Startups are born to scale. They’re created to search for and validate a scalable business model in a way that can have a major impact on the market or how a problem has traditionally been solved. The innovation, disruption and scalability aspects of a startup are why they are different from small businesses and more importantly, why they can’t be treated or built as a small business or subversion of a large company.
Small businesses are created to generate profits and secure local market share. Although small businesses also have the potential to grow into large companies, the driving force behind their growth is national and international expansion through larger teams, supply, manufacturing and distribution channels. When WhatsApp was acquired for more than $19 billion, it only had 55 employees. Instagram, YouTube, Viber, Skype and Tumblr had 13, 65, 50, 911 and 178 employees, respectively. Technology is an enabler, and the reason startups can scale so quickly with a repeatable business model and a tiny user to employee ratio,unlike small businesses.
For example, certified public accountants run a small business, and the core of their service is provided by them or their team. Although technology helps them do their job or save time on repetitive tasks, they cannot serve a client without investing time to review and complete their tax returns.
On the other hand, startups like TurboTax have created a scalable platform that enabled them to serve hundreds of thousands of people without needing the same number of service providers. A scalable business model powered by technology enabled this startup to grow exponentially at a pace a small or medium sized business cannot match without investing a lot of resources.
Scalability, innovation and disruption come at a high cost. While around 50% of small businesses fail in the first four years, 90% startups don’t make it and for those that do, several encounter near-death experiences along the way according to a Startup Genome study.
Thankfully, several startup and product development methodologies have been introduced to provide entrepreneurs with frameworks to alleviate the risk of failure and boost startup success predictability while minimizing costs, whether it’s time or money. Many of those practices can also be applied to start and grow small businesses. Here are two ways a startup development mindset can help you start small businesses on stronger foundations.
1. Leverage existing resources.
As opposed to small businesses, which typically execute on proven models, startups are created to search for a repeatable and scalable business model. As such — and following the dot com crisis that resulted in massive failures due to startups investing hundreds of millions of dollars under the assumption that their business models are validated — several principles were introduced to help startups alleviate risk, validate ideas quickly and build in response to demand instead of based on inaccurate projections.
The lean and agile development methodologies entail implementing an iterative process that starts by validating customer needs and expectations qualitatively through interviews followed by small and quick product version launches to test quantitatively and continuously instead of investing significant amounts of time and money building an advanced product, risking that no one need it or want to use it the way it was originally hypothesized.
In our example above, an entrepreneur is better off testing if people are willing to trust software to do their taxes. Creating a simple landing page where users are prompted to submit their tax information, thinking that their returns will be processed automatically when in reality, the founder is manually running the numbers in the backend and then sending a clean report, is an example of an MVP that can be executed quickly and inexpensively while providing valuable information about user needs and expectations.
How is this relevant or applicable to small businesses? Most small business owners fail to start due to lack of cash. Execution is often delayed until the envisioned business is created to perfection whether it is a restaurant, car wash, a logistics company or hair salon. Adopting a lean approach to starting small businesses entails leaving the biggest expenses for last, using existing resources and focusing on getting the job done. In the case of a restaurant, it could be using your own kitchen and vehicle to deliver. Start a car wash business on demand before buying all of the expensive equipment and leasing a commercial space. Follow the same approach to start a hair salon or a logistics company, one truck at a time.
Aspiring entrepreneurs understand the fact that they may have to start from zero. Real entrepreneurs start below zero.
2. Sell first, build next.
It is often believed that a product must be good or unique enough for a business to exist. The truth is, what entrepreneurs poor blood, sweat and tears in to build to perfection today, is often mediocre when evaluated a few months later. The idea of building a perfect version of the product or service before offering it for purchase is flawed.
By combining the lean principles shared above with presales, founders can significantly minimize business risk since they will build in response to demand, with higher certainty. While the product may later fail to meet buyer expectations, its value can be validated quickly with financial commitments.
Researchers and consultants Homayoun Hatami, Candace Lun Plotkin and Saurabh Mishra found that companies that presell their products achieve above average customer acquisition and retention rates of 40-50 percent and 80-90 percent, respectively.
No matter the product, several marketing campaigns can help you execute a presale strategy. However, since you are selling a promise, prospects will be investing in you, therefore, personally meeting your ideal buyers, showing your passion and seriousness in addition to samples or a prototype is how you will be most effective in preselling your idea. Paul Graham, investor and co-founder of Y-Combinator once said, “it’s better to have 100 people that love you than a million people that just sort of like you.” Find your 100 big fans even if it takes meeting them one person at a time. Those fans will help you build a better version of your product, provide you with testimonials and 10X your reach as they invite others to buy from you.
Business funding has long been considered the only fuel of business initiation and growth. Not anymore. Nowadays, serious entrepreneurs can start small businesses and startups by focusing on getting their customers’ job done or problems solved by leveraging existing resources, preselling the idea and delivering value through non-scalable approaches.