Small businesses are coming back – and it’s finally time

Do you feel a sense of disgust when you hear the word “startup”?

My colleague admitted to having this reaction last week when we spoke over coffee in a dingy little non-Starbucks establishment in the heart of the region’s startup ecosystem: We go there when we want to discuss what’s really going on.

He and I have over 40 years of combined experience in the high-tech, fast-growth startup world, and while I’m not yet at the stage where I get reflux when I hear the word “startup,” I understand his feelings and don’t blame him.

Because I had the same feelings about the term “small and medium-sized enterprises.”

But lo and behold, things have changed. “Startup” is a dirty word these days. And for good reason. And not because small businesses suddenly became beneficial for everyone involved. It’s because “small business” is now the opposite of “startup” when it comes to talking about growth, not the other way around.

I’m not saying we should all open a dough store or a macaron shop, but here’s why a shift from a startup mindset to a small business mindset is necessary. For everyone.

This is the title of an article I wrote a little over a year ago, in which I described my own history of being told repeatedly that the solid, profitable, long-standing company I run was not truly a “startup” – or at least not the kind of company that should be considered for investment or prime placement at events that would help generate big money so more people could benefit from my idea.

But anyway, my point is, I’ve had to battle the “small business” label for 20 years.

In the old days, you were either a “startup” or a “small business.” A “startup” could be a high-tech company, which was almost always fast-growing and often reliant on an influx of outside investment to cover initial capital expenditures, which necessarily required a program dedicated to “startup mechanics.”

Ah, yes. The term It makes me shiver.

These startup mechanics are a lot like typical start-up mechanics – they include all the usual start-up mechanics I love, like product-market fit, traction, and flywheel mechanics, but they also add in some undesirable mandates, like lower operating costs than the competition, first-mover penetration over market profitability, and of course the short-term milestones and gates needed to jump to the next riskier investment round, and the requirement to raise ever-larger amounts of money at ever-higher valuations.

Sorry for the long post, but I guarantee it’s spot on and as short as I could make it. I swear, no one talks about this without it in their head.

Now, when it comes to what it takes to grow and succeed, a startup works in much the same way a small business does. The difference is that a small business has to survive without fundraising, reinvestment, and repeated venture cycles. That means they’re not tied down to the silly obligations of a startup.

But it’s becoming increasingly clear in recent times that the startup system doesn’t always work — or, more specifically, it doesn’t work. More frequently More than actually working, successful startups usually have high growth rates. in spite of We all know that these mechanisms exist to make early investors successful.

We’ve had cheap money for a long time, and now when that goes away, everyone thinks up is down and the world is coming to an end, but the real problem is much deeper than that.

Let me state this as clearly as I can. This should be obvious: when money was cheap, the ROI on startup structures was low, but the promise of a big windfall was enough to convince employees across an organization to commit to those structures.

With money not cheap, many investors, private equity firms, and corporate boards have understandably mandated cuts and policies to curb spending. These cuts and policies are rarely passed on to shareholders, companies, or investors.

Wait, it’s not “seldom” it’s “never.”

Who do you think will lose out?

Yes, that happens in two ways.

First, talent gets tired of the treadmill and reaches its limits when it is repeatedly “offered” to work longer hours in worse conditions for lower profits.

Second, the “get to the mattress” winner-take-all mentality that arises from the very mistaken idea of ​​cutting costs to achieve growth creates a desperate tendency to grab market share, revenue and profits at any (remaining) cost, which ends up deceiving partners, vendors and, most importantly and most covertly, customers.

That’s a cause for failure.

In this situation, those who hold the purse strings demand profitability but have no patience.

Imagine this: you’re an NBA team, and the owner comes into the locker room and says, “Hey guys, because of the precarious economic situation, we need to win every game from now on. We can’t afford to lose. We need to win every single time. I know that’s a lot of pressure, but we can do it. Oh yeah, we just cut our starters. If we lose to the Celtics tonight, we’re going to cut two more.”

“Now go out there and give it your all.”

Okay, so if their only plan is a cutback plan for misguided growth, they may be saving some money in the short term, but time It’s just that much more expensive. By the time companies realize this and start to panic because they realize that cutting back will take longer and cost more to pay off, it’s too late. The downward spiral has already started and there’s no turning back.

This really pisses me off, so sorry for the bad tone.

I’ve put in decades of hard work, I have a publishable, quantifiable track record, I’ve gone from zero to one, one to sixty, and sixty to rockets.

Why should I reduce my income to prove that I am starving?

Won’t this lead us to pursue the wrong short-term results at the expense of greater long-term gains?

For whatever reasons, and largely because of poor choices made decades ago, this has been the case for a long time, as the startup structure requires that all of investor money be put into the “business,” implying that founder stability is not a prerequisite for the risk tolerance needed to achieve long-term growth.

I’ve been hearing a lot lately about VCs going bankrupt. Keep in mind that this is mostly anecdotal and some data may show differently, but this is the reason I’ve been hearing about, and it certainly makes sense.

The first was that I lost too much. Any gambler will tell you that a strategy of betting 10 times and winning once can sometimes mean placing 30 or 40 times and then hoping for three or four wins in a row after a string of losses. A lot of bad bets were made before the pandemic and the lockdown ruined the gambling cycle, exacerbating the timeline of losses.

Number two, many of them quietly or loudly got into cryptocurrency. I won’t say any more. I don’t want to say any more.

3. They missed the cutting edge wave, so now everyone is flocking to AI. AI is a great technology, but not great enough to support the massive investments being put into it. Many investors will get duped by the first movers. And the crowd may now be staring into the abyss as the first wave of OpenAI, Anthropic, etc. start to approach the valuations of the hectocorn companies.

I’ve been saying for a while now that the era of SaaS is over, and now I think the same innovative founders who would have rejected the next tenth wave are avoiding VCs altogether.

They gather in outdated coffee shops and on Zoom calls thousands of miles apart, using technology that was perfected years ago, and relying on new technologies like AI only when it makes sense.

They do what we would normally call “small business” things – hardware, physical products, process optimization, services – but they do it with a startup mentality that doesn’t require the obligations that come with “startup mechanics”. They operate and grow more like a small business.

In fact, let’s call them “high-tech, high-growth small businesses.”