Starting a small business vs starting a startup
When starting a small business, keep in mind that 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 work?
But the story of how they built their businesses doesn’t necessarily apply to everyone when starting a small business. 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.’ It’s not.
I like to draw a line here- between the blockbuster, unicorn- Silicon Valley-type of startup, and the smaller startup, the company that could become a $10–20 or even $50 million company. 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 some point- but I’m just going to call one group startups, and the other one small businesses. We’ll define what defines each further ahead.
We started Slidebean as the ‘startup’ kind of company. If you don’t know us, we are an AI-powered presentation platform. We built an algorithm that turns this- into this.
Back in 2014, we felt the presentation market was up for the taking. We thought we had what it took to take PowerPoint down: aspiring to 500,000,000 PowerPoint users worldwide.
It’s not that simple. We saw a lot of similar companies, with excellent and smart founders, fail at this attempt of being the next PowerPoint. We have a cool product, an incredible follower base- over 400,000 people watch or read our content every month- but we are by no means that company we set out to build- which can make you feel like you failed as a founder.
On the other hand, we’ve 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- 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. You should look into the Startup Therapy Podcast and the Baremetrics blog.
Here are some characteristics that can help you determine the type of business you are creating:
How to define your type of business
Are you providing a service that requires humans, meaning, employees on payroll? Then you are probably on this side because you will need to scale your staff to scale your revenue, and that usually leads to thinner margins and slower growth.
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 how much money can be made with this, which will dictate your business size.
Fundraising when starting a small business
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 (representing roughly 10% of the company), they will expect your business to be worth $50MM within 5–7 years. 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.
That’s another difference when starting a small business; 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 and are a whole other monster.
Understanding your business category
It’s critical that you understand your own category when starting a small business 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 is totally doable.
You may also look for friends and family funding before starting a small business. 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.
When starting a small business, 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.
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. Chances are, if you succeed, you’ll be associated with the company you built forever, in one way or another.