If you’ve ever wanted to read a story that compares the study of business with the study of physics, this is the story for you. And it’s about the difference between small and big. In this column, originally published in the Spring 2018 Network magazine, Ben Franklin Manager of Entrepreneurial Services Wayne Barz, discusses fundamental differences between small companies and large ones.
For more than two millennia, artists and scientists have been grinding big materials down into small materials for both artistic and scientific pursuits. What they did not know until the early 1960s, was that they were working in an area that later became known as nanoscience. What they did know, however, was that grinding down materials into ever-smaller particles changed the way the materials reacted to their environment. A micro- or nano-sized particle of gold, for instance, melts at a different temperature, has a different tensile strength, and adheres to objects differently. Current generations of nanoscientists now routinely quantify all the ways small materials are different from big materials.
Entrepreneur and investor Steve Blank made the discovery that businesses follow the same rules as materials: small ones are fundamentally different from big ones. Blank’s 2010 blog post brilliantly documents how small companies (i.e., startups) become big (https://steveblank.com/2010/01/14/a-startup-is-not-a-smaller-version-of-a-large-company/).
There are fundamental properties that are different between the two. Here are four:
1. Startups measure cash in 0s. Larger companies measure cash in 000,000s. You’ve probably seen financial statements from large, publicly-traded companies in annual reports. At the top of the statement, it’s usually noted that all numbers are depicted in the $ millions. So if the balance sheet shows cash of $10, this actually means $10 million. It’s probably done to save ink on all those extra zeroes!
In a startup, this is not necessary. At many startups with which I’ve worked, if the balance sheet shows $10 in cash, it means $10 in cash. This fundamentally changes the types of decisions that entrepreneurs make. In this case, the gold literally melts faster when there is less of it!
2. Startup teams are usually comprised of two guys, a dog, and a dream (which is how Mike Gausling of Originate Ventures described his startup). Large company teams are comprised of departmentally organized, cross-functional disciplines with nine-digit budget discretion and 20 attorneys. The value of available human capital and organizational capacity is hard to measure with precision, but suffice it to say that when one of your most-valued team members is a dog, decision making often takes a more primal approach than the more clinical, documented, and buttoned-up approach of the big company.
3. In startups, it’s “us against the world.” In larger companies, it’s “the world against us.” Many seasoned business readers are familiar with the “Innovators” series by Guru Clayton Christensen. Large companies have market share and territory to defend. They have supply chains and distribution chains comprised of personal relationships and legal arrangements that make them more formidable on the battlefield, but typically less agile. They often take a defensive position behind litigious and monopolistic behavior.
Not so in a startup. Startups behave like mobile guerrillas looking to attack to win one customer at a time, making short-term and less-formal alliances under the radar of the market place.
4. Most start-ups believe they have a market with thousands of potential clients, but large companies actually have them. Geoffrey Moore’s brilliant book, Crossing the Chasm, dissected the Technology Adoption Lifecycle curve (below) and essentially explained why some unheard-of startup with some new-fangled technology really only has access to 2-4% of the potential customers.
This miniscule percentage represents a group known as “innovators,” customers who believe it is their mission to seek out and explore all new technologies in an effort to gain a competitive edge in the marketplace. They see advantages in the technology that even the startup may not perceive.
Meanwhile, large companies with their $000,000s in marketing budgets, armies of organized sales people, and world-class production capabilities own the market’s other 96-98% of customers. Small companies need to approach prospective clients in a fundamentally different way because their clients are fundamentally different.
Technology Adoption Lifecycle Curve
All of these characteristics and others create essentially different behaviors between the nano- and macro-scale companies. Just as 100-nanometer gold has a different color, melting point, and solubility from one-centimeter gold, the way the nano-scale businesses get financed, make hiring decisions, secure clients, and impact markets is completely different from their macro-scale business counterparts. Published in Network Magazine.
Wayne Barz, Manager of Entrepreneurial Services for the Ben Franklin Technology Partners of Northeastern Pennsylvania, can be followed @TechonomicMan on Twitter and on the web at TechonomicMan.com.