Are you a Startup Founder or a Small Business Entrepreneur?
During my time with Jobs for NSW (a state government agency in New South Wales, Australia), I have reviewed and assessed over 500 grant applications submitted by startup founders. As the grant itself is industry agnostic, I was lucky enough to gain insights into a vast array of startups, their business models, founding team structures, and strategies to scale and grow startups. And because of that, I often get asked: “Hey Jonathan, have you come across any “good” startups recently?” Every single time, I need to pause and think for a moment, and the answer is often: “Not really, but there are quite a number of ideas which can become great businesses.” You might wonder, what’s the difference between a startup and a business anyway? If you do a quick search on Google, you will find tonnes of articles explaining the differences, and today, I wanted to share with you my version of it.
Before I start, I wanted to tell you a little bit about why I think it is important to understand the distinction between a startup and a small business. In recent years, we have seen an exploded increase in popularity for our younger generation wanting to become a startup founder or an entrepreneur, and often, they start with the intention of not having to work for someone else and wanting to make an impact on the world. When I first started out entrepreneuring 15 years ago, I didn’t know the difference between a startup and a small business, if I knew, it would have made a big impact on my life, both personally and professionally. The world of startup and business is a double edged sword, and if you don’t understand the differences between the two vehicles, it can ruin your life! It has almost become a duty that I share my insights with those who are currently and/or considering becoming a founder or an entrepreneur.
MY OWN DEFINITION
I won’t do those Oxford dictionary definition stuff, I’ll jump straight into my own interpretation.
A startup is an organisation that is organically formed, nurtured, grown and evolved into a fast-growing, scalable enterprise, whilst a small business is an organisation that is initially built based on a defined objective and some kind of proven framework or methodology.
A STARTUP
Let’s use a human embryo as an analogy for a startup (in simple terms, please don’t hold me to it, I’m not a scientist). An embryo is first formed with a heartbeat (the passion), and a spinal cord that supports everything (the mission), then grow and develop its organs (the founding team, and early employees), and bone structures (early adopters and early partners), nurtured with nutrition (mentors and advisors), and after it is born (launched), it keeps evolving (pivot at times), until it becomes a human being who have acquired the necessary skills and built a foundation to continue its journey in life (a fast growing, scalable enterprise).
You don’t know what the end product is initially, you started with a passion and wanting to take over the universe, it then keeps evolving based on internal and external factors.
A SMALL BUSINESS
If a startup is a human embryo, what is a small business? How about a robot as an analogy?
Based on a certain framework (other successful businesses you have seen, market analysis, supply/demand, reachable access to certain resources etc.), you decided to build a robot. You create the design drawings, calculate material and production costs, and most importantly, you already know why you are building a robot (collectively called a business plan). You go and buy the materials, you started building the frame and hardware side of the robot (inventory, renting of physical space, or acquiring of land, buying equipment, machinery etc.) You then build the software to control the robot (staff, business systems, sales/marketing engine, user manuals, etc.)
You already know the end product before you build it. You build it for a particular objective (usually monetary). You can anticipate the time and cost it takes to build it, and make an educated calculation on its return on investment.
WHY DOES IT MATTER TO HAVE SUCH DISTINCTION BETWEEN THE TWO?
Choosing between a startup and a small business, will dictate the way you look at the two major factors below:
How you raise capital and determine your exit strategy
The definition of success
CAPITAL RAISING AND EXIT STRATEGY
This is probably the biggest misconception for most founders who are just starting out. I have seen many founders who have tried to go out and raise capital with just an idea and a pitch deck, hoping that they can get some funds to "build the product". And the typical pitch deck looks something like this:
Tells you about how passionate the founder is, usually a worldly topic with massive social impact
A problem statement - a very big problem to solve
The magical solution - which has not been built yet
Size of market - a few big figures which you can find on Google (and you will be reminded of the worldly topic and social impact)
The team - two co-founders and 10 other names under the advisory board
Competition - the magic quadrant where corporates are usually shoved to the bottom left corner
Project Timeline - first milestone to have the product built, third and fourth milestones will see it expanded to most parts of Europe and US
Financial Forecast - 4 years hockey stick projections and unrealistic exit strategy (usually trade sale or IPO)
The Ask - $x for y% and we will spend it on building the app, hiring people and marketing
(Please don’t get me wrong, I am generalising a little bit here to illustrate a point.)
It is extremely hard to raise capital from professional investors for a startup that is trying to change the world, but have not yet demonstrated any traction. The reason why founders still do it, is because they have adopted a small business mindset in raising capital for a scalable startup. Let’s consider the following scenario.
John and Mary have come across a piece of distress property which is now selling for 20% below market price (the opportunity). They have done the research and surveyed 20 students and found that they all want to live in the area but could not find any affordable alternatives (clear demand). The couple has done their research and spoken with the local council and is 100% sure that the property can be converted into a student boarding house (the solution). They now need to raise $500k to take over the property, convert it into a boarding house, and rent it out to students. The project has a 12% rental yield cash flow proposition, with considerable capital gain potential (exit strategy - cash cow, refinancing, sale of asset for capital gain).
Comparing this with the typical pitch deck from startup founders, both scenarios do not have their product built yet, however, in John and Mary’s case, it is a proven methodology with an easy to understand return on investment where investors are more likely to invest before the project is started. A scalable startup is a very different vehicle. At an early stage, just like the human embryo analogy, it takes time to form itself, grown, nurtured and evolved until you have found the right business model and product market fit, only then venture capital should be injected to accelerate growth and scale. Before reaching that stage, a founder often has to put in all the hard work and investment into trial and error, testing the market, pivoting until early adopters start to use the solution, finding the right pricing strategy and business model etc. Afterall, as a startup founder, you are building a new investment vehicle for the capital market but not offering a proven investment product with a track record, and that is why the upside in building a startup is so much bigger but with a lot more risk.
THE DEFINITION OF SUCCESS
Another critical factor that underpins whether you will embark on a journey as a startup founder or jumping into small business entrepreneurship is the outcome that you are expecting from the venture. I grew up in the 1980s where most entrepreneurs started small businesses to provide for the family, to take control over their finances and time with a view to generate enough passive income one day and retire early. From my observation, many founders decided to create a startup with that same mentality and intention. However, a scalable startup is very different. It has every intent to become a large corporation. As Steve Blank (a serial entrepreneur and Silicon Valley legend) has described it, scalable startup founders don’t just want to be his/her own boss, they want to take over the universe. They believe they have come across the next big thing, that will disrupt an industry, take market share from existing companies or even creating new markets. And it takes a very different mindset to embark on a startup journey.
Startup is temporary but not a retirement plan. As a startup founder, your job is to search for a repeatable and scalable business model, provide a vision, create a series of hypotheses, quickly validate them and shift to produce outcomes and execute the found model. Being a startup founder is more of a way of life than a career choice. You will need to be prepared for chaos, long hours, little to no salary in the short term, equity and stock options that are not worth anything at all for several years, because your passion to solve a disgruntled problem overrides everything else.
A startup’s job is to grow big quickly and provide a massive return to its investors. In a startup, the founders are taking a big risk with a low probability of success, hoping for a very big outcome (usually a trade sale or IPO). And to do that, usually you need venture capital. When VCs are in your business, you will easily run into misalignment with your investors. As a founder, you might be happy with $5mil in your pocket, or even $2mil. VCs’ aim is to earn a very big return from a small portion of investments. By taking VC money, you are on a one way street.
With a small business, your definition of success can be entirely different. You don’t have the burden of having VCs at your back, pushing you for a billion-dollar exit. You can build a 7-figure small business, or a 6-figure small business, whatever expectations you set for yourself.
If you are considering to embark on an entrepreneurial journey, it is recommended that you do research on both different types of vehicles. Some entrepreneurs are more suited to go the startup route, others might be better off running a small business.
The real question is, what do you want from your business, both in the short term and long term? If you want a steady stream of passive income, so you can spend more time with your loved ones and travel the world, building a lifestyle business might be what you are looking for. But if you are disgruntled about a world problem, want to take over the universe, have no problem living without a salary for a period of time, willing to put 200% of your life into solving this problem no matter what, then going down the startup route might not be such a bad idea.
