The trigger that made me write this post was a facebook discussion about VCs that I was following last week. Entrepreneur-wannabes arguing with VC-wannabes about how Silicon Valley can be replicated and how much should the startup seed capital be… 😦 It was yet another piece of the generalized confusion that I continuously observe between the younger members of the so called «startup ecosystem». A confusion which I believe originates in misunderstanding of some basic terms used in such discussions around startups, entrepreneurship, funding, exits and so on.
So, if you who are reading this, are an experienced entrepreneur who knows all about starting up, please …stop! Read no more, you will waste your time! This post is just my 2 cents for those of you who may be just engineers, software developers or designers – those who thought business studies are a bit boring… but you still want or need to become an entrepreneur.
Hey guys! Get it straight!
The first clearing-up that needs to be made by everyone who thinks that he is an entrepreneur… Please, first answer the basic questions:
- Is your venture a «startup»?
- What type of entrepreneur are you?
- Who are your customers?
Now, one will say that I sound quite naive in asking these questions, but although the answers may seem obvious, for many, a lot of the common misconceptions start here.
Ventures…
Ok, you should realise that your venture will have a business model; a method that will allow it to be at least viable & sustainable – although profitable is the right word in business. This venture, you will eventually turn into a profitable business that will generate value to people, aka your customers. Depending on its scope, a business may be categorized in one of the following 5 types:
- Lifestyle business. This is something like a sailing school or a dance school, where the entrepreneur’s lifestyle is the business itself. They sell services to the neighbourhood.
- Family business. This is usually a small operation like a retail store, a bakery or a restaurant, where the entrepreneur and his family members are working in the business and are paid by the profits. They sell services & goods to the neighbourhood and can scale up regionally.
- Social business. Although one may argue that most of these are not-for-profit-organisations, the entrepreneurs running them are paying themselves a salary. Services may be sold or may be provided for free locally, regionally & nationally.
- Service business. These can be big or small, from a freelance accountant up to a telecoms operator. They sell services in the neighbourhood, regionally & nationally.
- Scalable business. These are the businesses that make & sell products in an industrial manner, i.e. automation is used in one or more operations in the business. These range from car manufacturers to software-as-a-service businesses. They sell products & services in a non-geographically restrained area. Scalable businesses are the ones that get funded by VCs.
Although one could say that he is starting up any of the above businesses, the term startup should be used only in the context of a new scalable business. If you are not venturing in a scalable business, i.e. a business that is not aiming to be funded by Venture Capital funds, then don’t call it a startup, call it a business bootstrap! I know that for some it may be disappointing but getting those semantics right is important, this might save you time & money…
Entrepreneur types
It sure sounds halfway awesome to call yourself an entrepreneur, puts you in the club with some of the legendary guys like Bill, Stephen, Richard, Mark and Jeff… Don’t forget, these guys are the successful entrepreneurs! I find that there are 3 basic types of entrepreneurs, characterising a person by his experience in setting up a business as a legal entity, successful or not:
- First time entrepreneur, he who has set up his first business
- Seasoned entrepreneur, he who has set up at least two businesses
- Serial entrepreneur, he who makes a business out of setting up businesses. He founds, scales and exits multiple ventures.
So, if you have not yet set up a business, it is not a good idea to call yourself an entrepreneur! It’s like calling yourself married when you are not… Call yourself anything else you like… By the way, I would only call myself an entrepreneur if I was a successful one!
Customers?
This is a very important question and the answer must be real. Please, don’t fool yourselves when you draw your business plans! If someone has not paid you for your business offerings, then he is not a customer – he is an opportunity. You have customers (or potential customers) only if you can prove that these people have paid, or are willing to pay, real money for your service, product or idea.
I hope that this post helped you a bit, I will be writing a few more posts trying to remove some of the noise generated from this startup hype.
Sbyrakis 
I’m not sure of the purpose of this beyond attempting to analyze something that really does not need to be.
I mean the last item which you highlighted…if you can prove that these people have paid, or are willing to pay real money… so….TWITTER anyone?
I also don’t think that having 2 startups under your belt makes you a seasoned entrepreneur. I think you need to look at revenue growth and a vast number of other factors. You can have 2 companies that never made it out of the bedroom and call yourself seasoned…. I think you need to have at least 1 success and 1 failure to be considered seasoned as each provides its own set of learning opportunities.
I also don’t see the benefit of differentiating between a bootstrap business and a startup. 99% of all new companies will never even be considered for VC funding so what makes a bootstrap different. On the other hand, family lifestyle businesses can invent a product or service which can then lead to funding etc.
I just think that you’re trying to fit too many square pegs into too many round holes…and for what purpose. I’m not sure.
Hi –
I think your categories are right on – with 1 exception. I believe scalable businesses can also be service businesses, not just product businesses. As long as a service offering can be scaled through standard processes and not dependent on one individual, I think also qualifies as a scalable business. Think HR Block.
Hi Fred, thanks for the feedback.
I believe that companies like H&R Block provide more of a product line than a pure service. Let me explain:
– a product may be tangible or intangible and may be bought or leased. This includes software and any other SaaS, PaaS, HaaS… offerings.
– a service is a performance of a third party, which you receive it terms of an outcome.
In that context, an airline company provides a service to take you through the clouds from A to B, while a cloud service provider offers you a virtual hosting account as a product. I hope I didn’t make it more cloudy! 😉
Hi Curtis,
Believe me that there is confusion out there, especially between the younger guys. The purpose of this post is to give a different, more realistic view for someone who is looking at the startup overhype and understanding where he stands. So simple…
I am a twitter user, I am its raw material, not its customer. Twitter sells me (and all of those birds out there) as data to its customers & advertisers. I am sure that the VCs that backed up the venture when it scaled, were pretty sure about the business proposition and its opportunity.
The differentiation between first time and seasoned entrepreneurs was put there just for clarification purposes. You are right, in the sense that perhaps we should name entrepreneurs only the successful ones.
I state exactly your point about startups and bootstraps! A startup that does not aim for VC financing (i.e. does not scale) should be called a bootstrap!
Hope I made it a bit clearer…
In this day and age. The variety of ideas of startups cannot deny the existance of sustainability and environental effect. Any of the aformentioned varieties of start ups cannot be divorced from sustainability. All new businesses need to have sustainability as part of their mission
You may be intending to touch on this further under «Customers», but I think an important consideration of any start-up activity should be what is often referred to as «ecosystem». That is, what is the environment in which you hope to launch a successful venture? An analysis of ecosystem should reveal how your venture will differentiate itself (and products and/or services) from what currently exists and what opportunities and risks are present. I think one of the basic examples of the importance of ecosystem can be seen by restaurants that fail. The failure can often be attributed to business owners who shape the concept of the restaurant on personal preference, rather than what is unique and marketable within the ecosystem. In contrast, a successful entrepreneur might assess the ecosystem first and ask, «What is missing? What venture would hold a unique niche and a competitive advantage in this location?» A failure to make an accurate assessment of this kind can place a new venture in direct competition with existing, established businesses and the resulting pressure can often be too much to overcome. It’s really Darwinian in many respects: How will my idea adapt and succeed in the environment I anticipate and what innovations would boost my chance for success?
Hi Clifford, profitability is one of the core mission targets of any for-profit business, which of course implies sustainability is achieved before profitability. I will include a reference on core mission targets for businesses in the next update of the post. Thanks!
Hi Russel, this is the essence of any business – customers! Yes, I will be writing a new post specifically for this. A quick reply is that businesses that can really listen to customers and are able to provide products / services that will repeatedly trigger positive emotions to people will succeed. Thanks for the feedback!