When I hear the word “startup,” my mind immediately begins playing a reel of a bunch of twenty-something year old web developers, huddled together in a retro office somewhere in the SF Bay Area. Drinking beer at midday, laughing about the epic, cool culture they’ve got going, and chatting about the fact that they spent the weekend hanging out with their venture capitalist besties.
So, when I hear people use the word “startup” in association with a small businesses—say a restaurant, cafe, hair salon or dental practice—my mind balks.
And I’m not entirely wrong.
The thing is, a tech startup or any type of startup for that matter (doesn’t have to be technology focused) and a traditional, new business venture, are different for a number of reasons, most notably: the way they think about growth.
Key difference #1—How these entities think about growth
Startups are different from traditional businesses primarily because they are designed to grow fast. By design, this means that they have something they can sell to a very large market. For most businesses, this is not the case.
Generally speaking, to operate a business, you don’t need a big market. You just need a market and you need to be able to reach and serve all of those within your market.
This is one of the reasons, most startups are tech startups. Online businesses can more easily reach a large market because they traverse time and space – people can buy from you or use your product regardless of whether you’re awake or not and whether you’re in Cape Town or New York. The distinctive feature of most startups is that they are not constrained by these factors.
The Small Business Association sums it up best:
“In the world of business, the word ‘startup’ goes beyond a company just getting off the ground. The term startup is also associated with a business that is typically technology oriented and has high growth potential. Startups have some unique struggles, especially in regard to financing. That’s because investors are looking for the highest potential return on investment, while balancing the associated risks.”
That said, not all technology companies have a very large market. If you sell software written in Hungarian for Hungarian school teachers, you’ve already got a very select market.
According to investor and angel entrepreneur Paul Graham, “that’s the difference between Google and a barbershop. A barbershop doesn’t scale.”
To grow rapidly, you need to make something you can sell to a very big market.
Key difference #2—The relationship with funding
Apart from having different ways of thinking about “growth,” startups seek financial investment differently than most small business operations. Startups tend to rely on capital that comes via angel investors or venture capital firms, while small business operations may rely on loans and grants.
The interesting thing about venture capital is that those providing it tend to have a more active role in whatever company they are backing. While a small business awarded a grant or loan may occasionally need to report back to their bank, a startup with angel backing will probably be getting a bit more help. They’ll be receiving advice from the investor (after all, the investor is the one taking the biggest risk) and, if you’re young and inexperienced, there’s probably nothing better than a helping hand. This is especially true for those teams or individuals that become a part of an accelerator or incubator program.
Difference #3—Planning for the “end,” or the exit strategy
“Startups looking for angel investors or venture capital (VC) absolutely need an exit strategy because investors require it. The exit is what gives them a return.” – Tim Berry
Another thing you’ll want to keep in mind is your vision for your business. If you’re pitching for VC funding without an exit strategy, you’re unlikely to get it.
Venture capitalists need an exit strategy as they need to maximize their ROI. If you’d still like to be running the company in 10 years time, you’re probably going to want to ensure that exit plan comes in the form of a steady revenue stream that allows you to pay off investors, an IPO instead of a buy-out, or simply opt for a different strategy—your own funds, or loans and grants, either private or governmental.
See also: How to Become an Online Entrepreneur
“Exit strategy” development is a problem you won’t have with your own business, at least not until you’ve made it big or until you change your mind about owning the business. The point is, in a traditional business (not a startup), you don’t need an exit strategy at the start. You’ll be entirely responsible for the future of your company and it will be down to you whether or not you run it for the rest of your life or decide to sell, merge or launch it on the stock market.