It can seem like everything is a startup nowadays. Somehow both the app that shows smiley faces when you tap it that your neighbor built in his dorm room and Uber, a $54B company with thousands of employees and contractors, both fall into the popular usage of the term. A project that has no way of possibly every generating revenue can call itself a startup and so can Facebook, a company that recently had one billion people using its product in one day. At the same time, there are small businesses. We don’t think about the bakery down the street as a startup even though it might employ more people than Instagram did when it was purchased. The local bank isn’t a startup, but it generates more profit than Uber currently does.
We have two different images in our minds for startups and small businesses. Many startups are small businesses in the formal sense of the phrase — they are businesses that are small by comparison. But what defines “small by comparison”? Instagram looked small compared to an Inc 5000 company, but Inc 5000 companies look tiny compared to Fortune 500 companies.
What are some of the ways that we think about SMBs (small-to-medium businesses) and startups? What are the popular conceptions of each? Most importantly, what differentiates the two?
Industry?
Maybe what defines a company’s status as an SMB or as a startup is its industry. After all, when most people think about “startups,” they think about (information) tech companies*. This could be consumer tech like Facebook or Snapchat or Instacart, or it could be enterprise tech like Oracle or IBM or it could even be government tech like Palantir. In the popular conception of the term, startups are companies that CS majors go work at and sit up all night pounding out code.
SMBs are everything else. Your bakery or bank or fruit market or cafe or botique store or hotel or oil company is not a startup under this definition. It might be small like many startups, but it isn’t employing software and IT engineers, so it isn’t a startup. It isn’t primarily creating software or hardware, so it isn’t a startup.
But we find startups that aren’t in the IT space all the time. Soylent is a nutrition startup that creates meal replacements that are mailed to your door. Warby Parker sells glasses online and mails you samples. While it is hard to imagine companies without a primary software component in their product being startups, they do exist.
Accordingly, there are small businesses that do do work in the IT space. They might be software developers or hardware manufacturers — they might create apps for tablets or build enterprise-level software for clients — but they aren’t startups. They’re not thought of as startups and don’t think of themselves as such.
Location?
Another thing people think about when you say “startup” is Silicon Valley. They think about Amazon and Microsoft in Seattle. They think of companies like Warby Parker in NYC, or finance companies in Boston.
A company in Middle-of-Nowhere, Nebraska can’t be a startup, even if it is doing the same thing as a company in Silicon Valley, right?
Not quite. While there’s a very obvious advantage to being in startup hubs (Silicon Valley is first, then cities like Austin, Seattle, NYC, and Boston come up after that), like being able to attract key talent, being near potential investors, and being able to more easily keep your fingers on the pulse of the industry, successful startups have come out of towns that don’t fall on the list of startup hubs. Pittsburgh, Minneapolis, and Chattanooga are all examples of cities that serve decent and growing startups outside of the traditional list. Similarly, there are companies based in Silicon Valley or Boston that wouldn’t qualify as startups but rather as SMBs.
My own personal experience corroborates this. I interact with a lot of different businesses in the course of doing Business Development for Praxis. I might meet with the owner of a flourishing SMB one day and the CEO and co-founder of a plucky technology startup the next. I spend time in both the rustbelt and in Silicon Valley, where I meet the archetypal business owners for both regions. And though you find more “startups” in Silicon Valley than you do in Detroit, they aren’t exclusive to hub cities.
Culture?
So if it isn’t necessarily the industry or the location, maybe it’s culture? These three things are pretty closely intertwined after all. Tech companies are going to attract certain kinds of people and are going to be attracted to certain areas, building a certain type of culture exclusive to their bubble. The same is true for finance companies, nutrition companies, and engineering companies.
But what defines a culture? The culture at Amazon is supposedly the polar opposite of Google, but they both would have, up until fairly recently, been called startups (Amazon just turned a profit this year). And how does the culture at a small, early stage startup differ from Uber, a company with thousands of employees all over the world? Uber is probably closer to Delta Airlines than it is to the bootstrapped company in the basement down the street from your mom.
We like to think that there’s this homogenous thing called “startup culture,” and it gets reinforced both within and outside of the companies from which it supposedly emanates. HBO’s Silicon Valley is essentially an entire running joke about not just the culture in Silicon Valley but the culture of startups and tech companies in general. “Entrepreneur meetups” are full of people whose primary job is to go to entrepreneur meetups, not actually run a company. Startup conferences focus on wearing t-shirts and jeans and sandals and listening to other people in t-shirts and jeans and sandals talk about how they meditate in the morning. But this is the fringe and it is the concentrated version of this. Location probably has a stronger impact on culture than the stage or type of company. If you took a business model from San Jose and plunked it in Minneapolis, it will have an entirely different culture.
Similarly, there’s no real thing as “Small Business culture.” We like to imagine the baker standing outside his shop with his arms crossed and grinning before a long day of fulfilling work because that’s an easy and obvious depiction of what a small business looks like, but it’s just that, an obvious depiction. There are probably tech companies in your town that look like startups but wouldn’t generally identify themselves as startups. There are probably non-tech companies in your town that look like small businesses but would identify themselves as startups. The idea of the homogenous culture for either is a myth.
Growth?
So those companies above — the ones that identify themselves as the other category when you think they’d be a startup or an SMB — what sets them apart? Paul Graham, the founder of Y Combinator, would say it is probably high-growth. Uber, despite being bigger than some established airlines in terms of valuation, is a startup because it is still experiencing high-growth. Facebook can be thought of as a startup despite having been around for years and serving billions because it is still experiencing high growth. Even those companies with just a few clients but massive valuations can be thought of as startups because they have the potential of experiencing high growth.
But what defines high growth and from where does it come? The bakery that doubles its profits every week is experiencing high growth, but it probably doesn’t see itself as a startup and isn’t thought of as one by customers. Graham isn’t wrong — startups are defined by high growth, but that high growth has to come from somewhere.
Vision
I’ve hinted at what I think differentiates an SMB from a startup throughout this post — and that’s how the company sees itself. A startup sees itself as having the potential to create a new industry or totally dominate a new one. Founders of startups, oftentimes starting out just trying to solve problems they themselves ran into, can quickly envision their companies as serving a much wider market than just themselves and their friends. They are truly entrepreneurs.
Small businesses, on the other hand, don’t entirely lack vision, but their visions are focused elsewhere. Many small businesses are founded by people who just wanted to be their own boss, who loved the trade they were doing and didn’t want to work for anybody else any longer, and who saw themselves as able to serve an immediate market need. They go into the work because they enjoy it and building a business out of it is the easiest way for them to be happy. Even the software engineer who starts a software company is doing this, just as the baker who starts the bakery is doing this.
This doesn’t make startups inherently better than SMBs, and it doesn’t mean that SMB founders are small-minded. They just focus their attention elsewhere. The informal institutions — culture, the right team, and a long-term gameplan — needed for high growth is something that most often comes out of the very founding of the business. How you found your business is going to determine its future. Choose carefully.
*This of course turns on how you define “tech.” Most laypeople think of tech as something involving software or hardware — it involves computers and computing power primarily. People like Peter Thiel believe that tech is any new and better way of doing something. If this is the case, then any company that improves on an old method of doing something is a tech company. This isn’t the sense in which I mean “tech” here — although it is accurate, it isn’t the popular usage.
