By Cliff Ennico
I am pleased every year to host a program for the New York State Bar Association (www.nysba.org) on “Representing the Startup Venture.”
Whenever I do this program, the question inevitably arises: what is a “venture” and how does it differ from any other business startup?
It’s actually quite simple. A startup business can be either:
- a “small business” or “personal business;” or
- a “venture.”
Let’s start with the small (or personal) business, which has the following characteristics:
Retail or Service Business. If a business involves manufacturing or the physical production of a product or service, it is usually a venture. Almost all small businesses are involved in retail, wholesale (such as a family farm), or service businesses. My solo law practice would qualify as a small business, even though I spend a lot of my time representing venture businesses.
Business is “Not Scalable.” If a business is such that it can achieve only arithmetic growth – where each dollar of additional costs generates only a fixed amount of additional revenue – it is considered “not scalable.” Take my law practice again as an example: I bill my time by the hour, but there are only 24 hours in a day and seven days in a week. To grow my practice I have only two choices: either (1) work more hours or (2) hire people to work the additional hours I cannot work. Each additional hour of labor generates only a fixed amount of additional revenue. Thus my practice is “not scalable.”
Market is (Usually) Local or Regional. If the business is “bricks and mortar,” it is serving a market that is usually confined within a 10 to 50 mile radius from the business location. A local plumber, for example, will rarely service customers outside of his home county or region.
Here is where the Internet has changed things dramatically, especially for retail businesses. If a local retail business sells its merchandise online, it can reach a national or even international market. It is still a small business, as it is selling its goods from a single location.
Business is Managed by the Owners. In a small business, there is no separation between labor and management. The chairman of the board of directors of a corporation running a fish store is also the guy who fillets and guts the fish. Small businesses are designed primarily to generate income for the owners, often members of the same family who want to create a “legacy” for future generations.
No Exit Strategy. Small businesses can stay in operation forever, and rarely are sold to larger companies. They never go public.
The venture business is almost exactly the opposite of a small (or personal) business. Here are its primary characteristics:
Manufacturing or Technology Business. If a business is engaged in a manufacturing or technology-oriented business, it is usually a venture. Small manufacturers – those who produce their goods in small or limited quantities or “runs” – may be small businesses if they meet the other criteria above. An author who self-publishes his books, for example, would not be considered a venture even though he sells the books on Amazon.com.
Business is “Scalable.” A venture’s business is “scalable”, in that revenue grows in geometric, not arithmetical, proportion for each additional dollar of cost incurred. A manufacturing business that constructs a factory overseas may be able to triple or quadruple its output and thus grow its revenue by 1,000 percent or more.
Market is National or International. Unlike small businesses, ventures are created to serve a national or global marketplace unlimited by geographic or political limits. The maker of a smartphone application or “app” that has only one limited function – for example, looking up telephone numbers – would still be considered a venture rather than a small business.
Company Has Outside Investors. There is a separation between labor and ownership. Unlike small businesses, ventures have outside investors who do not participate in the management or operation of the company’s business. As the company grows, management (the people who run the company) hire others to do the actual work of running the business.
Exit Strategy. Ventures are not designed to continue perpetually. Its owners usually want to “cash out” their investment at some point — either by going public or selling the company to a large corporation within a specific time frame (usually five to seven years).
Sometimes a company combines elements of a small business and a venture in the way it’s set up. So, for example, a franchised fast-food restaurant would be viewed as a small business at the local level (each individual restaurant being owned by a “Mom and Pop” franchisee), but a venture at the corporate level (with professional management selling franchises to the “Mom and Pop” franchisees).
Why is it important to know if your company is a small business or a venture? Because ventures require much different planning than small businesses, as we will see in next week’s column.
Cliff Ennico (www.succeedinginyourbusiness.com), a leading expert on small business law and taxes, is the author of “Small Business Survival Guide,” “The eBay Seller’s Tax and Legal Answer Book” and 15 other books.