Start Ups vs. Small Businesses

There is a lot of media coverage, hype, and trendiness around “Start Ups”. Who is the next Unicorn? Who raised the latest eight figure round? Who is disrupting what? There is a ton of advice (blogs, videos, etc.) addressing the various aspects of being a Start Up founder and how to grow your business. That’s great if you are actually in a Start Up. However, most of businesses that get created are not actually “Start Ups”, but rather “Small Businesses”. The problem is that much of the advice that is out there for Start Ups is totally inappropriate for Small Business owners. I am by no means the first person to touch on this topic, and I borrow heavily from other great posts (like here, here, and here). Let’s dig in…

First let agree on terminology. When I say “Start Up” I am referring to a type of business and not the maturity of a business. In other words, a business is not a Start Up merely because it is early in its existence. Second, there is no exact definition of Start Up or Small Business. I am speaking in generalities, and there are exceptions to everything I say here (so assume the words “most” or “many” apply to the statements that follow). To keep it short, I am going to only focus on two differences that illustrate my point well (this article is a great summary of some of the others).

Business Goals

Start Ups are designed to grow exponentially and to have a big exit (IPO, sale, etc.). The Founder of a Start Up needs to be prepared to rapidly scale the business and to quickly take a chunk out of a relatively large market. It takes a significant amount of resources to accomplish this feat, which is why most successful Start Ups require several large tranches of Venture Capital. Building a boot-strapped business to be self-sufficient is a very slow process. It is VERY rare that you could innovate (think highly paid talented employees) over several years, at a large scale, and quickly, without investment. If you have a business model that allows for that with no capital investment, hats off. However, the minute you take real VC money, you best be prepared to be driven towards rapid growth. The investors need every company they invest in to have the potential to scale exponentially, to make up for all the ones that will fail. For many Start Ups, if you don’t get to a 9-figure valuation (or more) investors will be dissatisfied.

Small Business, on the other hand typically, has the goal of becoming self-sustaining as fast as possible. Owners may start the business with personal savings, small business loans, or money from friends and family. They typically desire to become self-sustaining and to service that debt in a relatively short period of time. Where Start Ups need to burn through the cash fast to innovate and build a large customer base (anticipating another round), the Small Business is very careful with each expenditure focusing on sustainability. Once a small business is sustainable, many often do start to scale. For example, an owner that starts a dry-cleaning service may open a second location after the first location is cash flow positive and debt is under control. A small business can certainly grow large through steady growth, but many also stay in the 6-7 figure range for their entire existence.

Innovation

Start Ups typically have innovation at their core. Many are trying to do something entirely new, or provide a product or service that is at least an order of magnitude better than what is available in the market today. While there is plenty of room to innovate in Small Business, a Small Business can be highly successful by simply providing well established products and services to an underserved market. To be clear, many small businesses innovate in both their products and business models. It’s just not as essential as in a Start Up. For a Start Up it is hard to obtain massive growth and market domination with an incrementally better product. If you are passionate about the restaurant industry you be very successful opening several restaurants of the course of a few years; and you can certainly put your own unique spin on the business, but when was the last time you really went to a restaurant that truly innovated to provide an experience that was an order of magnitude better than anything else that exists?

So What?

There are many other differences, and people have written them up better than I will here. The main point I want to get across is that a lot of the books, blogs, and videos out there are geared towards Start Ups. Geared towards business for which the going in assumption is that you are trying to grow exponentially / fast, primarily through some technical innovation to create or disrupt a market. Advice about the persona you are supposed to have, your work life balance, financing, growth targets, etc. are largely geared towards Start Ups. If you don’t understand the difference between small businesses and start ups and the context in which the advice is given you could get wrapped up in a bad mental model.

I see a lot of small businesses reading blogs about VC, when it is clear that they don’t have a scalable business model that a Start Up would need. You can make damn good money with a business that pulls in $5M year after year with a 10% net profit margin. But no VC is going to invest in that business, and so any time the owner spends reading up on VC is a waste of time better spent elsewhere. Reading up on how pricing models for Start Ups that really care more about “users” than revenue, may not be super helpful if you are trying to build a sustainable local small business.

Start Ups get a lot of press, but I know a lot more people who have built significant wealth and financial independence as a small business owner than I do that have achieved the same through a Start Up IPO. Do you have a business that you think will really scale up to be a billion-dollar business within 5-7 years and is your goal to take it here? If so, then you might be a Start Up. If you are a business of 10 people and have been so for 4 years, you are a Small Business. If you are 25 people and offering products and services that are common in the market place, you are probably a Small Business. If you are just starting up and your first goal is to be sustainable and give yourself a pay check, you are probably a small business.

And you know what? Small Businesses are awesome. Small Businesses take just as much grit and determination as a Start Up. It’s not better or worse, it’s just a bit different. You need to understand that difference when seeking out information, planning for the future, and making decisions. So, my advice is to check out some of the articles I linked to and figure out if you are a Small Business or a Start Up. From there make sure you are seeking out information that is relevant to the type of business you have.