What is the difference between a startup and a small business?

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1 1 P a g e What exactly is a startup? A startup is a young company that is just beginning to develop. Startups are usually small and initially financed and operated by a handful of founders or one individual. These companies offer a product or service that is not currently being offered elsewhere in the market, or that the founders believe is being offered in an inferior manner. Startups may be funded by traditional small business loans from banks or credit unions, by governmentsponsored Small Business Administration loans from local banks, or by grants from nonprofit organizations and state governments. Incubators can provide startups with both capital and advice, while friends and family may also provide loans or gifts. A startup that can prove its potential may be able to attract venture capital financing in exchange for giving up some control and a percentage of company ownership. What is the difference between a startup and a small business? A startup is still thought to be a stage in the business process, which goes like this: Pre-start you are wondering whether business is right for you and you are right for business. Start up you decide to go for it and start your own business. The legal form of that business can differ you can be a sole trader, form a limited company, set up a partnership (limited liability or not). You can choose to buy a franchise or you decide you'll start a social enterprise (in whatever form). Early-stage business these are the first few years of your business, when things things seem to be going OK. Yes, it can be tough at times, but mostly you are doing well. What you don't realize is that this is sometimes called the 'honeymoon period' when family and friends buy your products or services and tell their friends about you Then reality dawns, your friends and family think that you are OK and can cope alone. The cracks in any weakness in your business model may begin to show and, one day, you realise with a cold feeling, that you are going to have to find new customers, keep you staff happy, pay your bills,

2 2 P a g e pay your tax and professional advisers, day in, day out, for the life of the business. We then move to either: or Growing business you really 'get' business. You understand how to find and keep happy customers, you're nicely profitable, you understand marketing and selling, you're on top of your pricing and breakeven. You've even got some very useful KPIs and metrics going. You're on the up! (You can then decide whether to grow the business even more and then sell it; or go public with it. It's up to you. If you've been wise, you'll have held on tightly to its ownership and will not have VCs breathing down your neck, urging (or forcing!) you to behave in the way that gives them their return on their financial investment, irrespective of whether you, as the owner, want to take their chosen path.) Failed business you don't have a profitable business model, you neglect marketing and prospecting, you don't understand pricing and margins and negotiation, you ignore your legal and financial liabilities, and so on. In other words, you're on the way down (or out!)

3 3 P a g e Steve Blank: The 6 Types of Startups (The 6 types of startups according to Steve Blank s observations are below) Lifestyle Startups: Work to Live Their Passion On the California coast where I live, lifestyle entrepreneurs are like surfers, teaching surfing lessons to pay the bills so they can surf some more. Lifestyle entrepreneurs live the life they love, work for no one but themselves and pursue their personal passion. The Silicon Valley equivalent is the journeyman coder or Web designer who loves the technology and takes coding and U/I jobs because it is a passion. Small-Business Startups: Work to Feed the Family The overwhelming number of entrepreneurs and startups in the U.S. today are still small businesses. This category consists of grocery stores, hairdressers, consultants, travel agents, Internet commerce storefronts, carpenters, plumbers, electricians, etc. They are anyone who runs his or her own business. Small-business entrepreneurs work as hard as anyone in Silicon Valley. They hire local employees or family. Most are barely profitable. Most small businesses are not designed for scale the owners want to own their business and feed the family. Their only available capital is their own savings, what they can borrow from relatives and banks. Small-business entrepreneurs don t become billionaires and don t make many appearances on magazine covers. But in sheer number, they are infinitely more representative of entrepreneurship than entrepreneurs in other categories and their enterprises create local jobs. Scalable Startups: Born to Be Big Scalable startups are what Silicon Valley entrepreneurs and their venture investors aspire to build. Google, Skype, Facebook and Twitter are just the latest examples. From day one, the founders believe that their vision can change the world. Unlike small-business entrepreneurs, their interest is not in earning a living but rather in creating equity in a company that eventually will become publicly traded or acquired, generating a multi-million-dollar payoff.

4 4 P a g e Scalable startups require risk capital to fund their search for a business model, and they attract investment from equally crazy financial investors venture capitalists. They hire the best and the brightest. Their job is to search for a repeatable and scalable business model. When they find it, their focus on scale requires even more venture capital to fuel rapid expansion. Buyable Startups: Acquisition Targets In the past five years, the cost and time required to build Web and mobile apps has plummeted. You can get to product/market fit and a million users with $100,000 to $1 million. Many of these startups bypass traditional VCs by using crowd or angel funding. In some cases, while they might be able to build a billion-dollar business, the lack of traditional venturecapital investors (and nosebleed valuations) takes away the pressure of the swing for the fences liquidity goals. This class of startup is likely to be sold to a larger company for $5 million to $50 million. The founders and investors walk away with millions but not billions. Social Startups: Driven to Make a Difference Social entrepreneurs are no less ambitious, passionate or driven to make an impact than any other type of founder. But unlike scalable startups, their goal is to make the world a better place, not to take market share or to create to wealth for the founders. They may be organized as a nonprofit, for-profit or hybrid. Large-Company Startups: Innovate or Evaporate Large companies have finite life cycles. And over the past decade, those cycles have grown shorter. It s already becoming clear that lean startup practices are not just for scalable and buyable startups. Corporations have spent the past 20 years increasing their efficiency by driving down costs. But simply focusing on improving existing business models is not enough anymore. Almost every large company understands that it also needs to deal with ever-increasing external threats by continually innovating. To ensure their survival and growth, corporations need to keep inventing new business models. This challenge requires entirely new organizational structures and skills.

5 5 P a g e What are some startup ideas that frequently fail? 1. Disrupting Craigslist (or ebay) Hundreds of companies have tried to kill them with vertical and hyper local marketplaces, but no luck. The best quote I heard about this is: Marketplaces are very hard to build, but impossible to die. After millions of dollars wasted, As craigslist seems to be on the decline, but far from being disrupted. Yet people try. 2. Dating Despite more than 5000 dating apps out there, people still try different spins. Most of them fail to take off, but once in awhile there s a hit (HowAboutWe, Tinder, etc.) and that creates fresh energy and excitement. As Andrew Chen notes: Built-in churn Dating has a shelf-life Paid acquisition channels are expensive City-by-city expansion suckshard to exit Demographic mismatch with investors 3. Disrupting Amazon Hundreds of companies try vertical e-commerce to try and take a slice of Amazon but fail.. As Scott Galloway says: We believe that pure play retail is going away, that ecommerce companies are either going to open stores or go out of business, and retailers need to be excellent in digital or they will go out of business.

6 6 P a g e 4. Food delivery The success of some early companies like Grubhub created many food delivery companies, most of them failed. From DineIn: Despite us being a bit smaller in order numbers to where Deliveroo were at, we had key restaurant relationships, were growing consistently, great tech but the main driving force was that funds were frightened of the follow on funding rounds required to scale this consumer business and having to compete with the larger funds. 5. Fashion re-sale The early wave (Poshmark, Threadflip..) of mobile vertical marketplaces for women's fashion created dozens of companies that raised millions of dollars, but Amazon is threatening them: "This is an execution business," said Brian O'Malley, a partner at Accel Partners, a venture firm that has invested in Vinted. "They're all competing over that same closet space." Investors and analysts agree that the competition is too stiff to ensure everyone's survival. The consolidation process has already begun. Bib + Tuck, a resale website funded by fashion entrepreneur Christopher Burch and others, has announced that it's shutting down after being sold to Crossroads, a national store chain. All buying, selling, and cashouts on the site have ended. "I don't even know if there is going to be one winner," said Sucharita Mulpuru, an analyst at Forrester Research, "This model is never going to take over the world." 6. Photo sharing I still see a new take on photo sharing, de-duplication, curation... don't know of a single success story other than Instagram. 7. Ed-Tech One of the toughest markets to crack, but hundreds of companies keep trying... direct to consumer, mobile education, a new product for teachers, for schools... only a handful survive(d). Avichal Garg's Why Education Startups Do Not Succeed:

7 7 P a g e Most entrepreneurs in education build the wrong type of business, because entrepreneurs think of education as a quality problem. The average person thinks of it as a cost problem. Building in education does not follow an Internet company s growth curve. Do it because you want to fix problems in education for the next 20 years.there are opportunities in education in servicing the poor in the US and building a company in Asia not in selling to the middle class in the US. The underlying culture will change and expose interesting opportunities in the long term, but probably not for another 5 years. 8. Proximity marketing After Estimote started, hundreds of companies went after (and continue to go after) ibeacon and proximity marketing... hard to get retailers to play HR / Recruiting Hundreds of new companies every year... assumption is that talent is a big pain point for companies... but companies are flooded with new products, it's very hard to sell to HR. Some general failure themes: X for Y Just because Uber, AirBnB, or Tinder took off, doesn t mean every Uber for X, AirBnB for Y or Tinder for Z will take off. From feet it may look interesting, but the peculiar dynamics of one market rarely make another work. New Markets it s a lot harder to create a new market than make an existing market efficient. Behavior change is hard. Consumer mobile most consumer apps are experiments and don t take off B2B efficiently getting to SMBs is hard, selling to enterprises is hard many B2B companies fail because the sales model doesn t work

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9 9 P a g e Appendix A startup is usually a combination of two things: an interesting problem or need, and an approach for solving that problem. It is easy to come up with big and worthy problems, but they tend to go beyond the scope of the typical entrepreneur. (If you have a solution for eternal peace or even just for unlimited clean energy, give me a call. I m sure we can work something out.) The challenge, then, is not just to find a worthy problem, but to also find an approach for solving it. Sometimes the problem is evident, but the solution is elusive. Many times, it is the problem itself that is hard to pinpoint, and once it is clearly defined and understood, how to solve it becomes evident. We are looking for a problem-solution combination. We can glean insight by looking at different types of problems, various sorts of solutions and the relationships between them. There are three primary types of problems or needs: a human need, a business need and a technical need. A human need is anything that we, as human beings, perceive as valuable. Most consumer ventures are addressing a human need. Facebook, Apple and Netflix are some examples of well-known ventures doing just that. A business need is anything that would help an organization, usually a company, to perform better in some sense. Most B2B (business to business) startups fall under this category. IBM, Salesforce and Slack are some examples of well known companies serving business needs. A technical need is the need for some system or component to perform better. For almost any system or component, there is a need for it to perform better in some sense, or for it to be less expensive. This need is ubiquitous. When Intel develops a CPU with a faster clock speed, or with lower power consumption, it is addressing a technical need. While it is true that a technical need will ultimately serve some business or human need, its characteristics are different, so we ll consider it a separate category.

10 10 P a g e When looking at solutions there are two main categories worth discussing: a technical breakthrough and a solution that requires solid engineering, but not a major technical breakthrough. A technical breakthrough is a capability that did not exist before perhaps something you can do and no one else can. That could be a new encryption algorithm that s harder to break or easier to use, a battery with a higher energy density and a car engine that does twice the mileage. It can either take place in an established market or in a new market. A technical breakthrough may mean that you can produce a superior version of a product for which there s already an established market like developing a cell phone battery with twice the energy capacity, for example. You could make a spaceship that can fly to Mars, and that would certainly be a technical breakthrough. But interstellar spaceships are currently not an established market. Four Startup Templates Based on the above classification we can now look at some common templates for startups based on the needs and solutions they represent. Human needs and business needs seldom require a technical breakthrough. Solid engineering is usually sufficient. There are two key questions which must be answered for these kinds of startups: Is this really a need, and is the proposed solution really solving it? Those are questions for the domain expert. For a business need, the domain expert is a person who knows this industry in and out. For a human need the situation is trickier as there is no real equivalent to the business domain expert. Common wisdom nowadays is that the only way to answer our key questions is to measure how the market responds to our solution using data analytics techniques. The key questions for a tech need in an established market are very different. As this is an established market there is no real question about the need. The only question is whether it can be done. This solution will most probably be of the technical breakthrough category. The person to answer the key questions this time is the researcher or scientist who invented the breakthrough or designed the solution.

11 11 P a g e The case of a technical breakthrough in a new market is probably the most challenging one. Here we need to ask not only whether it can be done but also what will be done with it. While the feasibility aspect should obviously get addressed by the inventor of the technical breakthrough, the business aspect is less clear. We cannot employ a business expert as the business domain is not determined yet. In this case a business innovator with an entrepreneurial vision is needed in order to envision the potential of the invention and its possible uses. A business expert can then validate specific uses of the invention, once they are defined. This can be summarized in the following table: Granted, this is a crude classification, and it has some overlaps. A technological breakthrough can serve a need in an established market, and at the same time have other implementations in new markets. This classification is nevertheless useful in helping identify the key questions we should ask about a startup, and what kind of people should be trusted to provide the answers. So, if you want to start a type II startup, which includes most B2B startups, you need have a business expert on hand. For the tech need category, a scientist is always a must. The type IV startup is a very challenging case, as it requires multiple lead people. It is also the kind of startup that may have a far-reaching potential.

12 12 P a g e The type I startup, which includes most consumer startups, is unique; there s no lead person and no need for a technical breakthrough. This combination may explain both the vast amount of consumer startups we ve seen in recent years, and the much lower success rates compared to the other startup categories. References o o Quora Readwrite.com