According to startup guru Steve Blank, a startup is a "temporary organization designed to search for a repeatable and scalable business model", while small businesses operate according to a fixed business model.
Let's take an example. Imagine we have two founders: Steve and Charles. Steve is launching a software startup for barbershops, while Charles is taking a more traditional approach by opening barbershops. Each of them is looking for $1M.
| Steve | Charles | |
|---|---|---|
| Capital requests | $1,000,000 | $1,000,000 |
| Objectives | Cover 100,000 barbershops | Open 10 barbershops |
| Costs structure | Team, Marketing | Rent, Equipment, Team, Marketing |
| Costs growth | Revenue grows faster than costs | Costs grow proportional to revenue |
| Predictability | Complex | Simple |
| Multiplier | ? | 2-3 |
| Investor’s ROI | 100X | 5X |
While the businesses seem to be similar, only Steve has a venture. He has a high-risk software business with high returns and high risks. Steve can generate huge revenue without proportional cost growth, but at the same time, the chance of failure is 90%.
Charles' business is much less risky, but the expenses will grow almost linearly with revenue growth due to a broad cost structure of the classic business model (rent, equipment, paywall, etc.).
The predictability and uncertainty of both businesses are different. Charles has a more predictable business with less uncertainty, but it won't be as huge as Steve's.
So venture business is characterized by rapid scalability, high margin uncertainty, and poor predictability.