New Business or Startup? It Matters

I’ve been the “Grumpy Get Off My Lawn!” about this over the years and tend to just roll with the people who are adamant that words are interchangeable, feeling that it’s not worth pushing when people want to say one thing can mean another.

Of what have I been grumpy? Words matter.

  • An investor in a startup isn’t necessarily an Angel Investor
  • A VC isn’t an individual investing, it’s someone who runs a fund
  • And while a startup is new and hoping to become a business, a new business isn’t a startup

A Startup is Not a New Business, and a New Business isn’t a Startup

I’m cranky because this dilution of words misleads would-be entrepreneurs as people attempting startups get poor advice from business advisors and investors, while people starting businesses get misdirected by advice about startups.

I was asked today, just today, over the course of 4 separate meetings, “How much revenue do investors expect to see in a startup before they’ll invest?”

And that was just today

And thus, a great example of my grumpy attitude about this. Genuine “startup” pitches wouldn’t have many startup investors asking about revenue to such a degree.

I put startups in quotes because I find that people expecting revenue are actually working with businesses while people who work with startups, at this early stage, know too well that revenue is a red herring. A distinction between “new business” and “startup.”

Startups are temporary ventures in search of a business model. They are NOT “new businesses,” because we have to in some way distinguish what the thing is that isn’t yet a business. We call that a startup. We don’t KNOW yet who the customers are, how we’ll make money, or what that revenue potential might be.

VCs (and Angels who invest in startups) know this.

Asking me, as the founder of, say, Twitter or Google, how much money we’re going to make, and how, is an inappropriate and, frankly, ignorant question.

Hopefully, it’s obvious why… things like Twitter and Google could not know yet how they’d make money, they were inventing their model. They didn’t make money for years.

They were not “new businesses,” they were startups.

New businesses can (and should) KNOW how they’ll make money, and thus could work out to some extent how much they might make. How?? Because while new, they’re doing something other businesses have already figured out. One of those new ventures, the first one successful, *was* a startup, until they figured out how it works, they then became a business; and subsequent similar ventures are new businesses, not startups.

Uber and Lyft were startups. If you were to launch a ride-sharing app today doing that, it wouldn’t accurately be called a startup because it’s valid that we all expect you know how to make money, and how much you could make.

Why then are “Investors” asking so much about revenue in your venture?

If your reference to “startup” actually means startup, then appropriate investors would not be fixated on revenue.

Then again, were that the case, you shouldn’t get such questions because investors genuine to startups, wouldn’t be asking you.

This means one of two things:

  1. What you have is not really a startup, and thus you should know the revenues
  2. Or they’re pretty bad investors and they’re misleading you, implying they do invest in startups when clearly, they don’t.

If your startup is actually a “new business” then it’s valid they’re asking for revenue and revenue potential. Businesses and business investors make money and reasonably expect to invest with that measurable return in mind.

Startup investors seek 3 things:

  1. Exit potential
  2. Market (competition, trends, history, partners, and opportunity)
  3. Team capable and flexible

Notice what’s not there: customers and revenue. Because in a startup, customers and revenue can’t yet be certain, having some customers and revenue is nothing more than a signal, among many, that the startup *might* be on a right path. It’s just as likely (more so in fact) that those customers and that revenue will mislead a bit, or that competition will still put you out of business; hence startups aren’t fixated on revenue (and investors shouldn’t be).

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Paul O'Brien

Paul O'Brien

CEO of MediaTech Ventures, CMO to #VC, #Startup Advisor. I get you funded. Father, marketer, author, #Austin. @seobrien & @AccelerateTexas. https://seobrien.com