What are startups, how are they different than any other small business, and how do you build one?
I wondered this same thing a few years ago. I did not know what differentiated “startups” from regular small businesses. I was weary from litigating for a living and my first love was business and being creative.
I asked myself, “How do I start my own startup doing something I enjoy?” How do I create my own online business at home? The business news was filled with startup founders taking their companies public and having what seemingly looked like tons of fun (and getting rich in the process). How could I get in on this business fun?
If you ask ChatGPT for the definition of “start up,” (OpenAI is another startup), you will get an answer like this:
What is a Start up?
“A start up is a company or organization that is in the early stages of its development, typically characterized by its focus on creating and bringing innovative products or services to market. Startups are often founded by entrepreneurs or small groups of individuals with a vision for a new business concept or technology.
Key characteristics of startups include:
- Innovation: Startups are known for their innovative ideas and solutions, which may disrupt existing industries or create entirely new ones. They often aim to solve specific problems or meet unmet needs in the market.
- Growth Potential: Startups are usually focused on rapid growth and scaling their operations. They seek to capture a significant market share and expand their customer base.
- Limited Resources: Startups typically operate with limited financial resources and personnel, especially in the early stages. They often rely on funding from investors, such as venture capitalists, angel investors, or crowdfunding, to support their growth.
- Risk and Uncertainty: Startups face a high level of risk and uncertainty, as they operate in a competitive environment and may not have a proven business model. Many startups fail, but those that succeed can achieve substantial rewards.
- Entrepreneurial Culture: Startups often have a distinct culture characterized by flexibility, creativity, and a willingness to take risks. They encourage entrepreneurial thinking and a focus on innovation.
- Lean Operations: Startups often adopt a lean approach to operations, seeking to minimize costs while maximizing their ability to iterate on their products or services based on customer feedback.
- Agility: Startups are generally more agile and responsive to changing market conditions compared to larger, established companies. They can adapt quickly to new opportunities or challenges.
- Scalability: Successful startups aim to build business models that are scalable, meaning they can grow their operations efficiently without proportionally increasing costs.
The definition of a start up can vary, and different regions and industries may have their own criteria for what qualifies as a startup. Additionally, as startups evolve and mature, they may transition into more established companies as they solidify their market position and business model.”
But we aren’t really interested in what the robot overlords think, are we? What you probably want to know is whether your new business idea qualifies as a startup, and if so, how do you actually, uh, start it up.
Keep in mind that your business doesn’t have to “change the world” to qualify. It simply has to be able to scale efficiently at some point. Meaning, you could create amazing productivity software, or sell freeze dried candy, both of which could scale and qualify as startups.
The idea of founding my own company, my own startup, led me on a journey of reading everything I could about startups and their founders. I learned a lot. I met potential co-founders and worked on various projects. And I lost a lot of time and money in the process because none of those projects panned out. Whether they were not technically possible or because there was no product market fit, everything I worked on turned out to be a dud. During this process I basically learned what not to do.
I grew frustrated with the whole startup scene. It seemed like everyone else was successful at it but me. Even though most people don’t get accepted into accelerators, and most people don’t go off to become the next Elon Musk, I nevertheless felt singled out. I had applied to multiple accelerators and did not get into any of them, not even the little ones who offered less money than what I could personally invest. Rejected, I felt like giving up. So back to practicing law I went! Uggh!
Despite the frustration and false starts, all of my efforts did give me a framework of how to think about starting a business in today’s online, fast-paced economy. And how to not make the same mistakes twice. I was determined to never give up. To never surrender. (And I might as well add, By Grabthar’s hammer, what a savings!)
But I digress. I was determined to keep trying like Colonel Sanders until something — anything — worked.
So, what Startup basics do I need to know?
The startup process usually begins with asking yourself some essential questions, such as: How do you get a good business idea? What idea should you go with if you think you have several good ideas? When do you call it quits? How do you get money to build your idea? Do you need a partner, and if so, how do you find one? Again, Graham’s essays are excellent for helping you answer these critical questions.
But it is also essential to think about whether your business can or must be done online / digitally to the extent it can efficiently scale, even if it is later down the road. (Side note: Paul Graham says work on ideas that don’t scale, get happy customers, then figure out how to scale later).
As you know, most businesses are brick and mortar and exist online only to the extent that they have a website that lists their services, hours and location. But what we want to know is, how do we create a business that will scale? Which naturally brings us to this question:
Will your new startup business idea scale?
Paul Graham distinguishes a startup from say, a dry-cleaning business, by its ability to scale. He would know as he is basically one of the founding fathers of the startup movement, having founded startups himself, most notably, Y-Combinator, the mother of all startups.
The ability to scale is what can take you from a solopreneur to a publicly traded company. So it’s worth looking into in your small business journey. It’s ok to start very small, even just a few paying users. But you will need to grow to be able to pay yourself and build a real business.
Are you wanting to start a small business or a small business online?
If you open a law office or a dry cleaning business, you will need at least one physical location and operating capital. While your website may attract some clients and customers, it probably won’t be the mechanism by which you deliver your product or service to your client or customer. In other words, you won’t be building a tech business even if your business utilizes some tech to operate.
In such a business, you may at some point consider your ability to grow and scale. You would consider whether it’s possible to grow, and whether you want to go through the trouble of doing it.
For example, I started a small law firm a few years ago. You soon realize there’s only so much work you can do in a day, and only so much time (and money) you can spend marketing and looking for new clients. And as far as the legal market goes, competition is insanely fierce! That intense competition means that lawyer advertising costs are astronomically high.
Your honor, I request a recess from these high advertising costs.
So what does it mean to scale? It’s really quite simple — expanding or scaling your customers and sales outward with as little inputs as possible. What are inputs? Labor and capital, basically.
Scaling your startup online is easier.
Digital products and software make scaling easy because of the almost non-existent marginal cost of adding one more user to the website or software. That’s why so many people with little or no money (like college and grad students) are working furiously to build software companies.
Scaling your startup offline is harder.
Scaling in the real, physical world is harder because real assets (buildings, trucks, inventory and your very talented employees) are expensive. It’s hard to scale a law firm because you have to hire a new lawyer (expensive!) for every X number of clients. Not so with software or sodas.
How do you get started building your startup?
Regardless of the type of business you want to build, I highly recommend reading Paul Graham’s essays on startups.
Graham’s essays will help you in your process of finding out what you’re good at and what you naturally want to work on. For example, I like talking about business and politics and really enjoy playing guitar. I also enjoy working on websites and doing “talking heads” videos. Basically, I like to create stuff rather than sue people. But my strongest aptitudes are not in songwriting or graphic design. Rather, I am much better at complex problem solving, legal and financial analysis, customer and client relations, negotiating, sales and business operations.
So the trick is to find the intersection of where your skills meet with what you naturally enjoy doing. Hartley Peavey wanted to be a rock and roll guitar player, but he wasn’t a guitar wizard. He was a wizard, however, at electronics, and a natural at business, and went on to build the music equipment giant Peavey Electronics from scratch. He says to do what you’re really good at and you will be successful.
After you decide which idea to work on, what are the next steps?
You don’t need an MBA or even a college degree in business if the business you want to run doesn’t require it. What you do need most of all is focus and perseverance.
One of the mistakes I made (several times, embarrassingly enough) was to form multi-member Delaware corporations right off the bat before my co-founders and I even had any product, software or even a website. For that matter, we weren’t really focused on a single idea as they kept evolving through the iteration process.
Corporations cost money to form, and there is also a lot of paperwork. And, if you don’t do any business, you still have to file an “informational return” with the IRS and possibly with your state. I had to pay my CPA several hundred dollars to file $0 information tax returns to close out the corporations when our startup ideas fizzled out. Sad!
Do you need a co-founder or business partner to help you build your startup?
According to Paul Graham, if you are building any kind of technical startup, the answer is almost universally, yes. For one thing, you will need technical people on your team to actually build out the concept into reality. Take it from me, you cannot subcontract this part out. I realize that legend has it there are some successful startups where the founder hired freelance programmers to code the idea into existence, but I can assure you, that is not the norm.
If you look at the most successful startups, such as the ones that matriculated through YC, you’ll notice a familiar pattern — most of the co-founders went to college or grad school together (many of which are Ivy League, but that’s another essay). You want to know your co-founder well, what they’re good at, what they’re not good at. But most importantly, what kind of person are they? Will they stab you in the back when things get rough? Ask me how I learned to ask that question…
If you do work with a partner / co-founder, you WILL need some sort of written agreement between the co-founders to establish ownership, percentages, duties and all of that boring yet essential stuff. Y-Combinator has simple co-founder forms that I’ve used before, and as a lawyer, I can recommend them to at least put your co-founder terms in writing. The folks at YC are some of the smartest people on earth, so you can trust pretty much whatever they put out.
How to choose the right co-founder / business partner.
This issue is perhaps the most important one in the entire equation, and is one that I am particularly sensitive to. And so it warrants going into a deeper dive. TLDR: Choose wisely.
You have chosen poorly, is what the wise old knight would have said to me.
I seem to have a preternatural knack for choosing terrible business partners. It’s one of my superpowers. I have been burned by several of them in the past, each one stabbing me in the back and costing me lots of money. Like multi-year salary level money. In one law partner I saw warning signs along the way but ignored them. The other partner betrayed us so stealthily I never saw it coming — she had a grin on her face the whole time she was double dealing behind our backs.
I should have put certain things in writing which I failed to do. I should have had a firmer hand, been more like the enforcer, or the equalizer, or some other 80s TV show hero. I should have withdrawn from the partnership when I saw the warning signs. But I didn’t do any of that. I was basically a doormat that said “Welcome — Now Please Cheat Me Out of All My Clients and Money.”
I consider myself to be a fairly skeptical person. But for some reason, maybe because I want people to like me, I overlook obvious red flags in people that I have chosen to work with. I also, naively, believed in the “goodness” of people. Surely this person won’t do that! Surely my clients will see that my partner is behaving badly and won’t give them their business.
Well friends, I was wrong about all of that. And I truly hate that life is that way. I do want to believe in the goodness of people, that people will honor their commitments and their fiduciary duties. But unfortunately, we live in a world where you have to “trust, but verify.” It’s kind of sad but you cannot take people at their word anymore without written agreements in place. I see all of that now and I hope to never make those same mistakes again.
And so I wanted to share with you those experiences so you won’t make the same mistakes I did.
What to look for in a co-founder / business partner.
My father and grandfather (both self-employed businessmen) once gave me some sage advice on how to choose your business partners. Each of them had multiple businesses and multiple business partners. They weren’t called “start ups” in those days, but the exact same lessons apply today. Technology does not change the fact that the people you want to do business with should be trustworthy, reliable and competent. Their advice went something like this:
- Don’t go into business with someone who isn’t smarter than you
2. Never go into business with someone who has less money than you
These are pretty basic rules and are fairly sound. But I would add that your co-founder also needs to be a person of honesty and integrity. If you don’t feel that the person conducts their affairs with honesty and integrity, especially in small matters, why would they do so in big matters? “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much.”
There is an important lesson there in selecting your co-founder / business partner. You should ask yourself questions, like: Do they have a history of flaking out? What is their reputation in the community or with your peers?
I hate being the “bad cop,” but you really need to make sure the people you partner with are good people. Look for people you can trust with your money, with your customers and with your friendship. Sadly, integrity seems to be rare these days and is as valuable as fine gold. This doesn’t mean all potential co-founders are trouble, it’s just friendly advice to help you avoid being in a tough spot down the road.
We will go into the next steps in your Startup journey in the next article. But for now, to conclude, here are the key takeaways:
- Read Paul Grahams free essays on startups and business.
- Figure out where the intersection is between your best talents/skills and what you would enjoy working on all the time.
- When choosing a co-founder or business partner, be sure to take the time to choose wisely.