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I think you're arguing against a straw man. Nobody in this community (including pg) thinks there's something wrong with small businesses. They likely patronize

I think you're arguing against a straw man. Nobody in this community (including pg) thinks there's something wrong with small businesses. They likely patronize many small businesses every week. The point is that's not what they're doing. Startups are categorically different from small businesses and there's a lot of advice for my tech startup which isn't applicable to my mom's landscaping business (and vice versa).

geofft 11y ago
I agree that startups are categorically different from small businesses, but why do we believe that startups are a better approach for / more suitable for tech businesses than the small business approach? (I'm deliberately leaving "better" underdefined, but I do want a definition that focuses on it being better for founders, early employees, late employees, users, or the world, more than better for VCs. I know it's better for VCs; that's not interesting.)
- jcrites 11y ago
  Technology and technology-based products and services have the intrinsic ability to scale, especially digital ones. Physical technology can be manufactured and mass distributed; digital products and services can be copied or spun up. WhatsApp was first released in 2010. Five years later, it had 900 million users with ~50 employees. That kind of expansion was only possible because of the intrinsic scalability of technology: the ability to build an app or a website or a web service once and sell it to "N" users with low marginal effort and unit cost. There's no way for a home gardening service to scale to 900 million users with ~50 employees, so if you're looking for investments with the potential for very high return, you might be inclined to look toward technology businesses. Tech businesses have this natural ability to make a product/service once and sell it to vast numbers of users, while traditional businesses do not (restaurants, laundromats, gardening services, consulting, etc.). Some chain businesses like McDonald's and WalMart have developed technology to allow them to scale above competitors, but no restaurant chain can match the growth potential (per unit of effort) of a digital product (viz. WhatsApp). A final reason for the investor and founder preference for digital tech-based businesses is the low capital requirements and operating costs. A business could not compete with WalMart or McDonald's with a shoestring budget, because of the unavoidable reality of the expense of real estate and physical infrastructure. Digital infrastructure has relatively low costs per unit - consider the cost of a restaurant chain serving 100 million people daily, vs. the cost of a digital appp/website/service at the same scale. The average McDonalds serves about 2000 customers per day, so you'd need 50,000 McDonalds to serve 100m people daily, and the capital to open that many stores would amount to tens of billions of dollars. If you've developed a game like Clash of Clans, then you can sell it to 100m people and earn revenue daily with relatively low unit and operating costs compared to a McDonalds. Clash of Clans is estimated to earn $1.5m in revenue per day, which is comparable to about 220 McDonalds stores; and Clash of Clans has far lower operating expense than 220 McDonalds stores, and has a negligible cost of goods sold. Digital infrastructure is also far more fungible. If Clash of Clans ceases to be popular, the servers that power the game can be retasked to the next big game far more easily than McDonalds stores can be remodeled into a new restaurant. Cloud hosting providers make it possible to rent a large amount of compute power without investing capital (taking it as an operating expense instead), and at short notice, whereas it'd be difficult to open a large restaurant chain without purchasing real estate up front, requiring a large up front investment in the business; and it would take considerable time to acquire the necessary property and assets (refrigerators, stoves). If the digital product/service proves to be successfu, the business can be scaled up rapidly, while if it is unsuccessful its operating expense can be slashed relatively easily and redirected elsewhere (compare the ease of ceasing to purchase cloud hosting, vs. closing a restaurant and remodeling or selling the property). All of these attributes together mean that: digital technology businesses have lower capital requirements and are easier to start; they are easier to grow rapidly if they prove to be successful; The businesses and their assets and employees are easier to pivot and repurpose; the ceiling of maximum possible success can be very high (the whole world buys it)
- morgante 11y ago
  Where did Sam say that startups are "better." He might personally find them more interesting to work on and better suited to his skills, but that doesn't mean they are in general superior. I wouldn't advise my mom to quit her business to make a "startup."
  - geofft 11y ago
    Do you disagree that Y Combinator encourages people who wish to work on interesting technical problems to do startups? It is certainly true that nowhere in this post is an explicit statement "You should do a startup." But the post is of the form "Given that you are doing a startup, you might run into such-and-such problem", and I would like to dispute the implicit assumption that you should be doing a startup in the first place.

geofft 11y ago

I agree that startups are categorically different from small businesses, but why do we believe that startups are a better approach for / more suitable for tech businesses than the small business approach? (I'm deliberately leaving "better" underdefined, but I do want a definition that focuses on it being better for founders, early employees, late employees, users, or the world, more than better for VCs. I know it's better for VCs; that's not interesting.)

jcrites 11y ago
Technology and technology-based products and services have the intrinsic ability to scale, especially digital ones. Physical technology can be manufactured and mass distributed; digital products and services can be copied or spun up. WhatsApp was first released in 2010. Five years later, it had 900 million users with ~50 employees. That kind of expansion was only possible because of the intrinsic scalability of technology: the ability to build an app or a website or a web service once and sell it to "N" users with low marginal effort and unit cost. There's no way for a home gardening service to scale to 900 million users with ~50 employees, so if you're looking for investments with the potential for very high return, you might be inclined to look toward technology businesses. Tech businesses have this natural ability to make a product/service once and sell it to vast numbers of users, while traditional businesses do not (restaurants, laundromats, gardening services, consulting, etc.). Some chain businesses like McDonald's and WalMart have developed technology to allow them to scale above competitors, but no restaurant chain can match the growth potential (per unit of effort) of a digital product (viz. WhatsApp). A final reason for the investor and founder preference for digital tech-based businesses is the low capital requirements and operating costs. A business could not compete with WalMart or McDonald's with a shoestring budget, because of the unavoidable reality of the expense of real estate and physical infrastructure. Digital infrastructure has relatively low costs per unit - consider the cost of a restaurant chain serving 100 million people daily, vs. the cost of a digital appp/website/service at the same scale. The average McDonalds serves about 2000 customers per day, so you'd need 50,000 McDonalds to serve 100m people daily, and the capital to open that many stores would amount to tens of billions of dollars. If you've developed a game like Clash of Clans, then you can sell it to 100m people and earn revenue daily with relatively low unit and operating costs compared to a McDonalds. Clash of Clans is estimated to earn $1.5m in revenue per day, which is comparable to about 220 McDonalds stores; and Clash of Clans has far lower operating expense than 220 McDonalds stores, and has a negligible cost of goods sold. Digital infrastructure is also far more fungible. If Clash of Clans ceases to be popular, the servers that power the game can be retasked to the next big game far more easily than McDonalds stores can be remodeled into a new restaurant. Cloud hosting providers make it possible to rent a large amount of compute power without investing capital (taking it as an operating expense instead), and at short notice, whereas it'd be difficult to open a large restaurant chain without purchasing real estate up front, requiring a large up front investment in the business; and it would take considerable time to acquire the necessary property and assets (refrigerators, stoves). If the digital product/service proves to be successfu, the business can be scaled up rapidly, while if it is unsuccessful its operating expense can be slashed relatively easily and redirected elsewhere (compare the ease of ceasing to purchase cloud hosting, vs. closing a restaurant and remodeling or selling the property). All of these attributes together mean that: digital technology businesses have lower capital requirements and are easier to start; they are easier to grow rapidly if they prove to be successful; The businesses and their assets and employees are easier to pivot and repurpose; the ceiling of maximum possible success can be very high (the whole world buys it)
morgante 11y ago
Where did Sam say that startups are "better." He might personally find them more interesting to work on and better suited to his skills, but that doesn't mean they are in general superior. I wouldn't advise my mom to quit her business to make a "startup."
- geofft 11y ago
  Do you disagree that Y Combinator encourages people who wish to work on interesting technical problems to do startups? It is certainly true that nowhere in this post is an explicit statement "You should do a startup." But the post is of the form "Given that you are doing a startup, you might run into such-and-such problem", and I would like to dispute the implicit assumption that you should be doing a startup in the first place.