With so much news and hype around startups (thanks to YCombinator and Shark Tanks TV show), it is important to understand that a small business online or offline, is NOT a startup and vice versa. While there are some commonalities, there are just too many ways in which the two differ. If you believe you are chewing on an exciting idea, be sure to choose the right track to maximize your chances of success and eventual exit.
This article refers to startups that are built using external sources such as venture capital or private equity and small businesses that are mostly bootstrapped with capital from owner(s).
Let’s first start with the similarities, mostly likely the source of all confusion.
Small Business versus Startup: The Commonalities
- Unsurprisingly, where the two are similar is Failure rate: 9 out of 10 startups fail. about 20% of small businesses fail in their first year.
- Most common reasons cited for failures for both businesses and startups include 1)bad market timing, 2)no product/market fit, 3)lack of capital, 4)team, 5)and not having a sustainable business model.
Let’s unpack each of those domains.
1. Market Timing
Just ask yourself a seemingly simple question, “why is this a right time to do it?”, in response to this, you can just right down your own rationale which make starting NOW a right call. When answering this question, don’t factor “yourself” into the reasons. Let me cite two examples as near perfect cases of timing (amount other things).
Airbnb and Uber were founded around 2008-09, which as you can conveniently recall, were the depth of global financial crisis. Humans are not very good at sharing their most valuable objects (i.e. home or car), but many people became receptive to the idea of sharing because of the financial situation at the time.
2. Product/Market Fit (or PMF)
If you agree with me that no amount of funding can buy you market success, then there exists a phenomenon of PMF. As Andy Rachleff, guy who coined the term, puts it:
“A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.”
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” “If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.”
Whenever you start a business, there is always life before PMF and life after PMF, and you guessed right, life before PMF is quiet frantic and full of unknowns.
Capital is fuel to building any business. It is sort of force that you can apply to crack open some doors however it hasn’t and will not help you buy market success. Generally, most disruptive the idea, the more capital you need to push it through. Lack of capital, when you really need it, is a kiss of death for any business.
Much like capital, bad market timing can overcome a great team. Your core team matters a lot, the first 5 people in your startup can mean the difference between success and failure (all else being equal). First 50, could mean if you’re going to just win or win big (again, all else being equal).
5. Business Model
Business model is how you plan to make money. Disruptive businesses would generally find their business model along the way.
Now, let’s discuss the big ways the two, small business and startup, differ.
Small Business versus Startup: The Differences
1. Market Size
Market size minimum bar for venture funded startups is at $1B and VCs are looking for their x5-x10 return on capital invested. There is no minimum market size for a small business.
2. Capital Intensity
Because of the larger market size, startup tend to need more capital to bootstrap and get to PMF. Even after PMF is reached, there will be more spend around product development, marketing and advertisement and sales (SGA).
Due to massive return on capital requirements, startups chase growth not profitability in the early stages. Startups continue to pivot until PMF is found or run out of capital (with or without down capital rounds).Most small businesses are bootstrapped by their owners or founders. Small businesses chase profitability right from the start, lower capital available doesn’t allow for many pivots.
Startups don’t chase passive income, whereas small businesses that are built online do. All of my businesses are built online, they are making money even when I am sleep.
As often said, higher risk lead to higher rewards and vice versa. Startups are higher risk investments, and likewise result in higher rewards if successful (x5-x10 multiples are common).
Let me summarize the key points made here.
Running a small business is hard work—and the percentage of small businesses that fail just shows that. As we discussed, there are many different reasons why a small business fails, but in general, keep an eye on your capital sources and cash flow—those tend to be the tipping point for business failure.
OnlineBusiness Mastery - Small Business vs. Startup
Who am I?
I run multiple highly profitable six-figure online businesses. Last but not least, I discuss this topic and techniques in detail within my Online Business Mastery Course. You’re definitely missing it out, if you have not checked it out already. For a Limited-time, Module 1 of this course is available free of cost.Signup now to claim your instant access!
Feel free to drop your comments or questions below, I will be responding to them over the next few days and weeks.