May 10, 2017
As the digital economy progresses, the lines between startups and successful small businesses are starting to blur. To be sure, you wouldn’t confuse a law firm in Kansas City with a venture-funded Silicon Valley software startup of the same size. But neither one of those is as typical these days as they used to be.
Quick, can you tell if this is a small business or a startup?
- Digitally powered products and services
- Ambitious business owner/founder who wants to sell the company someday
- No outside funding besides friends, family and credit cards
- Growing 50 percent a year with 20 employees
- Thousands of customers across the country
- Recurring revenue business model running at break-even (no profits)
You can’t tell the difference, based on this information. As more small businesses go digital and innovate, they look similar to the majority of software (SaaS) startups that are self-funded and surviving with “Lean Startup” habits.
Both are hard. Both have risks. Both can start small and grow big. Both can go out of business. Both have ambitious and talented leaders who want to be their own bosses.
The real difference is the intent to grow big or stay small.
Startups have higher ambition to create big businesses and get there faster. Invest now for a big payoff later. Go big or die. Change the world. Small businesses don’t have the same visions and aren’t placing their bets in the same way. They don’t risk as much. They don’t go too fast. Most stay small, but some grow into big businesses.
The difference is a decision by the founders on how to play the growth game. And it can change.
Some small businesses discover opportunities and redefine themselves as ambitious startups. Most startups fail to grow fast enough, so they simply turned into sustainable businesses that are not big, not growing fast and not going out of business. The exceptional startups are the few (usually venture-funded) growers that get most of the attention.
When your vision changes about how much you will risk to go big, it’s time to retool your strategies, your tactics and your team. Entrepreneurs should be very careful about what kind of business they decide they are in at any given time, and remember the following:
1) Your investors will change. Venture capital (VC) investors will only fund companies with real potential to grow to $50 million and higher within five to seven years. If you’re growing slower than that, profitable private equity investors or angel investors are a better fit. If you’re not growing and not profitable, you’ll have to make some tough decisions to get back to breakeven quickly.
2) Your investment approach will change. If you’re scaling back, you just can’t make as many of those costly investments that might pay off bigger in the future. When you’re scaling up, you need to look further ahead and make sure you are solving for where your company will be in a year or two. Many companies stop growing because they didn’t create foundations to support a larger and more complex company.
3) The CEO needs to change their approach. The mentality and habits of the CEO drives the culture of a small company. If goals are reduced but the CEO is still pushing hard for big growth, employee frustration will grow fast. On the other hand, if the pace picks up and the CEO is still in a mindset of last year’s business, they need to get help and catch up quickly.
Small businesses and startups are both great adventures that do great things. Just be clear which game you are playing at any time and make the most of your business.
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