Start a Business, Not a Startup Part 1: Introduction

I’ve been the CEO of two startups. The second startup was funded by YC in W14. Since then, I’ve worked at Salesforce, Facebook, and now Google. I mentor PMs and chat with startup co-founders on a regular basis. I share all this to say that I know a thing or two about startups. I’m passionate about starting and building businesses, but my experience has taught me that especially if you are inexperienced, you should start a business, not a startup.

In this post, I’ll try to convince you that in almost every dimension, you would be better off  bootstrapping a business than trying to play the VC-backed startup game. This is a messy topic, and I’ll be the first to admit that startups are better for people that have unusual situations. But on the net, businesses are where it’s at. 

This topic got way too long and so I’ve broken it into 4 posts. You can access all 4 of those posts below:

1. Start a Business, Not a Startup Part 1: Introduction
2. Start a Business, Not a Startup Part 2: The Money
3. Start a Business, Not a Startup Part 3: Time and Customers
4. Start a Business, Not a Startup Part 4: The Advantages of Not Taking VC Capital

What’s the Difference Between a Startup and a Business? 

Growth. The difference between a business and a startup is how the business grows from $0 to $1B in revenue. Here are two charts that I think accurately illustrate the difference:

Successful startups take in massive amounts of capital and very quickly convert those torrents of cash into massive profit. Successful businesses, by contrast, tend to absorb small amounts of capital investment and generate modest profits over the same time period.

Although not all startups are VC-backed, in this series I equate “startup” with “Venture-Capital-backed business.”

Here’s a summary of how startups and businesses tend to differ.

Startups Require More Work

If you want to really compete among other startups, you have to put in long hours. I was working 80-90 hours/week on my second startup. And those numbers are conservative because I didn’t count stuff like commuting, meals, and socializing as work. If you add that stuff back in, I was probably working more like 100-110 hrs/week. Most business owners work more than salaried employees, but the hours tend to be a bit less grueling. Data suggests that 50-60 hr/week is normal for business owners. [source]

Startups Raise a Lot More Capital

Less than 1% of new small businesses raise venture capital funding. Among businesses that don’t raise VC money, most are self-funded (77%) and require less than $10,000 in startup capital. The average seed round for VC-backed startups, by contrast, is $2.2M. [source]

Startups Happen in SF and NYC

Venture capital investments in startups based in either the Bay Area or NYC totaled $173B in 2021. That’s more than the VC investments made in every other city in the US combined. [source] So if you want to raise a venture round, you would be making it extremely hard on yourself to do so outside of the Bay Area or NYC. By contrast, it is most cost-effective to start a small business outside of these two major metros.

Startups Get Most of the Attention. 

There is an enormous industry built around startups: VCs, vendors, commercial real estate, and M&A legal firms to name just a few. All of these players have a huge vested interest in raising the visibility of startups and their founders. Small businesses, by contrast, have virtually no visibility to the average person. This makes a lot of sense: startups make good stories, small businesses do not. This point is important because it means that almost everything you probably think you know about startups is the subject of extreme selection and survivor bias. It also means you probably know next to nothing about the economics of running a small business.

Startups Require Crazy Levels Success to Make Sense

I’ll get into the details on this point in the second installment of this series, but a startup must be wildly, breath-takingly successful. If the founders and early employees want to make a single cent in profit, the exit multiple must be pretty astounding. 

VCs understandably don’t talk much about this. The conventional wisdom is that 40% of VC-backed companies fail outright, returning nothing to founders and investors. Another 40% return their invested capital to VCs through a sale, and 20% make “substantial returns.” [source]

But the returns must be very substantial for anyone but the investors to benefit. This data is very hard to track down, but from my own experience, I would guess that more than 90% of startups fail to generate even modest returns for founders and early employees. Small businesses, by contrast, suffer from no such value-capture. 

If your business generates $250k /yr in profit, you just made $250k. There’s no complicated cap table between you and your customers. Provided you have paid off your debts, own your IP, and have incorporated your business to protect your liability exposure, that’s a quarter million dollars of profit for you. Nobody can take that away or pressure you to spend it in any particular way. 

By contrast, posting $250k in yearly profit would be very bad for a startup. All of a startup’s profit can and should be soaked up by growing the business.

In summary, startups and businesses are very different from one another. All startups are businesses, but almost no businesses are startups:

(And yes, this is drawn to scale! That red dot represents 1% of the area of the blue circle.)

Follow along with the series and read the next post: Why You Shouldn’t Start a Startup: The Money.

Happy overthinking!