Anyone who works in software (especially in mobile apps) will constantly hear, “Oh! I have an idea for an app/website! You build it and we’ll split the profits 50/50!”
Firstly, ignoring the fact that most people think simply coming up with an idea merits them at least 50% of a company, the following idea is usually quite terrible. I am always polite and hear them out, then lightly explain to them the flaws in their startup idea. Often times the flaws I have to explain to them are outrageous, like: “That’s already been done” or, “That’s not even possible with current technology.” The seemingly good ideas that filter through the first few questions may be viable as small businesses, but often all have the same issue.
Is my idea scalable?
The greatest differentiator between a small business and a startup is that of its ability to scale. A small business may perform a service or sell a good identical to a startup, but if it cannot be done at scale with high efficiency, it will forever be a small business.
Let’s look at an example like Smile Direct Club. As of their last funding round in 2018, SDC is worth $3.2B. In comparison, the typical orthodontist practice is only worth about 50% of its annual gross income, usually between $600k to $1M. Both businesses perform the same services (more or less), so how did SDC come to be worth so much more? The answer is scalability.
Undoubtedly, the founder of SDC saw an opportunity with corrective orthodontics. He saw that thousands of orthodontics practices all around the country were growing in success as the demand for braces and clear aligners grew. At some point, he wondered how he could make the orthodontic practice business model better, eventually identifying it was through scale.
His pitch probably sounded something like this:
“A single orthodontist can only handle so many patients at a time. By requiring scheduled appointments and one-on-one time with patients, an orthodontist’s time is limited. What if we could eliminate the need for orthodontists interacting with patients altogether? What if we could eliminate the need for offices and practices altogether? What if we could put the entire orthodontist experience online?”
SDC did exactly that. They eliminated all of the barriers preventing corrective orthodontics from being scalable. They decided to mail out kits for patients to take their own dental impressions, they use cheap customer service reps to talk to patients and reserve the orthodontists only to evaluate and determine proper treatments on the back end.
This is what differentiates a small business from a startup. When you are coming up with your next “million-dollar idea”, your idea/business model needs to be easily repeatable, efficient and cost-effective. Why build a website when you could build a website that builds websites? Why start a bike rental stand when you could build a system that rents bike at scale?
The very essence of a startup is that of building a company that will someday be massive. For a company to grow to be massive, it needs to be able to scale it’s business model. If your idea requires significant effort for each customer and cannot be simplified or automated, you will struggle to scale and will therefore struggle to succeed as a startup.
So what now?
If your goal is to found and grow a startup, you must meet this rule of scale. But if your plan isn’t necessarily that of a startup, you very well may find success in small business! However, usually when these people come to me with their ideas, they aren’t thinking of opening a store in a strip mall in their local town… They’re thinking of building an empire and a brand everyone has heard of. Unfortunately, this is in modern times, most often accomplished through that of a startup, again requiring the ability to scale.