Startup vs. Small Business Part 1: Growth

Posted 6 years ago in Small Business Tips
by Tim Chaves

In the course of my career over the past decade or so, I’ve started three businesses—with varying degrees of success! The first, started with a great friend and business partner while in college, was called iWrap, and was a manufacturer of iPhone covers. The second was a design and development agency, called Reef3. And the third is what I’m working on right now—ZipBooks, free accounting software for small businesses.

I thought it would be interesting, and potentially helpful, to share a bit about what I’ve seen in the course of starting, operating, and exiting those businesses—each of which was very different from the others in important ways. I’ve talked with many founders whose goals with their business are a bit ambiguous, and who are making key decisions in one area that aren’t in alignment with their decisions in another. (Hat tip to an all-time favorite professor of mine, Noam Wasserman, and his book The Founder’s Dilemmas for some of the thinking here).

One useful way to think about some of those key decisions early on can be made clearer if you’ve decided whether what you’re building is a “startup” or a “small business.” Many people group those into the same category—and that’s fine, from a nomenclature standpoint. But there are some key decisions that you’ll make about your business that will determine if it’s more of a “startup” in the traditional sense, or a “small business” in the traditional sense—and bringing those decisions into alignment can help you save time and heartache, and can affect the financial and career outcomes you achieve.

This is too big a topic to handle in a single post, so I’m going to break it up into a few, each of which will tackle a key decision that you’ll want to consider carefully as you start and run your business.

Decision #1: Growth

One major differentiator between a startup and a small business is growth—including both how fast you can grow and how fast you want to grow.

Think about what you want your business to look like in five years. Do you imagine a smoothly humming machine, kicking off enough cash for you to take a few nice vacations every year, giving you time to volunteer, engage with your community, and work every day to make it a little better? That’s what you’d normally think of as a “small business.” Profits are prioritized over hyper-growth, often leading to predictably positive net income after a few years of very hard work.

Alternatively, do you imagine a company on its way to the moon? Do you imagine your company hiring as quickly as it can, racing to take a lead position in an ultra-competitive marketplace, and potentially looking to raise millions upon millions of dollars to keep up 100% or more year-over-year growth? This is the “startup,” where growth is king, profits are pushed back chronologically (if not deprioritized completely), and you’re aiming for the company to—one day—be worth hundreds of millions, or even billions of dollars.

Too often, it’s unclear to founders which one they’re choosing. For example, they’ll choose a business idea in a slowly growing industry (small business), but try to raise money from venture capitalists (startup). Or, they’ll expect to have a great lifestyle (small business) with a company that’s on its way to a billion dollar valuation (startup).

Lower-growth companies can lead to great lifestyles. Because the growth rates are low, there is minimal investment from venture capitalists or other institutional investors. Because there is minimal investment, competition is usually local or regional, and can be less sophisticated. These dynamics, in turn, leave an opening for savvy, hard-working business owners to do really well in their corner of the market. Service companies (like my second business, the design/development agency) are a great example of this. You rarely see an agency scaled to be worth a billion dollars—but sound business practices can lead to fantastic local, regional, and in some cases national success. In these cases, owners can often produce a great stream of income for themselves and their employees.

Higher-growth companies, on the other hand, often mean short-to-medium-term terrible lifestyles for their founders—with a larger potential payoff (often a windfall upon acquisition). When a company is growing fast, its valuation is often a multiple of revenue (like in software-as-a-service companies), as opposed to profits—or even based purely on strategic concerns (think Whatsapp being acquired by Facebook for $19B with revenue of just $10M). With sky-high multiples, institutional investment often follows, and where there’s VC money there’s increased competition (national or worldwide), intense pressure to keep growing, and hefty accountability for founders to their board and their shareholders. There’s also often enough dilution for founders that they lose control of their company entirely—they could be fired from the company they created.

That being said, a high-growth company that increases revenue significantly year after year means the founder may be getting a smaller piece of the pie—but it’s a pretty darn big pie.

In sum, when you’re starting a company, ask yourself: how fast do I want to grow? How fast can I grow given the dynamics of the industry I’ve chosen? If I want to grow fast, do I have the team around me to help me do that? And what does that mean for my business, my lifestyle? When it comes to growth, do I want to run a small business, or a startup?

For further reading, check out Paul Graham’s seminal essay, Growth. In the next post in the small business vs. startup series, I’ll get into the difference in how you can fund those two types of businesses. I’d love to continue this conversation with you, so feel free to tweet me @timchaves on Twitter.

About Tim

Tim is Founder and CEO of ZipBooks. He keeps his desk really nice and neat.

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