How to build an unsuccessful company: Business models (I)

For aspiring entrepreneurs, choosing between becoming a startup or an SME is crucial based on the business model they are going to follow. Understanding these differences is key to aligning business strategy with market positioning and long-term goals.

Jaime Medina

Each day, many aspiring entrepreneurs approach us with a common refrain: “I want to start a business” or “I have a business idea.” We are always eager to encourage entrepreneurship, (soon we’ll write a series of articles on the not-so-high risks of starting a business and the not-so-low risks of not starting one). But what most of the people do not realize is how to start a business and which model to follow: should it be a startup model or an SME model?

It’s crucial for a startup’s success that the business model, financing model, and the founder’s personal project all align. If someone wants to fund a startup the way an SME is funded, it won’t work. Similarly, if someone wants to start a startup but isn’t willing to commit to the personal journey that entails, it won’t succeed. It’s critical to recognize when a business should pursue a startup path versus an SME path.

The term “entrepreneur” often portrays images of tech startup founders intent on developing global, scalable products. Yet, the vast majority of Europe’s entrepreneurs operate SMEs across diverse industries such as services, education, and construction. These entrepreneurs create jobs, foster innovation, and solve longstanding problems, often generating substantial returns without the aim or need for global domination. Traditional businesses can thrive under the SME model, especially if they offer personalized services that differentiate from competitors without the inherent uncertainties associated with startups.

However, there’s a growing expectation for every business, no matter how traditional, to disrupt its sector. This includes embracing startup language and strategies, such as scalability and aggressive growth plans, even when they may not apply. “Is it a scalable product? How much are you spending each month? What are your plans for Series A? What are your internationalization plans? What are your unit economics?” Even if what you are planning to open is a neighborhood bakery.

A startup, as defined in The Lean Startup, is a human institution designed to create a new product or service under conditions of extreme uncertainty. This model is best suited for ventures tackling large, unresolved market problems with innovative technology-based solutions. There are many traditional businesses whose entrepreneurs want to provide services in a different, more personalized way, setting themselves apart from competitors. However, this does not necessarily mean that they are surrounded by great uncertainty or that they are offering a new product or service. These models are perfect for SMEs. In contrast, startup models should aim to address a significant, unresolved problem in a large market that can now be solved thanks to new technology.

Without delving into personal aspects yet, there are many founders who desire to establish a company with a very high growth ambition, where the spirit involves rethinking the most basic questions of any industry to find new answers, and where the culture is youthful, prioritizing eagerness over experience in a specific sector. However, it is equally valid for many other entrepreneurs to prefer operating an existing activity in the best way possible, aiming for moderate growth. It is also quite common for many employees to seek a more predictable job where tasks are more defined.

Later on, we will discuss which type of funding is most suitable and what kind of founder fits best in each case to achieve that perfect alignment that must exist between the business model, type of funding, and the founder’s personal project for a company, whether a startup or not, to succeed. If one of these three pillars is not aligned with the others, the project is doomed regardless of the effort invested.

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How to build an unsuccessful company: Business models (I)

Jaime Medina

Each day, many aspiring entrepreneurs approach us with a common refrain: "I want to start a business" or "I have a business idea." We are always eager to encourage entrepreneurship, (soon we'll write a series of articles on the not-so-high risks of starting a business and the not-so-low risks of not starting one). But what most of the people do not realize is how to start a business and which model to follow: should it be a startup model or an SME model?

It's crucial for a startup's success that the business model, financing model, and the founder's personal project all align. If someone wants to fund a startup the way an SME is funded, it won’t work. Similarly, if someone wants to start a startup but isn't willing to commit to the personal journey that entails, it won’t succeed. It's critical to recognize when a business should pursue a startup path versus an SME path.

The term "entrepreneur" often portrays images of tech startup founders intent on developing global, scalable products. Yet, the vast majority of Europe's entrepreneurs operate SMEs across diverse industries such as services, education, and construction. These entrepreneurs create jobs, foster innovation, and solve longstanding problems, often generating substantial returns without the aim or need for global domination. Traditional businesses can thrive under the SME model, especially if they offer personalized services that differentiate from competitors without the inherent uncertainties associated with startups.

However, there's a growing expectation for every business, no matter how traditional, to disrupt its sector. This includes embracing startup language and strategies, such as scalability and aggressive growth plans, even when they may not apply. "Is it a scalable product? How much are you spending each month? What are your plans for Series A? What are your internationalization plans? What are your unit economics?" Even if what you are planning to open is a neighborhood bakery.

A startup, as defined in The Lean Startup, is a human institution designed to create a new product or service under conditions of extreme uncertainty. This model is best suited for ventures tackling large, unresolved market problems with innovative technology-based solutions. There are many traditional businesses whose entrepreneurs want to provide services in a different, more personalized way, setting themselves apart from competitors. However, this does not necessarily mean that they are surrounded by great uncertainty or that they are offering a new product or service. These models are perfect for SMEs. In contrast, startup models should aim to address a significant, unresolved problem in a large market that can now be solved thanks to new technology.

Without delving into personal aspects yet, there are many founders who desire to establish a company with a very high growth ambition, where the spirit involves rethinking the most basic questions of any industry to find new answers, and where the culture is youthful, prioritizing eagerness over experience in a specific sector. However, it is equally valid for many other entrepreneurs to prefer operating an existing activity in the best way possible, aiming for moderate growth. It is also quite common for many employees to seek a more predictable job where tasks are more defined.

Later on, we will discuss which type of funding is most suitable and what kind of founder fits best in each case to achieve that perfect alignment that must exist between the business model, type of funding, and the founder's personal project for a company, whether a startup or not, to succeed. If one of these three pillars is not aligned with the others, the project is doomed regardless of the effort invested.