There Are 2 Types of Startups in the World, and You Better Know Which You Are

I am a big fan of Lean Startup. It provides a set of tools that startups can use to eliminate waste. One of the shortcomings of the approach, however, is that it deals with all startups as the same type of beast. Now every startup is different, so this is not an attempt to categorize startups in every way imaginable, but I think the fundamental difference described below is so fundamental, that it not only affects the path that a startup should take, but whether a particular founder or founder team is even capable of achieving success in this type of endeavor.

So, without further ado, here are the 2 types of startups: startup ventures and startup businesses.

I emailed with a friend of mine about this distinction yesterday, and here is what I said:

A startup venture is focused on achieving massive scale and then generating massive profits once 100 thousand (million?) users are actively using the service. There is a long gap between the start and the first dollar earned, but the amount of upside is almost unlimited (think Facebook, Google, YouTube). The key metric is engagement.

A startup business is focused on achieving profitability as soon as possible, and then scaling that profitability through technology. A startup business will not attract investment, but it also does not need investment. If it is being run properly, customer revenues should fuel development (think Basecamp, Github, and Flightaware…). The key metric is profit.

There are a couple of ways that this distinction can be important. The first distinction is whether you are even eligible to try a given type of startup:

If you want to build a startup venture, you must be (less than 30 and capable of building massive systems) or a serial entrepreneur.

If you want to build a startup business, you must understand your business model, cash flow, profit and loss, and balance sheet, and focus on a clear customer pain point.

The second distinction is what activities you perform when you start:

The first step for a startup venture is to build a product that users absolutely love and instrument the product to help understand and experiment with user engagement. The system must be built for scale, because no money will be made until the user base is large.

The first step for a startup business is to build a service that customers will pay for and instrument the service to help understand and experiment with profitability. The most effective way to build a profitable business is to experiment with a variety of business models in a given space of interest before writing any code, and then apply technology to optimize the best business model of the bunch.

I plan to go into more depth on this analysis over time, but I wanted to get the idea out and gather your feedback on whether the distinction makes sense.

Thanks for any feedback.

Matt