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Differences between a small business and a startup

Start-ups are sexy

Start-up businesses are exciting. They are chaotic. They are risky. They are responsible for much of the innovation in our social and professional lives. They provide an opportunity for substantial financial gain. Let’s face it – start-ups are sexy.

Many people call themselves “entrepreneurs” and/or state on their resume that they are starting a business or have started several businesses. In my opinion, too many people do. There should be a threshold that has to be met so we know the genuine article when it comes along. There is nothing wrong with other professions, small businesses or independent business owners/contractors. All are equally valid and worthy of great respect. A “start-up” is something different though – it should mean something different.

There is no official definition, but with over nearly two decades of work in and around these companies, I have come up with a threshold to identify “start-ups” versus other small businesses and endeavors. I believe that true start-ups should meet the following 4 criteria:

Criteria number one

Must have a formal business plan and financial projections.

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Start-ups should have a clear mission statement, a plan for accomplishing that mission and a financial plan to enable it.

Criteria number two

Must have a strategic plan to grow the assets of the business.

Start-ups need strategic and tactical plans to add resources, evolve, and grow the business so that revenue grows, but also so that the value of the business grows too. You want to build a valuable asset – be it a proven revenue stream, intellectual property, or a loyal membership base.

Criteria number three

Must have a regular formal financial reporting process.

Start-ups should have monthly or quarterly financial reporting. It is important to establish discipline from the beginning, so that as the business grows bigger and more complicated, it is in place to meet your demands.

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Criteria number four

Must have an exit plan for owners/investors.

Perhaps the biggest difference between a start-up and a general small business is an exit plan. Entrepreneurs should provide a path to an exit (and profit) for ownership – even if the entrepreneur is the majority (or sole) owner. This exit can be through cash flow, acquisition or initial public offering (IPO).

Categorizing your business

There are certainly exceptions to this arbitrary four-criteria threshold, in both directions, but it is a good basis for identifying true start-up opportunities. I want to stress that meeting or not meeting this threshold doesn’t have anything to do with whether a company is strong, or if it will succeed. I am only trying to identify the correct category for your businesses. Any and all can be great – and any and all face difficult challenges that must be overcome to beat the odds and succeed.

This is the first column in a regular series about the start up world. With extensive experience starting, growing and/or selling a half-dozen companies, and as an angel investor and advisor to a half-dozen more, I hope that some of my insights are interesting and helpful. AG Beat and I hope to help nurture innovative and industry changing companies and entrepreneurs, and hope that this can be a forum for discovery, questions, feedback and eventually financing and more. Please let me know if you have any questions or specific topics you would like covered, and stay tuned for more!

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Written By

Hoyt David Morgan is an entrepreneur, angel investor and business strategy leader. He is an investor and/or adviser to a handful of exciting and high growth companies, and has been a part of several high-value exits. He is passionate about customer experience, smart business and helping innovative companies grow... and sailing.

30 Comments

30 Comments

  1. David Friedman

    January 7, 2012 at 2:20 pm

    Some great points! I'd be curious to hear more about how you integrate these concepts with philosophies like the Lean Startup which advocate not having a formal plan, but rather, continuous cycles of validated learning that eventually get you on the right path.

    • Hoyt David Morgan

      January 11, 2012 at 9:17 am

      Hi David. Thank you for the question. I believe these ideas (and criteria) mesh well with the Lean Startup philosophy. A company can formalize a methodology for change and learning, allowing it to continuously evolve but also to ensure a "grown up" structure that most investors, employees an customers will respond well too. This formal methodology can replace the strategic plan in the right circumstances.

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