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Should Your Startup Actually be a Small Business?

 

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In the course of my career over the past decade or so, I have started 3 businesses — with varying degrees of success. I thought it would be interesting, and potentially helpful, to share what I have seen in the course of starting, operating and exiting those businesses — each of which was very different from the others in important ways. I have talked with many founders whose business goals are a bit ambiguous, and who are making key decisions in one area that are not in alignment with their decisions in another (hat tip to an all-time favorite professor of mine, Noam Wasserman, and his book The Founder’s Dilemmas for some of the thinking here).
One useful way to think about some of those key decisions early on can be made clearer if you have decided whether what you are building is a startup or a small business. Many people group those into the same category — and that is fine, from a nomenclature standpoint. But there are some key decisions that you will make about your business that will determine if it is more of a “startup” in the traditional sense, or a “small business” in the traditional sense — and bringing those decisions into alignment can help you save time and heartache, and can affect the financial and career outcomes you achieve.
Although this process covers a number of steps, one of the key decisions you should consider as you start and run your business is how fast you can grow, and how fast you want to grow.
Think about what you want your business to look like in 5 years. Do you imagine a smoothly humming machine, kicking off enough cash for you to take a few nice vacations every year, giving you time to volunteer, engage with your community and work every day to make it a little better? That’s what you would normally think of as a “small business.” Profits are prioritized over hyper-growth, often leading to predictably positive net income after a few years of very hard work.
Alternatively, do you imagine a company on its way to the moon? Do you imagine your company hiring as quickly as it can, racing to take a lead position in an ultra-competitive marketplace, and potentially looking to raise millions of dollars to keep up 100 percent or more year-over-year growth? This is the “startup,” where growth is king, profits are pushed back chronologically (if not deprioritized completely), and you are aiming for the company to — one day — be worth hundreds of millions or even billions of dollars.
Too often, it is unclear to founders which one they are choosing. For example, they will choose a business idea in a slowly growing industry (small business), but try to raise money from venture capitalists (startup). Or, they will expect to have a great lifestyle (small business) with a company that’s on its way to a billion dollar valuation (startup).
Lower-growth companies can lead to great lifestyles. Because the growth rates are low, there is minimal investment from venture capitalists or other institutional investors. Because there is minimal investment, competition is usually local or regional, and can be less sophisticated. These dynamics, in turn, leave an opening for savvy, hard-working business owners to do really well in their corner of the market. Service companies are a great example of this. You rarely see an agency scaled to be worth a billion dollars — but sound business practices can lead to fantastic local, regional and, in some cases, national success. In these cases, owners can often produce a great stream of income for themselves and their employees.
Higher-growth companies, on the other hand, often mean short-to-medium-term terrible lifestyles for their founders — with a larger potential payoff (often a windfall upon acquisition). When a company is growing fast, its valuation is often a multiple of revenue (like in software-as-a-service companies) as opposed to profits — or even based purely on strategic concerns (think WhatsApp being acquired by Facebook for $19B, with revenue of just $10M). With sky-high multiples, institutional investment often follows, and where there is VC money there is increased competition (national or worldwide), intense pressure to keep growing, and hefty accountability for founders to their board and their shareholders. There is also often enough dilution for founders that they lose control of their company entirely. They could be fired from the company they created.
That being said, a high-growth company that increases revenue significantly year after year means the founder may be getting a smaller piece of the pie — but it is a pretty big pie.
In sum, when you are starting a company, ask yourself: How fast do I want to grow? How fast can I grow given the dynamics of the industry I have chosen? If I want to grow fast, do I have the team around me to help me do that? And what does that mean for my business, my lifestyle? When it comes to growth, do I want to run a small business or a startup?

 


 


The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.

Image credit: CC by Mack Male

About the author: admin

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