I saw this great post by Steve Blank: Make No Little Plans – Defining the Scalable Startup the other day and tweeted out a quote that I thought was very important to me:
A lot of entrepreneurs think that their startup is the next big thing when in reality they’re just building a small business.
His post talks about the fact that many entrepreneurs that create web businesses want to be big, but in fact only create something that is small. There is nothing wrong with this; the world needs lots of small businesses, and even those on the internet. The post also offers some hints and tips as to how to create something that grows large.
When I tweeted, the tweet also showed up on my newsfeed where some of my Facebook friends commented. I thought that the comments there were a nice addition to my previous post, The Rise of Small Business on the Net, and thought I’d post them here:
Me: “A lot of entrepreneurs think their startup is next big thing when in reality they’re just building a small business.” http://ds.ly/8PXB19
Friend 1: Depends what you call small. A lot of room between a hardware store and Google. 🙂
Me: a small biz is one that makes a decent amount of revenue for its employees and is a nice sustainable business, but not much more than that. there is not hyper growth but just nice, recurring revenue. there can be a big spread of revenue that could qualify for this, like from a few 100Ks to even low millions.
The issue is that it is unfortunately a dangerous place for angel investors to be, because the biz is too small to be acquired at a large multiple of its value, or even to be noticed by the big guys. We can’t easily get our return on investment from companies like these.
However, that is not to say that these biz shouldn’t exist. I think it’s a healthy evolution from the storefronts we see on our streets to the virtual storefronts of the internet. not all biz need to go IPO or make a billion bucks from an acquisition for them to have a reason to exist.
Friend 2: Do angels build in other means of acheiving ROI? For instance share of revenue+ebitda over time after a certain agreed to time horizon?
Me: not traditionally, but i have been thinking about applying something like this to startup investing. it’s almost like investing in a restaurant or some other kind of cash business.
however, another problem exists where the entrepreneur is batting for the moon and of course they always think their idea will be the next google, even when we can see … See Morethat it will only grow so big. thus, they are unwilling to accept terms that are not the usual startup investing type terms for investing.
i do think about this every day though, and hope that a solution does present itself. or we just suck it up and try to only pick the ones we think have the best chance for being google-like, or near-google-like, and we just write off the others that we can’t get our money out of, even if they are nice small businesses.
Friend 3: For some reason I think there must be a sweet spot for investors that focus on smaller tech businesses or even projects. I’m thinking about investments in tech analogous to those made by restaurateurs, real estate developers, etc. Where capital requirements are low and return is performance based not exit based.
Me: I call this the Rise of Small Business on the Net http://ds.ly/7X5JM5 and think that there is something here, but just not quite clear yet. in the old days, banks would be the lenders to such businesses, but banks are way too conservative to invest in internet businesses, and with the economy the way it is, they are even less so.
While Steve’s post (and many others) focus on encouraging the entrepreneur to think bigger (even I ask about the world domination plan and more on why), I have not heard much about the plight of investors who end up involved in a startup which becomes more like a small business than the scalable, world dominating startup we all would love to find. Steve does mention those who are OK with flipping startups, but some are simply too small to even flip.
I’d love to hear more about this from others who are thinking about this.