Startup or Business; why its importance to know the difference
I can’t be the only one bothered by people using the terms ‘startup’ and ‘business’ interchangeably. I get it, at a surface level both of them essentially do the same thing, catering to the respective demands of the market; but they are also fundamentally different.
In the past, I couldn’t see this difference either, however the overlaying similarities between the two were too obvious to deny. This lack of clarity was partly due to me looking at things through the lens of a Founder and that of a Venture Capitalist but after years of being a technology partner to countless startups around the world and helping them scale, the difference between the two have begun to clear up.
When I say it bothers me, I mean that this is one of my biggest pet peeves, right up there with people who talk during movies.
Should you call all new businesses, startups?
No, you shouldn’t. Millions of new companies sprout out every year and cover every sector, but startups only account for a tiny fraction of them. Being newly founded does not necessarily make your company a startup, nor does your company have to work in tech, raise venture funding or have some sort of “exit”.
Instead, startups are defined by a special set of characteristics that help them stand out, chief among them being their rate of growth. Unlike regular businesses, startups can operate under less clarity, giving us Founders the ability to rethink the ability to take on challenges with speed, and have a more upbeat attitude when it comes to failure.
As anyone with a history of running a business will tell you, this is the exact opposite of what they practice. But the biggest factor separating the two is their rate of growth.
Startups show a greater rate of year-on-year growth, in their first few years, than businesses do. This is mainly due to businesses being unable to sustain their growth rate annually as the company itself grows.
It’s funny because the more I thought about the growth rate of startups, the more I drew parallels between them and the generic anime protagonist. Just like in anime, startups are the new kids on the block, who use their innovations/powers to achieve a faster growth rate than those characters who have already established themselves in the sector/series.
I’d never thought my years of anime watching experience would come in handy, but here we are.
Growth of a startup
This high growth rate is what makes a company a “startup” and not a “business”. Unlike businesses, startups are intended to have a higher growth rate in their first few years of operations, up until it is no longer sustainable.
There is not a specific growth percentage a new business must reach annually to be considered a startup, but there are a few metrics I follow.
As a company, if your organization showcases a year-on-year growth of below 50%, it is more than likely that you are a business. While, if the growth numbers showcased are significantly north of 50%, oftentimes by a huge amount; then you have a startup on your hands.
Financial projections done on the global startup market have shown that the first year of an innovative startup, accounts for one of its biggest growths. Out of 25,000 selected international, early-stage ventures in 2016, it was seen that the average growth rate of startups is a whopping average of 177,98% in its first year, and continues to decline each year as the company gets more established and increases its levels of growth.
A blog posted by Entrepreneur and Venture Capitalist, Paul Graham, categorizes the growth of a startup into three phases:
- Phase 1- There is an initial period of slow or no growth while the startup tries to figure out what it’s doing.
- Phase 2- As the startup figures out how to make something lots of people want and how to reach those people, there’s a period of rapid growth.
- Phase 3- Eventually, a successful startup will grow into a big company. Growth will slow, partly due to internal limits and partly because the company is starting to bump against the limits of the markets it serves.
Going by my personal experience and Paul`s research, its easy to see that startups eventually end up becoming businesses themselves.
Let’s take my own company, CabbageApps. From 2020 to 2021, it has grown 3x-4x, and we are continuously focusing on having a 3x growth every year up until it becomes harder for us to sustain. As a Technology Partner for Startups, Scale-Ups, and Enterprises, as we mature it`ll become harder for us to sustain the current growth rate, so we will eventually be pushed into a 0.5x annual growth rate, by which time we would have turned into a business.
As Founders, we design our startups with the specific purpose of growth, and fast growth at that. And this is all there is to it, growth is at the core of every start-up, with everything we do in our companies being directly tied to its growth.
Why it’s important to differentiate the two
Having a clear picture of what you’re running will help you plan and characterize and plan your growth accordingly. This is because businesses and startups require a drastically different process in place to help them reach their goals; these include having specific mental models, teams, and company processors.
Identifying what your company falls under will help you avoid unnecessary transitions such as changing current teams, mental models, and operational instructions, halfway through the company’s growth. This helps you analyze what you need to do during different stages of the startup so that you continue to have a good overall picture of where you are actually headed.
If you’re a founder looking for advice from someone who has been in your shoes, follow me on my LinkedIn and get updated on more entrepreneurial hacks that will aid your business.
