Funding doesn’t determine a startup from a small business; the nature of the business determines the funding.
Twist of logic perhaps, so let’s explore it. Very frequently, I find small businesses looking to raise venture capital; let me cut to the chase that such efforts are almost always wasting their time.
The distinctions between small business and startup are in innovation and intention
Startup is merely a stage of business whereas Small Business is a defining characteristic.
Your intention as a founder is to either own a small business or a company.
Companies will scale to any size possible. Companies aren’t owned by the founder alone; in fact, you’d willingly be replaced if best for the company. Companies share ownership and as such, can offer those shares on the public market (“go public”)
Startup is the early stage of a company.
Your intention is to be a company, not a small business.
Begging the question… well, doesn’t a small business start up?
Yes… but that’s not the same as “a startup.”
A small business starting out is likely able to draw from the knowledge base of existing small businesses.
While that small business is “starting,” the distinction is that HOW to start, what to do, can usually be derived from predecessors.
If you’re opening an Accounting practice, for example, that’s a small business starting out, and it’s able to essentially replicate other accounting practices in the process.
This distinction is the second consideration: innovation.
Startups are largely agreed upon as new businesses that are distinct in some way. They can’t just replicate the Accounting practice, they aren’t the same business.
Their innovation is what enables them to scale beyond being a small business among many existing, to being a company with sizeable market share.
They’re doing *something* new.
Innovation doesn’t mean “tech,” that new could be anything from a radically different business model, to addressing a completely different market; and sure, technology based companies are by their nature of working with technology, likely more innovative.
This is what makes them “startups.” They’re new businesses that are inventing their new approach as a business.
Such businesses may remain small (it’s their intentions that make them big and beyond the starting up stage), but it’s the innovation that distinguishes the new small business from new startup.
Thus, how they’re funded is determined by what they are. Funding doesn’t determine that they are different.
A startup is more attractive to VC and Angel investment. Startups, becoming companies, are likely to go public or exit whereas Small businesses are not (only being sold when the owner/operator wants out).
A distinction of such investors is that they expect the company to “exit” so they can get their substantial Return on Investment
Small Businesses generally are NOT attractive to VC and are rarely attractive to Angel Investors.
Don’t misunderstand, they can get investors, but it’s more accurate to refer to those investors as “business investors,” not Angels. Such investors are usually referred to as partners and they’ll favor profit-sharing or drawing from the business more than waiting out for that exit.
Business investors typically focus on revenues, hence their favoritism of known businesses, whereas Angel Investors should not be focused on revenue at this early stage… after all, doing something innovative, we can’t really predict or expect the incomes of the business.
Appreciating that distinction, we can also see how small businesses are often more suited to loans, while startup founders typically can’t collateralize or justify financing as a startup.
An economy mostly made up of small businesses that remain small (don’t scale) and one that does not have access to Venture Capital or Angel investors has therefore to be quite different from one where there are many start ups that have access to funding that allows them to scale up …….
Business investors typically focus on revenues, hence their favoritism of known businesses, whereas Angel Investors should not be focused on revenue at this early stage… after all, doing something innovative, we can’t really predict or expect the incomes of the business.”
This seems to be one of the challenges for early stage startups in Austin and Houston – there is a HUGE focus on revenue generation in angel groups’ decision making processes. Very few startups get angel funds without having revenue in our region.
Based on your experience, what can we do to educate investors and change this to help more startups get the funds they need to launch?
In fact, I believe the only answer is to better educate entrepreneurs and journalists; to hold Accelerators, investors, and funding events accountable to what they actually are.
Look at Texas as a good example.
We have “Angels” who are really just people with wealth from real estate… Who then expect founders to show customers before they invest. That’s not an Angel, that’s a business investor. Who’s calling them out?
We have journalists and other media happy to announce that that $50k investment from a local program means that a startup got funded. That’s an award, best case, not funding.
We have incubators that don’t teach and we have Accelerators that that invest.
Sure, we can educate investors to change but to what end? Most “know better,” after all, they’re wealthy, and maybe even earned it, so who can tell them they’re wrong? /s
Educating the entrepreneur empowers everyone.
It’s almost akin to politics. An ignorant populace is easily manipulated. Change starts with educating the populace so they don’t get misled.
Loved your answer, Paul!
I really could not have said it better myself…
Linda Stewart worth reading. Thought it may be of interest to the team at CEDA and their reports/articles using the term ‘startup’.
Thanks Paul. It’s very insightful
It’s that or Carta right?