Why Startups are Terrible Businesses To Start
Remember the old joke, “the best way to become a millionaire is to start out as a billionaire and make some bad investments”? If you want to start a business to get rich, the whole world of startups fits that joke perfectly. A lot of startups (and venture capital funds), rather than being a vehicle for ordinary people to become wealthy, turn out to be a way for wealthy people to become less wealthy.
If you want to start a business so you can increase your wealth, you want a different kind of business. Small, even boring, businesses are a far more reliable and simpler way to build wealth. Surely you’re heard this many times before, but it’s easy to forget in the frenzy of hype that the media generates around every startup that goes big. Paul Graham’s latest essay, insightful as usual, identifies what makes a startup. And in the process he points out why they are bad businesses.
As he outlines, a startup is a company that can only succeed by selling to millions, or hundreds of millions of people. If it does it can get very big very fast. If it doesn’t, it goes down fast. The essay also outlines the formula for the alternative, boring, non-startup business. Instead of trying to reach a market of millions right away, choose a smaller market that’s protected from heavy competition. Sometimes the competition is kept out by imaginary barriers, which you can overcome with a little creativity. This makes it easy to get a profitable business started, and once you have that you have a lot of options to continue growing it if you want.
Boring businesses aren’t just reliable. They can also be a better route to building a large business. Starting a retail store or selling cash registers are two businesses that are boring but reliable if you do them the right way. This was true 150 years ago and it’s still true today. These humble moves, combined with a drive for consistent growth and a few risks, led to such companies as Wal-Mart and IBM. Selling soap and candles (again, something you can do profitably today) led to Procter & Gamble.
The catch is that if you want to make a boring business big, it will take a long time (sometimes multiple generations). In the process they do have to go through a lot of transitions and give up what they once were. I’m usually not an advocate of doing something you don’t want to do now so you can do what you want to do later (other than the minimum necessary), but having decades of experiences and thousands of profitable customers gives you a position that no innovative startup can match. Startups have to hit a very narrow target or they run out of options. Contrast this with profitable companies, that have the flexibility to try new things and fail because they are making money.
A good portion of the Fortune 500’s top 20 companies started out fairly small and then grew persistently for a long time. On the other hand, many startups grow quickly and then either go flat (sometimes for decades), decline, or sell to an established company (often the more patient kind).
Of course I’m picking out a few examples that prove my point, just like every startup success story ignores thousands of unknown failures. Not every corner store will become Wal-Mart. But many that don’t will “only” make millions in profits. And many more that don’t reach that level will “only” make hundreds of thousands of dollars.
If growth is what makes a startup, profit is what makes a non-startup. Boring businesses can be profitable at almost any scale you choose, from $10/year and up. This means they can be adapted to your needs and goals. You don’t have to fit yourself into one all or nothing model to do well.
The choice is simple. If you want to put all your hopes on a long-shot to make it big, get rich, and change the world (and you don’t want to just buy a lottery ticket and give the winnings to charity), start a startup business. If you want something simple and reliable that even you can do well at, and that will eventually give you a platform to do all those other things if you want, start an “upstart” business.