Difference Between a Startup and a Business for your kids

Once a kid asked me "uncle what you do"?

I told the kid "I run a startup".

The kid understanding that I am a complete idiot shot me back "Uncle what is a startup"?

I replied "It is a small business that can grow big"

kid, "then why not start big"?

After a few minutes of conversation and his failed attempt to understand what I was talking he gave me a very deserted look, as if "You don't even know what you are doing".

So I decided to write this article as a self-reference such that I can answer these kids. If you too ever faced an uncomfortable situation with kids where you have failed to answer them what is a startup or a business then you can see this "cheat sheet" and answer them.

A. Business

A business is a permanant entity which provides what consumers want in exchange of money by either producing the "Wants" by itself or getting it from some other business which produce what consumers want.

Entity

An entity is a distinct and independent existence. A business entity is simply a group of people, process, desired goals, methods, policies that together are identified and certified as independent by some government authority. The group of people in this entity is called a team.

Company

A company is an entity which can do a particular business. Many times business and a company are used in the same context. But a company is the recognized name for the entity and business is the operations that are performed within it to generate profit. As a startup and established business are both companies, we will avoid the word company and use business and startup hereon.

Process

The steps in which a product is made or obtained from other business and delivered to the customer is called a process. The steps in the process can be repeated over and over again to obtain the near similar result.

Need Vs Want

A "need" is something that is essential for a business or an individual for either surviving or thriving. A want is simply a high desire to meet the need right now. Need is often for thriving whereas a want is associated with surviving in a literal meaning. Don't confuse this two.

For example, I need all of you to read, like and share the article. That will make me feel like an expert(thriving). But right now, I don't want you to do that, because the article is not yet complete and I do not want you to leave before I have proven you that I am an expert.

Need is a desire, a necessity that I can wait for, want is an immidiate requirement.

For example, humans need to have a colony on Mars( if the earth is hit with a disaster, we can go and live there). But I do not want a colony in Mars now, because I am happy with my life on earth. We need cars, but we want food.

Goods and Services

The "want" can be of two types:

i)Some physical objects which are called Goods.

ii) Some necessities that need to be taken care of by skilled people who are good at fulfilling this need. Which is called Services.

Customer Vs Consumer

A person or entity who has the want and will use the good or service that meets his wants is called a consumer. The person or entity who will find and get the product or service that a consumer wants is called a customer. For example, kids use pencils. So they are the consumers. Parents get them pencils. Here, parents are customers. A customer may sometimes be a consumer. A consumer may sometimes be customers.

Income and Expenditure vs Price and Cost

Customers pay some money to the business for the goods or services. The amount that a business wants a customer to pay is called price and the amount business actually gets is called income.

The business has to spend some money to produce and deliver this good or service. The amount that a business is ready to spend for the same is called cost and the money that is actually spent, it is called expenditure.

Profit Vs Loss

Difference between income and expenditure is called margin. If the margin is less than zero, then it is called loss. If the margin is more than zero than it is called profit.

Total income in a time frame(hourly/daily/weekly/monthly) is called revenue(like monthly revenue). Total profit/loss in a time frame(hourly/daily/weekly/monthly) is called net profit or loss(like net monthly loss).

Buying Vs Selling

When a customer pays money and gets what he wants, it is called buying. When a business gives out to customer what he wants in exchange for money, it is called selling.

Therefore a business is an entity that can make profit by selling goods or services to customers.

Delivery Vs Transaction

When goods of services transfer hands between one business to another business, or business to a customer, it is called a delivery. When money is exchanged against a delivery, it is called a transaction.

Discount v/s Premium

If a customer has to pay more than the price to get the product, then the extra amount is called premium. If the customer gets from a business what he wants paying less than the price, the amount saved is called a discount.

Problem and Solution

A consumer is not fooled to simply take product or service from a business and pay them money. He has to have a strong need and a strong want to do that. The reason for the need to become a want is called a problem. Therefore, the good or service that helps them to meet the want is called a Solution.

Sales and Marketing

The art of motivating customers to think that they want things that they might actually need and bring them to market is called marketing.

The science of actually sending off the customer from the market by giving him what he wants in exchange of money is called selling.

Market vs Marketplace

A market is a place(physical/virtual or conceptual) where all the consumers/customers who have similar problems can come in search of a solution. Because customers come here for buying, it is a place where businesses who have the products and services to meet the wants of the customers also come here for selling. Those who have the wants but not yet have come to the market are called potential customers.

A market place is a place where goods and services from different markets can be bought and sold by consumers. So in a marketplace, a consumer can become a seller and sell his product or services to another customer who in turn may sell his good or services to another customer and so on.

Competition

When multiple businesses try to meet the same want of the customer then the businesses are said to be competitors. They are competing for the same customer and same want of the customer and thereby the same money of the customer.

Advertisement

The tactic of letting the potential customers know about a business is called advertisement. Advertisement is, therefore, the first step in marketing. Often advertisement is targeted at the customers with need and tell them to convert the need to want. Once this conversion takes place, marketing pulls them to the market where the sales will sell the product.

Customer Retention and Satisfaction vs Consumer Loyalty

The smartness of keeping the customer in the market with a hope that he can be motivated to buy something more is called customer engagement.

If a customer is happy or proud or both long after he has gone back from the market, then it is called Customer Satisfaction. Even though there are many similar products by other businesses, if a consumer only uses the product of one business, it is called consumer loyalty. If a consumer is satisfied, that doesn't mean that he will be loyal. But if a consumer is loyal, then he will almost always be satisfied.

Note, a consumer may be loyal even when the customer is not satisfied. A consumer may not be satisfied and thus not loyal even when the customer is satisfied. In both cases, the chances of customer buying from the business again are zero. But if there is customer satisfaction as well as consumer loyalty the customer will invariably buy form the same business. In this case, the business is said to have retained the customer(and thus the consumer).

Market Size and Market Value

The total number of customers who are already in the market as well as those who can be brought to the market by marketing is called market size. The total money that customers in the market and those who are expected to be in the market can pay is called market value.

Market Segment and Market Niche

Even similar-looking wants are of different types. For example, if we want a cloth, it may be for a man or a woman or a boy or a girl. In which case a market is divided into interconnected by separable boundaries wherein each area one particular type of the want is sold.

The small part of the market where one specific category of a product or service is bought and sold is called a market segment.

In a segment also different subcategories of product and services can be sold. Such an inner segment is called a Niche. For example Suits and shirts are two niches of men's cloth market segment.

Further is sub-segment can also have other sub-segments which are called micro-niche. For example, half shirts and full shirts are two micro-niches of Men's shirt niche of Men's clothing segment of a cloth market.

Supply Vs Demand

The total wants of all the customers in the market is called demand. The total goods and services offered to meet by different businesses in a market are called the supply.

Market Growth

If supply is the same as demand then the market is called a saturated market. When supply increases, but demand doesn't, it is called a shrinking market. Obviously, when demand is increasing and supply is failing to meet the demand it is called a growing market.

Business type

If a business is producing what consumer wants by itself and supplying then this business is called Business to Consumer(B2C). If the business is helping another business to serve their consumer than the business is called a Business to Business(B2B).

Brand

A brand is the perceived total value of a company/business among its customers. A brand is an extra price a customer is ready to pay to a product of a business in comparison to its competitors. They are ready to pay extra due to their love and trust in the product. So, if another business wants to completely buy this business, it has to pay the bought business money equivalent to the brand value. Such a buy out is called acquisition.

A business is an entity where a group of people called a team identifies a particular need of a particular group of people, convert the need to a want, create a product or service to meet the want, offers this product or services in a relevant market where they deliver the same to a customer in exchange of money by following processes in such a way that after all this they have more money then they spent.

B. Startups

A Startup is a temporary entity to test a set of hypothesis(assumptions) which if proven can be converted into a profitable, scalable and sustainable business.

Often we misunderstand a startup and a business and think that startup is a mini version of a business. However, by nature, there is very little similarity between a business and a startup.

Assumptions

i) There is an unfulfilled need. (Problem)

ii) There are people who are pained by the unfulfillment of this need. (Potential Customers)

iii) A product or service can be created to satisfy and meet this unfulfilled need. (Invention-Most Viable Product/Solution)

iv) There is a way by which they need can be converted to want through the new product or service. (Demand creation/Niche Creation)

v) After the need to want conversion the person in need will be ready to actually pay for the product or services to get the want fulfilled. (Innovation-Commercialization)

vi) After the want is fulfilled, the person will be using it for long and become a consumer and then will again pay for the repeat product or services. (Customer Retention)

vii) There is a cost-effective way to discover all the people with this need. (Customer Discovery)

viii) There is already a place where these new potential customers can be brought to offer the product or the service. (Total Addressable Market)

ix) There are not too many other businesses in this market so that the temporary entity can become the main business in this market(or segment). (Competitive Advantage)

x) That there is enough demand for this need, for the temporary entity to become a business and operate with a profit. (Service Addressable Market)

xi) The demand will keep on increasing even when the supply increases. (Market Growth)

xii) The product can be successfully sold in this market like a regular business(Product Market Fit)

xiii) After the temporary entity has become a business, it will still be first and fore more choice of the new customers even when others established businesses come and try to sell to the customer. (Market Leadership)

xiv) The product or the service can be sold to the customers with profit, product and services can be created to meet the demand when it increases. (Profitability)

xv) All the potential customers can be repeatedly brought to this market and be sold the product or services in exchange for profitable money. (Business Model)

xvi) Many such markets exist, so that the temporary entity can offer its product and services to the next market, and another market so on by following the same process. (Scalability)

Idea, Plan, Story Founder, and Team

Because by definition, a startup is created to validate the above assumptions, someone has to make these assumptions in the first place. Once a person thinks that there is a problem and a solution can be built for the problem for which people will be ready to pay, then it is called an Idea.

All these assumptions when combined is called a story. Creation of the idea doesn't itself mean the creation of a startup. But a strong story can be considered as a powerful seed of a startup.

The story now needs to be followed by a plan to prove that the assumptions are right. This plan that mentions how each of these ideas will be tested and under what criteria will the testing be considered as successful is called a startup plan.

As you can see that there are too many assumptions to be tested, it is highly unlikely that a single person will be able to implement the plan. Few more people must be convinced about the idea and the plan and must be motivated to come together to implement the plan.

Initial sets of people who believe in this idea and the plan and come forward to execute the plan to validate all the assumptions are called a founding team.

As you can see, startup creation starts with an idea, followed by a plan and thereafter a team to pursue the plan, one person has to have the idea and bring the team. He is called the founder.

Pivot

Because these are just assumptions, many can fail. When they fail, new assumptions are to be made. With new assumptions, the new plan has to be built. Changing the assumptions and a corresponding plan is called a pivot.

Once the idea, the plan, and the team to pursue the plan is put to existence by a founder, a startup is created.

Capital, Valuation, Investment, and Exit

As startups are just a plan under validation, any money it generates is just a bonus. The startup by its definition is created to validate the assumptions as scientifically, effectively and as fast as possible. Only after a startup has become a business, can it make any money. To execute the plans and validate the assumptions, a startup needs people and other resources which doesn't come for free. The required money for a startup to validate the assumptions is called capital requirement.

The startup is expected to successfully validate all the assumptions and thereby transforming itself into big business. If it does, the money such a future business can make is called the valuation. Therefore the startup valuation is the money power of the startup plan created out of a startup story. An investor is an entity or a person who gives a startup the required capital based on the valuation. As startup keeps validating the assumptions, it's the probability of success improves. Thus valuation also increase. Once it becomes a business, it is valued based on the next few year's earning capability. As the value and valuation increases in the startup as they complete one validation after the other, investor's money is increased. He mostly gets the money back in many folds, only when a startup becomes business. It is risky. Thus it is very difficult for the startups to get money with a poor story and poor startup plan and a poor execution record. When an investor takes his money back once startup becomes a business, it is called an exit.

Promotor Vs Founder

A promotor promotes a profitable business to make it more profitable. A founder runs a startup with an aim(and hope) to convert it into a business.

Difference

From the basics of Businesses and Startups, we see the following major difference between them.

A business is a permanent organization created with an aim to make profit and increase the profit over time. Whereas a startup is a temporary organization that is created to build the business.

Once all the assumptions are proven, the startup becomes a business, and therefore it is a temporary organization or entity.

Conclusion

An initial idea is like a movie plot like a rich guy will love a poor girl and the guy's father will not agree, but finally, the guy will somehow manage to marry the girl. It may appear unique for you, but as the plot in itself has no story, it has no taker. Once the plot is developed as a story, it is sellable. The writer of the story now has to go to different producers and pitch them the story so that one will be ready to put his funds. Same way, the founder needs to pitch the startup story to the investors to get a promise for capital for developing the story. Once people have started liking the story, the writer has to find a team to edit the story, illustrate, write dialogues, or do research for developing the story. A same way startup founder has to put together a team. A story will be changed many times to make it better, which is called editing and rewriting. The same way the startup team will pivot the story to make it more compelling and convertible to a business. If the writer is unable to get a producer for supporting him during the process of writing the story, he will have to arrange the money for himself and his team. In the startup world, it is called a bootstrapping. Once a plot is developed into a compelling story(not a startup story), the writer searches for a market, either a book publishing or a movie or both. People will only pay to the writer if his story is converted into a movie or is made to available for people to read. The book publishing is like a B2C market where customers will directly buy the book and a part of the money will come to the author. If the story is converted to a plot, then the writer is like a business who is providing a product to movie-making business(B2B). Finding the right business model is product-market fit. As a lot of other things like publishing and movie making has to be done before the writer can actually start making money, the same way after product-market fit, the right business model has to be obtained.

Metaphorically a startup is a story and the business is the movie. The founder is like the writer. And just like movie making, it needs money to transform from the idea to a business and make money.