The shift from 'startup' to 'small business' mentality is real and necessary.
Does the word "startup" make you cringe?
A colleague of mine admitted to me that he has this reaction when we talked last week over coffee at a grungy little spot that wasn't the Starbucks at the epicenter of our area's startup ecosystem. We go there when we want to talk about what's really going on.
He and I together have more than 40 years' time served in the high-tech, high-growth startup game. And while I'm not yet at the point where the word "startup" gives me reflux, I can see where he's coming from and I don't blame him.
Because I used to feel the same way about the term "small business."
But holy smoke, how things have flipped. "Startup" is a dirty word these days. And for good reason. It's not because all of a sudden small businesses are the ones that make money for everyone involved. It's because when we're talking about growth, "small business" is now the antithesis to "startup" and the better option, instead of the other way around.
Look, I'm not suggesting we all open fabric stores or macaron stands, but here's why the shift from startup thinking to small-business thinking is necessary. For everyone.
Your Startup Isn't Really a Startup
That's the title of an article I wrote a little over a year ago, talking about my own history of being repeatedly told that my robust, profitable, and long-running companies weren't really "startups" -- at least not the kind that should be considered for investment dollars and prime spots at events that would help generate the windfall of customers that would allow more people to make more money off my idea.
But whatever. My point is, I had to fight the "small business" label for 20 years.
See, it used to be you had a "startup" or you had a "small business." The "startup" was sometimes high-tech, almost always high-growth, and often depended on an influx of outside investment to cover the initial capital outlay, which always mandated a dedicated program of "startup mechanics."
Hoo boy. That term makes me cringe.
These startup mechanics are a lot like your everyday new business mechanics. They include the normal new business stuff I love, like product-market fit, traction, and flywheel mechanics, but also tacked on an unwanted mandate for lower-than-competitive operating costs, first-mover market penetration over market monetizability, and, of course, the short-term milestones and gates required to hop to the next, riskier, investment round, with a requirement to raise ever larger sums of money at ever-higher valuations.
Sorry for the long sentence, but I guarantee you it's spot on and as short as I can make it. I swear, no one talks about this stuff because they don't have that sentence in them.
Now, startup mechanics are really kinda the same as small-business mechanics, if we're talking about what it takes for the business to grow and succeed. The difference is that the small business has to survive without raise-rinse-repeat venture cycles, which means the small business isn't subjected to those stupid startup mandates.
But these days, it's becoming evident that startup mechanics don't always work. Or to be more clear, they don't work way more often than they do work. And further, when a high-growth startup is indeed successful, it's usually in spite of those mechanics... which we all know now are just there to make the early investors successful.
Startup Mechanics Don't Work Without Cheap Money
When you've had cheap money for as long as we've had it and then you take it away, everyone thinks up is down and the world is coming to an end. But the real issue is a lot more grounded than that.
Let me be as clear as I can here, because this should be obvious. The ROI on startup mechanics had poor odds when money was cheap, but it was enough to convince entire organizational workforces to commit to those mechanics in hopes of a windfall payday.
Now that money isn't cheap, a lot of investors, private equity firms, and corporate boardrooms have naturally mandated cuts and policies that reel spending in. Those cuts and policies rarely put the pinch on shareholders, firms, and investors.
Wait. Not "rarely," but "never."
Guess who gets the shaft?
Yeah, and it plays out in two ways.
First, the talent gets tired of the treadmill and reaches their breaking point when it's "suggested" again and again that they work longer hours in worse conditions for lower benefit.
Second, the "going to the mattresses," winner-take-all mentality that results from the incredibly misguided notion of cutting to achieve growth produces a hell-bent drive for market share, revenue, and margin at all (remaining) costs. This ends up screwing over partners, vendors, and, most importantly and in the most clandestine manner, customers.
It. Is. A. Recipe. For. Failure.
The Expectations Have Become Unrealistic
When this happens, the people in control of the purse strings demand profitability but aren't patient.
Imagine, if you will, that you're on an NBA team and ownership walks into the locker room and says, "Hey everybody. Due to the choppy economic conditions, we're going to need to start winning every game. No losses. We need to win every time out. I know that's a lot of pressure, but we can do it. Oh, by the way, we just cut the starting five, and if we lose to the Celtics tonight, two more of you are cut.
"Now go out there and give it your best shot."
OK. When their only plan is the misguided cut-to-grow plan, they may be saving some short-term dollars, but time becomes that much more expensive. When they realize this, and they realize it's going to take that much longer -- at more expense -- for those cuts to produce profits, and they panic, it's too late, the downward spiral has already begun and there's no turning back.
No One Wants to Starve to Prove They Work Hard
This one really irritates me, so excuse my tone.
I've got decades of hard work in my rearview. I've got a publishable, quantifiable track record. I've done zero to one, one to sixty, and sixty to rocket ship.
Why do I need to make less money to prove that I'm hungry?
Won't that just make me chase the wrong short-term outcomes at the expense of the richer long-term gains?
Who came up with this?
Let me guess.
For whatever reason, but mostly because it's long been that way because of bad choices that were made decades ago, startup mechanics require that all the investor money go into "the business," somehow suggesting that the stability of the founders isn't a requirement for the risk appetite required to achieve long term growth.
Shh. Venture Capital Is Tapped Out
The story I'm hearing more and more these days is that VC is broke. Keep in mind, this is mostly anecdotal and some data may say otherwise, but here's what I'm hearing are the reasons for this, and dammit, they make sense.
One. They had too many losses. Any gambler will tell you that a strategy of counting on one win for every 10 bets sometimes results in going zero for 30 or 40 and counting on hitting three or four wins in a row after the losing streak. A lot of bad bets got made before the pandemic, and the lockdowns screwed up that gambling cycle and exacerbated the timelines on those losses.
Two. A lot of them quietly or loudly got into crypto. I'll just leave that there. I don't want to pile on.
Three. They lost the pulse of the cutting edge, so all of them are herding into AI, which is great tech but not great enough to support the massive weight of investment going into it. A lot of those investors are going to get burned by the first movers. And as the first wave -- OpenAI, Anthropic, etc. -- starts closing in on hectocorn valuations, the herd is now potentially staring into an abyss.
The Cutting Edge Is No Longer App Tech
For a while now, I've been saying the reign of SaaS is over. And now I think those innovative founders that would have spurned the next one-in-10 wave are avoiding VC altogether.
They're gathering in the untrendy coffee spots, in Zoom calls over thousands of miles away, using perfectly good tech that is years old, and leaning into new tech like AI only when it makes sense.
They're doing hardware, physical products, process optimization, services -- things that you'd normally call "small business" -- but they're doing it with a startup mentality that doesn't require the mandates that come with "startup mechanics." They're run and grown more like small businesses.
In fact, let's call them "high-tech, high-growth small businesses."
This article was written by Joe Procopio for Inc.com
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