Every time a topic starts to become mainstream, it is common to encounter mixups. In Costa Rica we are in the middle of the business startup mixup and that is causing major confusion to entrepreneurs, policy makers, investors and organizations.
Entrepreneurship is hot right now. Almost 15 years ago, when I started my first small business, leaving a decently paid job to pursuit your own idea was very much frowned-upon. There were no incubators, no events glorifying innovation and we didn’t even know what seed money was. Fast forward to 2015 and the word “startup” yields you 72 articles in el Financiero, turn your TV and you can see Mark Cuban plow half a million dollars in a business after a 10 min pitch in Shark Tank, check your Facebook and you’ll find at least 5 entrepreneurship related events coming in the next month. Nowadays, even when we still got a long way to go, the path of the entrepreneur is becoming more appealing to young people and middle age professionals.
As entrepreneurship hits mainstream media and people start considering making the leap, we find that not all businesses are created equal. Starting up is hard enough as it is: you are leaving the security of a job, you’ll be working long hours and you’ll probably have to wear many different hats, some of which perhaps you had never worn before. But depending on the type of business you are planning to get into, you will face very different challenges, and this is something that is overlooked by many. Let’s get into the different flavors of new businesses.
Innovation-based Businesses: Everybody wants to be Uber. This type of business is the one that grabs all the headlines with their impressive growth rates and disruptive effects on the market. And of course what’s not to like? You can go from project in your garage to being acquired by Facebook for $19Billion in less than 4 years (yes, we’re talking about you, Whatsapp). The catch is that these types of businesses are cash-hungry which requires you to seek considerable investment, and are sometimes slow to monetize which implies you’ll have to have the stomach to weather monthly loses on your way to break even. With non existent local venture capital and not exactly wide cast of angels, these heavy investments are hard to come by. Add to that the small scale of the local market and you’re basically required to think abroad from the get go if you want to sail in the innovation-based business boat. Also they usually require you building teams with great expertise in different areas: your drive as an entrepreneur and particular industry knowledge certainly won’t be enough.
Traditional Businesses: More than good ol’ mom and pop shops. This is the Chinese restaurant in your neighborhood, the bakery in the corner, the bar where you go grab a beer after work. Traditional businesses are said to be the backbone of the economy and they are mostly owned by individuals or families. Although looked down on by innovation purists and many investors, truth is there’s money to be made in these type of businesses if you play your cards right, that is, if you think beyond earning your livelihood. After all, Chipotle was just a fast food restaurant and Starbucks coffee shop, right? These types of ventures don’t necessarily require huge amounts of money to get off the ground (up until you start scaling them up fast), which means more independence from investment and somewhat more controlled risk. Although some business acumen is always necessary, given they are more traditional, there’s always good practices readily available to learn from. Growth is certainly slower but allows the starting entrepreneur to learn and figure things out.
Micro – Businesses: The One man Show. The internet and the many different tools and services available to support businesses make it easier than ever for anyone to start a side gig that can turn into a full blown business. Say your hobby is to arrange vacation trips for people, your are a good photographer or can write a killer Excel guide for dummies, there’s nothing in the way of turning that into a business run from your own home. You can create a website for free with WordPress, can process payments with Paypal, you can manage mailing lists professionally with Mailchimp, you can self- publish content (books, guides, audios), and manage your finances with Quickbooks, for a couple of bucks a month. If you are an expert in any domain, you can start your consulting practice at any given time, provided that you can deliver value to customers with a specific need. In a book called $100 Startup, Chris Guillebeau gathers hundreds of examples of people that started this type of businesses with little or no money and only their individual work and turned them into a very nice livelyhood and beyond.
Social Businesses: Making profits while making good. The notion that any venture aimed at helping a group of people or solving a social problem had to be a non-profit organization is outdated. Hundreds of examples around the world have shown that sometimes the best way to make a profit, is precisely by solving society’s most pressing challenges. Growth with these types of businesses is usually triggered more by demand than anything else, but investment or expansion can speed things up. Besides its social impact it can act like an innovation based or a more traditional businesses but the good will aspect of it can score big points with investors and customers that are sensible to the subject. Plenty of organizations, including the Costa Rica based CIC, and private initiatives like that of Chivas hold competitions to support and fund social startups.
Being aware of the differences between the types of businesses and the advantages and disadvantages of each can help entrepreneurs prepare better for the road ahead and make better decisions when making the leap. For policy makers it is also crucial, specially because currently in Costa Rica all government based support for new businesses is largely tailored to traditional businesses (or PYMES). And as for investors, having clarity on this can help understand the risk profile, the return horizon and the type of support he can expect to provide to the venture.
Here’s a table to sum things up: