My mission this year has been to encourage people to turn their passions into profit – I want people to pursue their dreams and prosper. If you are stuck in a dead-end job, then it’s time to look for something better. It’s time to fulfil your potential and live a bigger life. I’ve been asking my readers to think seriously about what they love and consider how they could build a business around that. Today I want to look more closely at business models, particularly a new type of business that is known as the startup. Could you run a startup business?
What is a Start-up?
According to Wikipedia a startup company is an entrepreneurial venture which is typically a newly emerged fast-growing business that aims to meet a marketplace need by developing a viable business model around an innovative product, service or platform. From this definition, it’s hard to understand how a startup differs from a conventional small business. Often startup companies are described as businesses that use ‘disruptive innovation’.
Disruptive innovation is a theory developed by Harvard business professor Clayton Christensen. Disruptive innovation is when an entrepreneur creates a new market or network that disrupts an existing market. For example the founders of Netflix used disruptive innovation – they offered people the chance to receive new release movies over the internet and ‘disrupted’ the existing video/DVD rental market. Annabelle Smith, the founder of Social Playground (an online photography business), described startups as a business that “is disrupting an industry and looking to develop a scaleable business model to grow quickly”. Some people say Uber is a startup business because it disrupted the taxi industry and used mobile phones to link drivers with passengers at a charge.
How Start-ups Grow
Startups are different from small businesses because they grow rapidly. They sell to large, often global markets whereas traditional businesses do not. Small businesses usually only service their local community. This is the reason why most startup companies are internet-based. Online companies are not bound by time or geography. People can jump online and buy your service or product day or night from anywhere in the world. It doesn’t matter if your customers are in England or India. According the US small business association, startups have high growth potential because they can access the world market. Co-founder of Y Combinator (an American startup financer), Paul Graham, said startups grow at a rate of 5 to 7% a week in the beginning.
Financing your Start-up
That brings up another key difference between startups and conventional small business – how they are financed. A small business owner usually raises his or her own capital and goes to a bank for a loan. But the operators of startup companies look for venture capital backers – companies or private individuals who are prepared to finance their enterprise. These backers usually then want some say about how the startup company is run, whereas small business operators are autonomous.
Startup company operators also have to come up with a buyback plan, so that one day they will be able to buy out the venture capitalist. Venture capitalists are usually looking for a quick return on their capital and to eventually exit the business. Unfortunately venture capitalists are a bit thin on the ground in Australia. The Financial Review did a great story on venture capitalists back in March. It reported:
“Australia's top start-up investors say the $450 million in ‘dry powder’ venture capital funds are sitting on too low compared to the United States and other developed countries…. Australian venture capital firms raised a record $568 million from superannuation funds and other institutions last year, according to the Australian Private Equity and Venture Capital Association. That included the establishment of the single biggest fund by an Australian venture firm to date, when Daniel Petre's AirTree Ventures, raised $250 million.”
The Questions You Need to Answer
Do you think a startup business would be right for you? The first question you need to ask yourself is: are you going to sell to an online market or a local market? Are you planning on running a large scale enterprise or mainly trading in your locality? If you have a product or service you can distribute to the world then a startup business would be the right model for you.
The next question is: are you prepared to work very hard and embrace change and new technology? David Jackson from the investor group Sydney Angels said startups are usually the creation of two people, one who is the tech expert, and the other has a background in sales and marketing. Do you know enough about the internet to run an internet-based business? Alternatively, do you know a good web-designer and a competent IT expert? If you are a creative go-getter with a new and clever product then a startup business will be perfect for you.
Have a Mentor
In the past I have written about the advantages of having a mentor, well, a venture capitalist who is prepared to invest in your business is just a mentor with cash! If you find a venture capitalist, who can back your enterprise, then you are going to get input and guidance from that expert. If you have never run a business before, you will find this very helpful. Your mentor should be able to help you grow your business quickly.
Everyone is raving about startup businesses, but they are not the be-all-and-end-all! Everyday conventional small businesses are starting in Australia and many do very well. I’m talking about traditional cafes and clothing stories. If your passion is to open a more traditional business, do feel compelled to begin a startup business. It may not be for you and, after all, my message to you is to follow your passion, not someone else’s!