Startup: A Decision Based on Growth | Por @OpenEXO
One issue that creates confusion among those who want to venture into starting their own business is the definition based on the project's size, development, and growth. In addition, talking to friends and acquaintances about the idea leads to debate since some will talk about a small or medium-sized enterprise (SME), and others will think of a startup.
At this point, the entrepreneur must have a clear idea of what he wants to find since an SME is not the same as a startup, and, of course, the answer will depend on how far he wants to go with his idea.
What are the main differences between an SME and a startup? Although on paper and for the public administration, they are the same, some differences are defined by the fact that both follow different paths to reach a final goal.
Generally, the goal of small companies is to generate profits and long-term value, which usually translates into a profitable company that can grow into a medium or large company or remains in a stable position. However, startups are not as interested in generating profits as they are in demonstrating their capacity for potential growth to attract the attention of investors, venture capital funds, and ultimately large companies that may buy them in part or whole.
Likewise, while small companies are primarily concerned with their financial survival and pure and simple profit, startups are usually concerned with developing what they consider to be a great product, capable of reaching wide audiences, even at the cost of not being able to monetize it.
How Are They Defined?
For a long time, investors viewed startups as a small version of a large company, when there is a big difference in reality. While there are no strict guidelines that determine what a startup is, the general definition is that it is any company that is in the early stages of operations but expects significant growth shortly; a small business is any type of business that only has a certain number of employees, the maximum of which differs by industry.
Although these types of businesses may appear to be the same, there are both ideological and organizational differences, starting with the fact that each requires a different financing strategy and key performance indicators (KPIs). Understanding the differences between the two will be critical to your future success as an entrepreneur.
According to Steve Blank, a serial entrepreneur, Silicon Valley legend, and professor, a startup is a "temporary organization designed to pursue a repeatable and scalable business model." A startup, especially in the context of technology industries, should be shorthand for "Scalable Startup," which seeks to not only test the venture but to do so quickly to achieve high growth potential and impact in the current market. The creator of a startup is not only looking to be his boss but to take over the universe, i.e., from day one he is looking for his business to become a large disruptive company.
A small or medium-sized business is defined by the U.S. Small Business Administration (SBA) as an organization that is "independently owned and operated, organized for profit, and not dominant in its field."
While the startup seeks to disrupt the market with a scalable and impactful business plan, the small business owner wants to be their boss and secure a place in the local market. Eventually, a startup may cease to exist as an independent entity through a merger or acquisition, as a satisfier to the need to scale growth and capital. Meanwhile, for the small business owner to relinquish control would defeat the purpose of managing his own business, which for the startup may be necessary.
Although both are entrepreneurial, the business's goals, primary function, and funding are radically different and require different strategies. Both models (the startup and the small business) are built with funds from savings or bank or family loans. Still, if the startup is successful, it will be easier to obtain additional funds and, with each, the ownership of the business is diversified.
Given the above, Blank proposes three main functions of a startup creator:
- Generate the vision of a viable business idea or product with a set of characteristics in a startup phase.
- Then, formulate a series of hypotheses about all the parts of the business model: Who will be the customers, what will be the distribution channels, how will the company be financed, and so on.
- Immediately validate whether the business plan is correct by checking whether customers behave as your model predicts.
Financing and Growth
The differences between startups and small companies are relevant in terms of two main factors: how they are financed and growth expectations.
Both have notable differences on the financing side. A small company can be financed in different ways, but in most cases, the amounts are not large and generally do not exceed two thousand dollars from the same source. For example, nearly 33% of small businesses start with less than $5,000 in financing.
Despite the low funding, many small businesses have succeeded because they focus on profitability from day one. Since they make profits almost immediately, they do not require further financing. The primary sources of funding for this type of business usually come from the entrepreneur's savings, bank loans, or loans from family and friends.
Startups, on the other hand, are financed in a very different way as they require larger amounts since their purpose is to create a product or service that is viable in the market, and this implies capital for the development of the product. In many cases, startups can be funded through angel investors or venture capital firms willing to invest in a company they believe will succeed and ultimately are likely to get a share of the company - usually equivalent to 5 - 10 percent - in exchange for their money. We are talking about the average angel financing can range from $10,000 to $100,000.
On the other hand, when the startup grows and sees the possibility of expanding its market, the entrepreneur can turn to a venture capital firm to invest in the business. This type of company can participate in Series A, B, and C financing rounds with capital ranging from one million to one hundred million dollars, depending on the level of scale the startup achieves.
While this financing is attractive to many young companies, it is important to understand that venture capital firms typically want a high return on investment of at least 20%. The best time to engage a venture capital firm is when you are poised for substantial growth.
But one of the most notable differences between a startup and a small business relates to the type of growth and revenue objectives they have. Small businesses are primarily driven by profitability and consistent long-term value. When starting operations, a small business seeks to be profitable immediately and will try to grow over the years; this growth should be stable and steady, which means that the business will always remain small. Growth occurs only when necessary and is driven primarily by the need to remain profitable.
Up to what size can you still be considered a small business? It all varies depending on the industry you are working in. For example, in the United States, a small business in the agricultural sector must earn less than $750,000 in annual revenue and wholesale trade. The maximum number of employees allowed is between 100 and 250 and in the real estate, leasing, or rental sector, any small business must generate a maximum of between $7.5 and $37.5 million in annual revenue.
Up to what size can you still be considered a small business? It all varies depending on the industry you are working in. For example, in the United States, a small business in the agricultural sector must earn less than $750,000 in annual revenue and wholesale trade. The maximum number of employees allowed is between 100 and 250. In the real estate, leasing, or rental sector, any small business must generate a maximum of between $7.5 and $37.5 million in annual revenue.
Startups are different in terms of growth and revenue; they are a temporary business model for which there are no restrictions or limitations on growth. They are not looking for a slice of a large market, they are looking to get as much market share as they can with the product or service they offer.
Startups are generally not profitable in the early stages of business development, as their focus is to grow in the shortest possible time through a product or service that can be successfully placed in the market, which could bring millions of dollars of profit in the long term. Among the most successful startups is Uber, which now has a market value of $50 billion.
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