In this article I discuss several differences between startups and starting businesses. I find this important because over the last year, I’ve gotten increasingly frustrated about the types of questions I (as a startup founder) would get.
“Can you already live from your startup?”
“Why is raising money is so difficult for you, there is so much capital out there?”
“Why don’t you just use Facebook ads for advertising?”
These type of questions seemed so naive, so stupid. I wanted to yell out “what are you thinking! Of course I cannot live from my startup yet. It just doesn’t work like that, it’s not that simple!“. But, thankfully, at some point I realized that instead of getting frustrated by these questions, I needed to have a look at where these questions came from. And why I was getting so annoyed with them 🙂 .
I found that the main issue lies in the understanding of (and agreement on) what a startup is. There are such fundamental differences between startups and starting businesses that it’s no wonder that sometimes you’re not on the same page in a conversation. That’s why in this blog I outline 5 of the biggest differences between startups and starting businesses that I found over the last year. Enjoy the read!
Just as a note: In this blog I’m in no way arguing that running a “startup” is easier, more difficult, better, worse, more challenging or whatever than a “starting business”. This post is simply meant to share my observations and hopefully help people have more meaningful conversations.
5 differences between startups and starting businesses
This list is by no means conclusive. If you have any differences to add, feel free to leave a comment or contact me.
1. The maturity of the industry & product
Startups usually operate in relatively new and undefined industries. This can be a completely new industry such as Virtual Reality or 3D printing. Or it can be an industry moving from offline to online (such as the art industry with accessART). You may think; so what? One of the largest issues with startups in undefined industries is that they have little to no references or examples.
For example, you can look at the stage of development of the product. Best case, you have a competitor who’s working on the same and you can have a look what they are doing. Worst case (or well, the most challenging) scenario you still have to develop the product or tool completely without any examples or experts in the industry. Mentors and advisors will be hard to find as there are few people with relevant expertise.
On top of that, when you have developed the product, there are dilemmas such as pricing. Pricing is one of the most difficult things for a startup. Who should you charge? What price will your customers accept? What is your product worth? What kind of revenue model should you pursue (commission, subscription, freemium etc..). All unanswered questions that have to be solved through trial and error.
Next to all this, when a market is still in its infancy, you have to work like crazy to convince your first customers that this is a great idea. For example, my friends at SwipeGuide are really disrupting the instruction manual industry. They have managed to get some great launching customers on board but this is the result of hard work and a lot of convincing 🙂 .
To sum up, running a startup is like skiing off-piste. You never know who or what is gonna be around the corner 🙂 .
The starting business
A starting business usually operates in an industry that is already more or less defined. Are you selling ecological t-shirts? Are you following your dream and start a food-truck? This is definitely challenging, but you have a reference framework. You know more or less how much people will pay for a hot-dog. Of course you can be on the lower or higher end, but you know what bandwidth you have for hot-dogs. Next to pricing, the competitors in the t-shirt business are very obvious. Advisors, mentors and potential investors are a bit easier to identify because there are usually already “stars” in the industry you’re in.
So, learning to ski is very hard, but the piste is clear and the teachers are available 🙂 .
Let’s get this straight right here right now 😉 . Growing IS NOT THE SAME as scaling. Many people think that if you’re adding new team members, you are suddenly scaling up. This is actually one of the main differences between startups and starting businesses. In my opinion, scaling is selling more of the same, without increasing the costs with each sale.
Startups should by definition be scalable. That’s what makes them financially interesting. They usually operate based on technology and can repeat the same “trick” in new cities or countries. Startups are usually not held back by working capital, production costs etc. Variable costs do not increase equally with each new product sold. In other words, because of the (usual) automatization and use of technology, if a startup adds one more team member, this person could potentially serve 10.000 new customers (or more). A prime example: AirBnB currently runs a company of 250 people with a revenue of $900 million in 2015. Usually, only 1 hotel of a major chain already employs 250 people.
I recently met the great startup No Food Wasted. Based on technology, they are super scalable and making a difference in this world. Supermarkets enter their products that are about expire in the application and customers get a notification with discounts in their area! Amazing idea, practical and super scalable to new cities / countries!
The starting business
A starting business is usually not scalable. For example, founders “sell” their own hours as consultants. Or they sell a product that is prone to serious variable (production) costs. If you produce 1 more product, you incur € X more costs. Or say you run a gym with a personal training service. If you add 1 member of staff, he or she can help 8 people per day. So you can add people and grow and grow and become huge, but this is the not the definition of scalable. You always need to add resources before you can become bigger.
This can become a great success for the founder, but has its limits. Which makes a nice bridge to the next point 🙂
3. Financial curve
These two graphs are where I get the most disagreement/confusion. But also the most eye-opening moments.
As a startup you go down hard in the beginning. Building technology is expensive and time consuming. Finding customers maybe even more so. Are you a 2-sided marketplace? Double the fun! And then when that is done, you have to start making money.
When the startup keeps experimenting and find its product-market fit, it has the chance to get out of this downwards trend. Things are starting to look up! Then you see a crucial point. Depending on factors as execution or investment, the startup starts to fly. Or not which is the red dotted line 🙂 . In the positive scenario, because startups are scalable, hyper-growth can happen while costs remain low. This is the big pay-off startup founders and investors aim for 🙂 . These kind of pay-offs are not usually generated in traditional industries or starting businesses.
As an example, Udemy is one of world’s largest marketplaces for online courses. What they did to get their platform going was creating their first 100 courses themselves. This obviously was a large cost and time burden. But then things started to fly, they got out of the red numbers and “marketplace liquidity” was reached. Nowadays many Udemy instructors make solid incomes with their online courses.
The guys from MeetJune, an online platform for unique local travel experiences, are making the most out of their pre-launch. You can sign up already while the platform is not live yet. So, even though a startup is still in the phase of launching its product, steps can already be taken to get out of the red numbers as soon as possible!
The starting business
The starting business is a different story. You will usually have to make certain investments before starting your company. If you start your consulting business this will be a printer, laptop, business cards, a website etc. If you sell actual products, you will have to bear the costs of the first production batch. But because you operate in a more defined industry or you sell your own hours, you should get out the downwards curve soon.
With starting businesses that are producing actual products, the curve will keep going up and down a bit because production batches will have to be financed beforehand, and sales can come in months later! This puts more pressure on the working capital.
The other major difference with a startup is that the pay-off curve will not be that steep over time. You may be able to increase your rates, hire more employees or sell more products. But, there is a maximum as to how much this graph can go up because costs will rise with new sales.
4. The Business Plan
As a startup, you should be experimenting. Product, business model, revenue model, customer groups. If I’d have to write a 40 page business plan every time I’d make a change in our proposition, I would be doing that full-time and still would not finish it.
Luckily, there are things like the Business Model Canvas, the Lean Canvas or the Next Canvas from the people from Next Amsterdam. These tools allow you to draft your plan quickly, but also iterate quickly. In the beginning it may be a bit hard and seem superficial, but as you get along in the process things will start coming together.
So no, as a startup there is no sense in creating 40 page business plans. But, you do need to think concretely about all the things that happen in a business. These canvases provide an efficient tool to still document things as you go.
The starting business
The starting business and its business plan. You have probably spent weeks and weeks on writing it, calculating your margins, perfecting the marketing mix and finding your sales channels. And this is OK. Because most likely, you have concrete examples from competitors or even templates or proven formulas from your franchise. You may have to make changes to your plan or proposition in the future, but they will not be weekly or even monthly.
These business plans are often the basis for financing. Which leads to the next point 🙂
Yes, there is a lot of capital in the market. Interest rates are low, banks are not rewarding people with lots of money for keeping it in the bank. But, not every investor is ready to invest in a startup 🙂 .
Startups are inherently risky. For all above mentioned reasons. They operate in undefined industries, have to experiment constantly, are creating little revenues and take years to start making profit. So, startups are financed based on future potential and scalability.
This does not mean that money should just be poured into a startup based on thin air. But this does mean that often, investments are based on gut feeling about the team or some early traction. This also means that early-stage startups with un-experienced teams find it hard to raise investments. Which will cause an issue with the graph you see above (with the huge initial financial dip). Market potential & size and potential acquisition targets are also interesting for startup investors.
Banks are usually out of the question as the default risk is too high. Banks are basically hedging mechanisms that need a certain return on their portfolio. Startup investing and hedging in the same sentence.. mwah :). Crowdfunding is becoming an increasingly popular tool as, although many people question how beneficial this will turn out for investors in the future. As another great option, programs like Present your Startup are doing a great job connecting startups to investors with the right mindset.
The starting business
Starting businesses are more often suitable for bank financing or more traditional investing institutions. There are proven examples of succesfull businesses, the capital investment is often lower than for a startup and short term revenues are more likely. With a sound plan, it should be easier for a starting business to raise capital.
If a starting company is already a bit further and is making revenues, investors will look at the books and will apply some more traditional valuation mechanisms and look at the books of previous years.
What do these differences between startups and starting businesses mean for you?
All in all, there are plenty of serious differences between startups and starting businesses. In any case, starting a business is hard. No matter if you define it as a startup or starting business. Entrepreneurship is exciting. But, it will cause you sleepless nights and it will bring financial and sometimes personal risk. I’m sure that all of you can identify with this picture 🙂
Thanks for reading, and if you have any comments please share!