Start Ups vs New BusinessesWritten by Kevin on October 13th, 2009
I have often been accused of using the word start up too much. I can’t believe how some people can be so critical of a guy’s passion. But, the fact of the matter is that a lot of people have bad impressions, or worse yet, bad experiences in a start up. I don’t see how a start up can be a bad experience as long as it is run responsibly and everyone is treated respectfully. Worst case scenario is that it doesn’t make it, you miss the equity upside and you walk away with tons of experience, your bills paid (this refers back to the responsible factor) and war stories that you will be sharing for a long time.
The other misnomer that I come across often is that people mistake new businesses as start ups. They are not. In fact, they are drastically different. I would like to share some major differentiators between the two.
- Dealing with extraordinary uncertaintyWhen you start a business, you generally know your market, your competitors and a business model that has been replicated and proven over and over again. They generally occur in mature industries as well. Think about starting an automotive shop, a restaurant or a construction company. Sure you could try to provide better service than anyone else, have an innovative market twist or use newer, innovative equipment, but the basic business model to be successful is known.
Compare this with a start up. It has nothing but uncertainty. Will the technology work? Is there a market for what we are building? Do I have the people that can pull this off? Will people be willing to pay more than what it costs? It is also a fact that most start ups end up doing something different than what they set out to do. I love Eric Reis’ definition of a start up:
“A start up is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.”
- The people make the differenceThere are not many businesses out there that wouldn’t say the most important thing is their people. However, how many companies out there would completely fail if one of your employees really messed up? Probably not many, especially if you are in the service or retail industry. But this is exactly what happens in a start up. Every team member is of such extreme importance and has to carry a massive sense of ownership and responsibility.
- Lack of fundsIn most new businesses you begin generating revenue as soon as you open your doors. This is not the case in start ups. So many up front resources go into developing your product that you may be months or even years without revenue. That means you have to find a way to bridge that gap. And don’t think that you can just walk down to your local bank and get a loan – no banker would touch companies like this as the risk is just too high. You will need to stretch your personal finances, find angel investors to invest in your company, possible try to raise large rounds from institutional investors or venture capital funds.
In starting “normal” businesses, the question is whether or not your revenues are larger than your expenses. In start ups, the question is whether or not you will have any money next month. Big difference.