Starting a business and starting a startup are two very different things. Having done both, I tried to articulate some of the differences.
Being an entrepreneur, then recently moving to work in a VC (Entree Capital), I wanted to share something from my own personal experience. I meet a lot of entrepreneurs, and the dilemma I’m addressing here is a very common one.
At the beginning of 2018, together with my co-founder, we started a swag agency. In less than two years, we sold goods worth over 5m NIS and had 5 full time employees. At the beginning of 2019, together with a third co-founder, we started a tech startup, and within the first year raised $5.5m.
These two experiences were very different, and the differences between starting a business and starting a tech startup taught me a lot. This is an attempt to put some of these lessons on paper.
It is important to say right up front that not all businesses are the same and not all startups are the same. Broadly speaking, I am referring here to a business as a company owned by its founders, with no external capital investment (not including loans), relying on sales revenues. In contrast, I refer here to startups to describe tech companies that strive to generate fast exponential growth, and rely on money invested in the company in exchange for equity (percentage of ownership in the company). Startups that start out as “bootstrap” (without external funding) are a beautiful and very unique creature that I will not refer to for now.
Businesses and startups are different primarily due to a different perception of the term “success”. So many times I found myself in conversations with entrepreneurs who want to raise money, and take pride in the revenue their venture can generate. These conversations are a bit frustrating because they require an understanding of something counter-intuitive: for venture capitalists, your profit is not interesting in the short term.
If a business can support its founders, pay its employees, not hurt anyone, it is a successful business. A good friend of mine owns a Falafel shop, and he is a dizzying success — the food is delicious, the employees and customers are satisfied. that’s it. It’s not easy at all, it’s hard, but it’s clear what exactly is required to succeed.
Venture capitalists measure success differently. The profit that the company can generate in the foreseeable future, within the range entrepreneurs can plan for, is not interesting. This means, and this is a kind of TLDR, that if you’re building a venture that can turn a nice profit, sell to a lot of customers, and you think that using your talent you can generate fantastic returns, say 200% in 5 years, you will not raise money from a venture capital investor.
To put it bluntly, venture capitalists do not want a refund on their money, they want their money to explode. They assume most investments they do will die on the vine, and are looking for the one investment that can generate a huge return of 50 or even 500 times. These are the rules of the game.
This may sound like I look down on businesses that can turn a profit in reasonable timing. I want to make clear that my intention is the opposite. In my first business, the first time we saw profitability in the numbers of a particular month, we were so happy. It is a tremendous effort and whoever is able to create a venture that makes money is awesome. But a startup sounds glamorous and a lot of people who actually have a business in hand want to raise money or think of their business as a startup, and this is a mistake.
If you are building something that can generate sales in a small place like Israel, if you have an ambitious business plan that will get you profitable in a short period of time, go for it. Start selling. Look for what works for your customers. If you are short on money, a loan is a good option — the interest rates are very low. You will be your own boss, you will decide who to hire and when, who the customers are and what kind of service they will receive. You will be the face of the business and the strategic mind behind it. The responsibility is on you so is the success you generate. The business will become part of your identity, a source of pride and hopefully also a livelihood.
On the other hand, if you are building a venture that you think can grow rapidly by thousands of percent, you will probably have a hard time generating revenue right from the beginning. In physics this is always true, in business it is mostly true: to jump high you need to invest a lot of resources. Thus, a loan becomes unsuitable. You won’t be able to repay it in reasonable time, and the risk that the entrepreneur bears is great. This is why venture capitalists exist. They like taking risks and they know how to think years ahead.
If your venture can raise money (i.e. there is an investor who believes it can grow by thousands of percent) you need to get used to the idea that you are no longer the only decision makers. You now have partners, and they have opinions. Hopefully, your investor will bring experience to the mix and contribute by creating connections and offering advice. You will have to share the fruits of your success but also the burden of risk. You will be under tremendous pressure — not only your livelihood is at stake, but the fact that you are now managing other people’s money, and they have high expectations.
In business, when you decide to call it a day and go to bed, send this email tomorrow, cancel this delivery because of the rain, you make a decision that impacts your income. In a startup, the decision to go to bed means that you are done making an effort for yourself, and for your investors. Both options are stressful, but in different ways.
I hope I was able to convey some of the differences between starting a business and starting a startup, there are many. I recently shifted from entrepreneurship to investments, and I guess I will go back down that road in the future. I am always happy to talk to entrepreneurs of all shapes and kinds, listen, offer feedback and assist if possible. I am available on Facebook, LinkedIn and Twitter. Good luck!