Small Businesses and Tech Startups are Very Different

Recently I was talking with a friend that had been a small business owner for eight years before shutting down his company to join a tech startup. It’s been over a year since he entered the tech startup world and he said he’s been knocked down making all the common mistakes like taking too much time building features no one needs, not generating enough traction for the product to be viable, and poor timing.

One of the things he said really stuck with me: being a small business owner for many years and joining a tech startup are very different. Here are three ways he said they differ:

  1. As a small business owner, you focus on profitability from day one. Many tech startups are bought for large sums of money without ever turning a profit.
  2. As a small business owner, it’s easy to keep track of how much a good or service costs and you make money by marking it up some amount and selling it. Tech startups often have no marginal cost for each additional user/customer, creating a very different dynamic.
  3. As a small business owner, marketing typically comes through word of mouth and they service a local geographic area. Tech startups need to build a repeatable customer acquisition process and deliver the technology on a national or international scale.

The biggest aha moment for him was that tech startups aren’t about making money in the short term and that it’s usually more about building a large customer base before economies of scale and profitability kick in. Small businesses and tech startups are alike in that it all comes down to people and very different in how the economics work.

What else? What are some other ways small businesses and tech startups are very different?

4 thoughts on “Small Businesses and Tech Startups are Very Different

  1. I am on the fence with the build for profitability vs. economies of scale models for a tech startups outside the valley. I started my journey going for scale, but then I quickly realized that a likely scenario for my personal situation would be that I would run out of my personal money bootstrapping the venture before I could create enough traction to attract investors.

    So recently I started making a pivot towards building for profitably. After reading this, I see the thought pattern I now have is similar to a local mom and pop small business since I am focusing my marketing on word of mouth (direct sales), servicing a local geographic area (Atlanta) and charging customers from day 1 (saas). Essentially going for the “scrappy” startup strategy.

    Curious to know if you think “scrappy” startups should start their companies thinking more like a small business rather than like the typical silicon valley businesses we read about in TechCrunch?

  2. I agree that the user base vs. revenue issue is the biggest observable difference. Paul Graham defines a (B2C) startup as a company growing users at a rate of 5-7% per *week*. I have been at a startup that really was a small business: they never crashed and burned but they never soared in the sky.

    Startups are all-in for one product/service (which may diversify but only in the future).

    Corollary: startups must establish one very strong branding instead of having many irons in the fire.

  3. One more point that I would add is that small businesses are typically much more replicative in nature than tech startups.

    Many small businesses use the same processes for finding and keeping customers in a particular market, just in different locations. On the other hand, tech startups often start from scratch and then search for a repeatable business model.

  4. Good point about profitability. Ideally I would like to get an investment for a startup, but right now I am just running my business bootstrapped.

    I am seeing quite a few opportunities for growth, but cashflow issues are delaying what I want to do by a couple months. Perhaps finding some VC investors might be the route to go.

    Chris

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