Debunking the “Are you building a Startup or a Small business” Legend
This is the first installation in a series we shall call “Debunking Startup Legends”
This is legend.
A lot of people in venture capital have preached the Lamentations of founders building startups when in fact they are building small businesses. They’ve preached this from the pulpits of fireside chats and pavements of Tik Tok videos.
I used to be one of them. Back when I thought I was very smart and a subject matter expert. Now, I have come to know that there are way too many unknown unknowns — how could I ever possibly be a subject matter expert? So, no, I’m not very smart at all.
This might be closer to the truth.
It really doesn’t matter if you’re building a small business or a startup, this is like asking if a chicken for sale at the supermarket was free range reared or pumped full with steroids in a laboratory. A chicken is a chicken, farm grown or lab grown.
Fun fact: In South Africa, the “organic chicken” is famously called “run away chicken”
What truly matters is that you are building a business that exists to solve real problems faced by real people with real purchasing power to pay you and keep paying you well and long enough to perpetuate the existence of your business. This should be the first principle of every company just as the first principle of a chicken is to lay an egg to perpetuate it’s existence and continuation of its species.
Sadly, too many companies are founded on the first principle of “Can this raise venture capital successfully?”
This is utter rubbish and unfortunately an endless supply of water soaked bricks currently being used to lay the very foundation of our African tech ecosystem. We’re all sitting on a brick wall waiting for a great fall with no Kings men around to put us back together — all the kings men have boarded the AI Event Horizon with SamA casting as Dr William Weir heading to a terrible singularity — but I digress.
Where was I? Ah yes, this is utter rubbish. All noise.
This might be more satire than truth
So what exactly is a startup? A startup is a carefully designed finance construct purposed to facilitate the eventful harvest of alpha returns for investors first and foremost then maybe founders if the exit price was big enough. A startup is a VC construct by design and not truly entrepreneurial.
Entrepreneurship is organic, startup-ing isn’t. Entrepreneurship, like all things under the sun, obeys the natural law of organic growth. Slow and steady. A startup is synthetic, designed to have hyper growth within a short time frame so as to satisfy investor performance benchmarks such as IRR, TVPI and DPI.
So what exactly is my point? I believe the starting point of any business should be the first principle of solving customer problems. Businesses should be treated like people: they are borne like babies and grow until they die. Like people, they can die prematurely, or live to old age. Just as people give birth to other people so as to perpetuate their lineage, so can businesses innovate new ideas/products so they can perpetuate their existence. Toyota, the automobile company started as a weaving company in 1918 by inventing the world’s first automatic loom (Loom is an apparatus for making fabric by yielding fabric or yarn. No, not the screen recording startup you that crossed your mind)
The above rant is my first point, I have a second point too. It is the point where a founder reaches a cross road of two choices. You can choose to grow this business organically over time by single digit rates of compounding year on year. OR you can also choose to pump your business with steroids so you can accelerate your growth rate to double or triple digit rate of compounding, steroids in this case being VC money, the six digit kind of money that has been flying all over the place for the past decade now. Some cash is bound to land, all sticky and messy, on unlikely places as we have seen lately in companies imploding across the continent. But I digress again. Please bear with me, my mind, sometimes, can be in a constant state of superposition as multiple thoughts race through me in tandem in a weird battle not unlike an Alan Becker animation.
One of the parallel thoughts racing through my mind is my third point. It is the point of convergence between organic growth and hyper growth: that rare moment when planetary bodies align in a temporary ensemble to actuate newtons of gravity bottoming over like masterful fingers strumming the strings of our earths polarity in a beautiful legato and to the rising tide of oceanic applause. It is that rare moment where VC cash becomes a catalyst rather than an accelerant: accelerants oxidise and is it any wonder that a key metric that police VC founder relationships is burn rate? Catalysts, on the other hand, stimulate pre-existing propositions for growth and yes, even speed.
Beyond the telescopic view of this third point, VC money can be a force for good and the startup construct can become a collaborative vehicle that can transform a regular business into a cosmic fshaping celestial with both VC and Founder as co-pilots. I believe that this galaxy of opportunities needs to be explored more and not merely observed from our current milky way of obscured ideas.
A call to action
I think, connecting these three points of reasoning together, equilaterally, can provide a sturdy solid plane for debating a different premise for growing and investing in companies in a sustainable manner. Oxidising the steel wills of founders with legends and ill-fitting constructs will only erode this nascent bridge we are desperately trying to build for an African future. We are less than a decade in but already headed the same path that our western neighbours are turning away from.
Something that sounds like a legal disclaimer.
This article, up until this paragraph, was written by me. No ghost writer, no AI. In the addendum below, I used AI to define some terms because as we have already established in the beginning part of this discourse, I am not very smart and these are very smart things as VC’s are super smart people. All grammatical and typograpjhical errors were intentional to prove that there is still beauty in the fallibleness of human efforts. My feeble attempt to delay Sky-net’s judgement day.
This article was written on Lazy, my official note taking app. It comes with embedded AI and other really cool trinkets. You should check them out.
Addendum
I mentioned in the article some VC metrics such as, IRR, TVPI, DPI and burn rate. I asked my instance of ChatGPT, “Chewie” to define them and he came up with this below: (I call my GPT “Chewie”. Yes, the force obviously is strong with me but the age of Jedi’s have sadly come to an end)
IRR, TVPI, and DPI are common investment performance measures used in private equity and venture capital:
- IRR (Internal Rate of Return): This is the annualized effective compounded return rate which can be earned on the invested capital. IRR represents the percentage rate earned on each dollar invested for each period it is invested. It’s often used in capital budgeting to measure and compare the profitability of investments.
- TVPI (Total Value to Paid-In): Also known as the investment multiple or total value multiple, TVPI is the ratio of the total value of the investment to the total amount of capital paid in. It combines realized returns (distributions) and unrealized returns (residual value) and signals the total value created by the investment.
- DPI (Distributed to Paid-In): This ratio measures the portion of the returned capital against the paid-in capital. It signifies the cash distributions received by the investors from the fund relative to the capital contributed by them. Generally, DPI is used to understand how much cash has been returned to investors from their investments.
These metrics help investors evaluate the performance of their investments, balancing both the returns generated over time and the amount of capital that has been returned to them.
Chewie is smarter than I am and obviously prefers American english to my British english. Sometimes, maybe a little too smart so I asked him to explain it to me like I’m 5.
Sure! Imagine you have a piggy bank where you put some of your allowance money every week. You want to know if your piggy bank is a good place for your money, so you use a few ways to check:
IRR (Internal Rate of Return): This is like figuring out how fast your money grows in the piggy bank. If you put in one dollar and it grows to two dollars, that growth rate is what IRR would tell you. It’s like seeing how big your plant has grown from the tiny seed you planted.
TVPI (Total Value to Paid-In): Now, let’s say you sometimes take out some money to spend, but you also have some left in the piggy bank. TVPI is like adding up all the money you’ve taken out and the money still inside, and then seeing how many times bigger it is than the amount you first put in. If you started with $10 and now you have $15 worth in total, your TVPI would be like saying the piggy bank made your money 1.5 times bigger.
DPI (Distributed to Paid-In): Imagine that of the $15 worth, you’ve taken out $5 to spend on toys already. DPI is like looking at just that $5 and seeing how it compares to your original $10. It tells you how much of your piggy bank money is in your toy box instead of the bank.
So these are like three different ways to judge if putting money in your piggy bank is better than keeping it in your pocket!
Thanks Chewie, what is burn rate and please explain it like I’m 5
Imagine you have a piggy bank where you keep your allowance. If you spend some of your allowance money every week on toys and candies, the speed at which you’re using up your money is like your “burn rate.” So, if you get $5 a week, but spend $2 every week, your burn rate is $2 per week.
In a company, burn rate is how fast a company spends its money, especially when they are not making any profit yet. If a company is spending more money than it’s saving or earning, it has to be careful so it doesn’t run out of money too fast, just like you have to be careful not to spend all your allowance at once or you won’t have any left for later.
Thanks Chewie and thanks to you too, dear reader, for reading to the end.
