The word “startup” is used all over the place these days, go to any tech event and you will inevitably meet plenty of “startup founders” rather than business owners which they also technically are.
So, what’s the difference between a startup and a business and why does it matter?
The purpose of this article is to think about the goals and motivations when starting a business or founding a start-up
Allow me to explain…
Over the past 20 years or longer, there has been a drive to found startups, raise a ton of venture capital money, build a unicorn, exit or IPO and walk off into the sunset with a bag of cash!
Now, compare this with. Start a business, invest your own money and resources and hustle hard to get those first revenues in.
Those first revenues provide the cash flow to hire some help and if the idea has legs the business will flourish.
All going well the business goes from loss-making to breaking even to profitability within a few short years.
The owners (shareholders) of the business can eventually draw a salary and hopefully a share of profits via dividends.
The company then either continues to grow and provide a healthy income for the owners or gets bought out at some point and there’s a nice payday for the shareholders.
Examine those two scenarios a little more carefully
In the first example, the goal is to raise money and build a unicorn
Let’s look at this in a little more detail.
Approximately 0.05% of startups successfully raise venture capital funding. That’s 5 out of every 10,000!
Raising VC funding takes a lot of time, energy, networking and luck and is just the beginning of a very long and difficult road.
Let’s assume you are part of the ‘lucky’ 0.05% and secure the seed funding that can help you build and scale your startup.
Now the next statistic, it’s estimated that about 90% of startups fail. Ouch!
Most fail in the first year which makes sense and then the percentage drops.
Now let’s talk about the fabled unicorn.
Less than 1% of VC-backed startups go on to reach the much-coveted unicorn status, which is a value of over 1 billion.
Can you see where this is going?
In essence, the startup founder is focused on raising money and the business owner is focused on making money!
Getting VC funding could end up being like kicking a can down the road
It could be said that going the VC funding route is like kicking a can down the road.
You raise capital, this gives you a runway, let’s say 12 – 18 months before the cash runs out.
During this time many startups will be focused on raising more capital to keep things going and to achieve the ambitious and exponential growth laid out in their pitch decks.
Note, that the focus is on raising money and keeping investors happy and not always on the fastest route to profitability.
This means focusing on important metrics that can attract further investment, user growth for example, but this user growth may not always translate to cash.
What happens if the startup isn’t growing fast enough and there is no follow-up funding?
What happens if the VC investors’ goals and your own are no longer aligned?
Things to consider.
Now, this is not to say that VC funding isn’t viable.
If the idea is truly revolutionary, addresses a huge global market and time is of the essence then VC funding could make a lot of sense and help you establish yourself as a market leader before competitors do.
Jeff Bezos and Amazon.com made not making a profit fashionable
Until the dotcom boom of the late ’90s, most people were looking to start businesses with the solid goal of turning a profit as fast as possible.
The dotcom boom changed that.
All of a sudden during the dotcom gold rush anything with “.com” at the end of a name could suddenly attract significant funding.
Profits and sustainable business models became somewhat less important in the race to the top…or bottom?
In the case of Amazon, the long game and gamble paid off for the founder and investors and after almost a decade the company turned a profit.
Amazon is a global business giant today and a success story of our times!
Thousands of others weren’t quite as lucky though!
The difference between thinking like a business instead of a startup
Ultimately, all startups are aiming to be profitable, that’s a given.
Some might develop a unique technology or a user base that gets acquired but the original goal will have been to create a business that makes a lot of money, grows fast and gets bought out or IPOs
Let’s now look at it from thinking like a business from day 1
In this old-school scenario, there is no drive to raise capital, except perhaps some seed capital from friends and family to get things started.
Most people will start with their savings to get things going and buy some time.
The ultimate goal is to get to profitability as fast as possible, be self-sustaining, pay back the friends and family who provided the initial seed capital and be in a position to be paid a salary from the company’s profits
What’s the difference you might be wondering?
At its core, a business is income, minus expenses.
Ideally, the expenses are lower than the income and a profit is made.
The profit should be sufficient that it allows for re-investment into the business, cover all costs and take out money for yourself.
Based on this idea, the mission will be to keep costs as low as possible and spend every waking moment trying to increase sales/income
Notice the difference?
In the first example, the mission is to build a global business, get VC funding and turn it into a unicorn
In the second example, the goal is to get to profitability as fast as possible.
Ultimately, it depends on what you want to achieve.
Ask yourself why you founded a startup in the first place
A fundamental question every founder should be asking themselves very honestly, is “Why am I doing this? What is the end game? Why do it?
Common answers are independence, not having a boss, having enough to buy a boat or a sports car, having exotic holidays, buying beach houses, retiring early, the list goes on…
Most of the above can be achieved with a modestly successful business, it doesn’t take building a unicorn to get there
A unicorn is often more about recognition for the founder, an achievement and for the VCs who have backed the company it’s about a massive return on investment (ROI). That is the VCs business after all.
As so many startups fail, the handful of really successful ones make up for the others that either fail outright or make a modest ROI. It’s also a feather in the cap of the VCs who will use this to attract more capital to invest. The wheel keeps turning!
The VC investment landscape has changed
While the craziness still exists, currently AI and tons of money being thrown at it, there seems to be more diligence when it comes to investing.
Do the numbers make sense, is the market big enough, can the team deliver?
It’s not quite as easy as in the late 90s when adding a .com to the end of your business name could get you plenty of cash and not too many questions asked!
What’s the takeaway?
The point of this article is not to say that raising VC funding and trying to build a unicorn is bad if that’s what you want to do but to ask yourself the question of why you are doing it.
By thinking about starting and building a business, your focus is not on raising capital necessarily but rather about turning a profit.
A profit that can eventually buy that boat, sports car, house or finance an early retirement.
By not going the VC route you are way more in control.
You call the shots and have to make less as there are less people taking away a slice of profits.
Now, as it happens, there’s a good possibility that you will put all your energy into building your business, control costs, increase sales and steadily grow profits.
At this stage, there’s a chance you will be contacted by investors.
This puts you firmly in the driving seat and gives you the wonderful opportunity to assess if outside investment makes sense.
Investors on the flipside are buying into something that is already turning a profit.
Venture capital isn’t the only way to grow a business. Once revenues are growing there are other funding options like debt financing which do not require you to give up equity or control.
In my opinion, it’s better to think in terms of a business, instead of a startup even if the difference may seem slim at first glance.
By thinking like a business, you are more likely to succeed if your idea is good and if you have what it takes to do it.
Thinking like a business keeps you razor-focused on costs and profitability because it will matter eventually.
By thinking like a startup and chasing funding as a priority you might just be kicking a can until you reach the end of the road and so does your startup!