A startup isn’t the same as a small business
The Finance Ghost is thrilled to introduce you to our newest contributor, The Venturing Vagabond. A vagabond has no home and usually no job, travelling from place to place. Our resident vagabond (oxymoron intended) uses that time to his advantage, committing himself to reading widely and learning as much as possible about his favourite topics: startups and venture capital!
Take him seriously though; he’s a CA(SA) and CFA with an incredible mind and a wealth of hard-hitting experience. Right off the bat, he explains the difference between startups and small businesses.
What are startups and what do they do?
There are many definitions out there, and tons of buzz words like “unicorns”, “blitzscalers” and “tech-enabled” all trying to capture the essence of what a startup really is. Let’s lean on a couple of big names in the industry to unpack what a startup really is, without the jargon or clickbait words that accompany them all over social media.
Steve Blank is the closest thing you will find to an entrepreneurial scientist, shifting the balance of startups from an art to a measurable science. He has done incredible things in the field of Customer Development. It’s interesting that his definition refers to a “…temporary organisation in search of a scalable, repeatable, profitable business model…” – in other words, a startup is meant to morph into something else.
Ever heard of Y Combinator? It’s the most successful incubator in Silicon Valley, co-founded by Paul Graham. They have incubated the likes of Airbnb, Dropbox and Instacart. His definition is simple: a startup equals growth.
Growth is what happens when you make something that people want and you find a way to reach those people.
In my view, a startup is the result of a key insight that the founders believe they are uniquely placed to execute on. Through a temporary startup, they test this insight in the search of a growing, scalable and profitable business model.
Let’s unpack these concepts.
Diamonds are forever. Startups aren’t.
Startups must start and then evolve into something else. It’s a cocoon from which a butterfly must emerge at some point, or the cocoon will have failed its purpose.
Unlike a typical small business which usually takes an existing product or service to an existing market (with perhaps a small tweak or two), thereby serving a known need, a startup is focused on a specific insight or idea. This is untested territory, making startup founders the pioneers in modern business.
People often say, “ideas are cheap” and while there is some truth in that (because implementation is the real magic), without an idea there would be no startup.
The insight is nothing more than a hunch; an intuitive guess if you’d like.
And how do you check the accuracy of a guess?
Well, it’s easy: you go fact-checking (remember the dictionary next to the board whilst playing Scrabble). But wait – many of the facts are not yet known. This is what leads me to conclude that the initial role of startup founders is to act as fact-finders. Founders need to go out into the world to test whether their insights are really true – they do this through a startup.
“When the facts change, I change my mind – what do you do, sir?”
A startup’s response to John Maynard Keynes’ famous question: the business model changes, SIR!
A startup will continue to change its business model, until it‘s consistently selling a product or service to a well-defined set of customers. Once the business model is bedded down, the startup needs to demonstrate that it can grow and scale. Done successfully, it will stop being a startup and become a fully-fledged business.
Let’s delve into a couple of real-world examples of startups and small businesses operating in the same space.
I’ll take a Droppa please!
Everyone who has ever moved house, or delivered an item to a friend, knows how painful an experience this can be.
The process usually looks something like this: call or visit the company website, complete the paperwork or fill in an online form, receive a quote via email, accept the quote, sign a contract, pay in advance via EFT (or if you are lucky credit card) and finally the service gets delivered.
The traditional business model for moving companies is to buy (or lease) a fleet of vehicles and a property, and to employ drivers (in addition to all the other personnel), after which they are ready to start serving customers.
Alas (for them), a new startup appears: Droppa.
Droppa is a South African startup that links its network of drivers (pickups, bakkies, etc.) with customers looking to move their goods. Completing a transaction is as simple as opening the Droppa application, inserting your relevant information through a user-friendly interface and then waiting for a driver to come and pick up your goods.
Once a successful transaction has been completed, the payment will be processed through the application.
A new way of exploring – Tour 2.0
Tour guides come up with a curated experience: a selection of different accommodations, restaurants, cultural sights and modes of transport. Tour guides advertise these curated experiences through packaged deals on their website (or even still in magazines) and then take full responsibility for organising the tours through their relationships with different suppliers.
Tour 2.0, another South African startup, created a marketplace where local tour guides can list their services to tourists (or other locals) who are looking for an authentic South African experience: a township pub crawl, a cultural walk through Soweto or any other authentic experience that you just won’t find anywhere else.
Not everyone can scale
From the above comparisons, it is easy to see that startup companies like Droppa and Tour 2.0, although relatively untested compared to other small businesses, are positioned as more scalable and potentially more profitable in the long-run.
Why is this?
The common thread with a lot of startup companies, compared to small businesses, is the use of technology and their vision for growth (startups aren’t aspiring to be lifestyle businesses for the entrepreneurs).
These days, the ecosystem for entrepreneurs is phenomenal, with affordable cloud infrastructure providers and a wide variety of SAAS (software as a service) companies offering web-based platforms and productivity tools that allow startups to operate at minimal cost. The connective nature of technology further enables these businesses to reach a broader audience, paving the way for more growth (in both examples above, the startup is a platform that connects small businesses with customers).
There’s so much more to the world of startups than just technology. I look forward to exploring it with you in future articles.