide, which is s not that simple.
They saw a lot of similar companies, with excellent and smart founders, fail at this attempt of being the next PowerPoint. They have a cool product, an incredible follower base: over 400,000 people watch or read our content every month.
On the other hand, Slidebean has generated millions of dollars in revenue, out of a company that three guys started in good old San Jose, Costa Rica, and by a lot of measures that is a fantastic achievement.
The message I am trying to bring here is that:
We should be more aware of the companies we are starting, and understand the paths we can take to get them to where we want them to be.
By the way, a small but influential group of entrepreneurs have started talking about the success stories of ‘small businesses’ in the tech space, to shed some light on the entrepreneurs that don’t make headlines but have been able to build multi-million dollar companies that employ dozens and sometimes hundreds of people.
Startup vs. Small Business — The Difference
Here are some characteristics that can help you determine the type of business you are creating. Some examples:
Are you providing a service that requires humans, meaning, employees on the payroll?
If yes, then you are probably on the side of small business because you will need to scale your staff to scale your revenue, and that usually leads to thinner margins and slower growth.
On the other hand, the startup category of business is usually software or tech-related. That means that once the software is built, millions of people can use it without requiring a proportional amount of employees. If you are replacing an existing manual process with tech, then you might be on your way to the unicorn type of business but you need to be aware of how much money can be made with this, which will dictate your business size.
Startup vs. Small Business — Fundrising
Investors putting money on the startup kind of business, at the earliest stage, expect a 10x return of their investment. That is if you raise $500,000 at a $5MM valuation which represents 10% of the company, in exchange for those $500K they will expect your business to be worth $50MM within 5–7 years.
Notice: it doesn’t need to be $50MM in sales, but someone must value it at $50MM, either a new round of investors or a potential buyer. If that metric is not met, then the investors are not getting the money they expected out of this investment.
That’s another difference; these investors expect you to sell the business, liquidate assets so that they can get their money back quickly. They’ll prefer that to the alternative: collect a percentage of your dividends over years or decades.
Doing an IPO, or initial public offering - which means listing the business on a stock exchange is another way for investors to get their money back - but IPOs are reserved mostly for large, $100M+ companies.
It’s critical that you understand your own business category so that you don’t waste time approaching the wrong type of investor.
If you are starting a development services company, or a growth marketing consulting firm, for example, you should not waste time looking for startup-type investors. Again using the term ‘startup’ as I defined it earlier on. In those cases, you probably want an executive type of co-founder, that brings the capital and the client network for say, 50% of the company.
You are equal partners; you provide the talent and manage operations. That relationship is totally doable.
You may also look for friends and family funding. It might be possible to raise $100,000 from people that you know, and that believe in you - but defining the right business size will set the right expectations as to the risks and potential rewards of their investments. What you definitely don’t want, is raising a multi-million dollar seed round only to find you couldn’t scale as fast as you expected.
On one end, you might have a smaller-than-expected business that employs a few people and generates some profits and could continue to operate happily, but on the other hand, you have a group of unsatisfied investors pressuring you to grow more.
Conclusion
Whatever route you choose, make sure is something you love doing. You’ll be doing it day and night for years - and it will become a significant part of your life and your professional career. Chances are, if you succeed, you’ll be associated with the company you built forever, in one way or another.
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