Is it a Startup or Small Business?

October 7, 2018

 

 

People seem to be really confused about the difference between a 'startup' and a 'small business' to the demise of everyone involved. There are so many examples of people claiming to be a founder of a startup, but they are actually running a small business. It isn't their fault, they just don't understand what the difference between a startup and a small business is and being a 'founder' of a 'startup' is ultra chic these days.

 

A few years ago I took a wonderful course called “Startup Engineering” on Coursera. The course no longer exists, but here are some notes and the video lectures:

 

https://gist.github.com/dideler/5796745

 

https://www.youtube.com/playlist?list=PLw5h0DiJ-9PCP3qcFaylNA1apEz9-UUtQ

 

The course gave a helicopter view of the tech stack of a startup (although it is a few years old now). It also goes through some non-tech aspects like how to assess market fit, get traction, design principles and so on. Overall it is a helicopter view for the developer/ tech entrepreneur.

 

Startups vs Small Businesses

A small business is designed to serve people in the local neighborhood, a startup is designed to scale and grow globally, to dominate in a big market. A startup is going to be more ambitious than a small business.

 

For example, I am a small business. I am a guy who helps and advises people on data science problems. As a consultant, your business model is pretty much money for time. If I have more clients, then I physically have to spend more of my time on that work. If I get too many clients (a fantastic problem!) I have to either say no, work around the clock or hire someone to help me. This makes me a small business owner and not a founder of a startup.

 

So, what is a startup?

A startup is a business designed to scale rapidly, the idea is that an internet startup uses technology to automate processes so they don’t have a linear relationship between costs like salaries and profits/ time to win markets.

So, if I have a platform that clients access for $20 per month, theoretically it costs me about the same to serve 100 clients as it does for 10,000 clients.

 

 

 

If your means of scaling is to hire more staff to do the same thing you probably aren’t a startup!

In the example above if you need to grow your business doubles, but you also need to double your staff to serve those clients then you have more in common with a small business than you do with a startup. An example, would be if the local accountant, or local lawyer’s business doubles then they need to work twice as many hours as they do now. So the business isn’t scalable.

 

 

 

Get on the command line. Automate.

Startups will automate processes where possible! If the 'startup' you are working for has 100% manual processing of applications, and they aren't willing to automate this process then chances are you are working for a small business, not a startup. The automation allows the business to scale rapidly while keeping cost down as more business does not necessarily mean you need to hire more staff.

 

Automation of reports is also handy to save time and reduce errors for any business - startup, small or big! Many founders think of Excel as a data science tool, so reporting for a month involves a couple days of copy/ paste. Sadly getting reporting down to one day with documented processes is seen as a big win for many businesses, while the risk of a copy/ paste error remains, and maybe even increases. 

 

 

 

Startups scale and grow

If the startup hasn’t made money in 5 years, then you can safely say it probably isn’t a startup. It is probably just an unprofitable small business. Startups are designed to rapidly scale and grow. They do this by moving quickly, testing out new revenue options, A/B testing continuously to get market fit.

 

 

 

Turning the same old wheel

Related to the point above a startup needs to test new products, new markets and new ideas. If they stick then kaboom hello to startup riches. However the way to not innovate is to keep doing exactly what you are doing now.

 

 

 

Planning for an exit from day 1

It is always good to plan for an exit, but if the strategy is to keep plugging away doing the exact same thing until someone big comes along and buys you out then this is worrying. It stifles innovation, and in my experience there are two possible conversations you can have with an investor:

 

  • We have some really good ideas, and with your extra capital we think we can execute something amazing.

  • We have something amazing, it is making money, we need your capital to expand to new markets.

 

 

Learning from data

There are many people who believe their 'value add' to a business is the skill and judgement they have in interpreting information and making decisions, using 'gut instinct' and not an algorithm. “I’ve been a forensic accountant for 10 years, I know data”. An algorithm on a wide dataset with plenty of history is going to kick your butt I’m sorry to say.

 

If there is inadequate data then yes things are trickier for an algorithm to work, but it is better to wrap whatever data you have into a simple heuristic, or data-based decision to guide human decision making.

 

 

 

So, while there is nothing wrong with working for a small business there are some problems if you think you are working for a small business that thinks it is a startup.

 

 

 

 

If you are trying to work out if you are a startup or a small business, you can send me an email: admin@datafriends.net

 

 

 

 

 

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