SME or startup?
Many new business owners run into a quandary trying to figure out the best business model for their brand new ventures. Although SMEs and startups may have quite a few overlapping similarities, their goals and enterprise structures are completely different.
Startups are ventures that open with smaller budgets and teams, eventually gaining backing from large investors later in its life. Groups involved in a startup environment are usually more resourceful and initially work bootstrap. The business starts off with an idea, which is both scalable and promises a high growth rate within a short span of time. These reasons are why startups usually comprises tech or software companies.
As for SMEs, they are what is also called a lifestyle business. Think of a mom-and-pop shop that quenches the demand for a specific need within a small community. The budget for such an enterprise will usually be gathered in the form of savings, personal credit, or loans. Such businesses come up with thinner margins and lower scalability, due to budget restraints as well as a higher requirement of manpower. They, however, will be a highly self-sustainable business in the long run.
And that brings us back to the main question…
Which should be my choice for a business idea that I have?
Firstly, assess and classify your business idea. Ask yourself, is it a highly innovative idea, that can potentially change the way people do things across the globe? Or will your idea fulfill the needs and demands of a local market, essentially filling a gap in an already standing process? If you chose the first one, you’ll need a startup model, while the second classification suits the build of an SME.
The following point to addressis the goal of your enterprise. Should you want to grow your business and eventually set it up as a source of generational wealth within your family, the most suitable model would be an SME. Startups are usually put into gear with the final intent of building a business for a sale of profit, a buy over, or merger. This generates a quick profit for the founders. The next is the design of the company itself. Startups are built to be unicorn companies, in that they experience rapid growth and turn a profit at a larger scale, in a shorter time. An SME, on the other hand, is built for the long-term, bringing in continual wealth. However, growth patterns will be slower and more stable, with the focus being more on direct profit from sales.
Now for the financial bit. Do you foresee needing a bigbacker to fund crucial processes in order to progress? Or will a personal loan be good enough for you to run the show? For the first scenario, the startup model is ideal. However, with big-backers, come big cuts. Startup investors are also interested in the quick profit mechanism. Hence, their funding usually comes with specific compensation plans and agreements, for example, a public listing before a certain period.
A good example of this, is ride-hailing giant, Grab. As they expanded, there was a need for huge funding, which is where shareholder SoftBank comes in. Grab received a whopping $ 1.46 billion injectionfrom the Japanese conglomeratein2019. In exchange for the incoming finance, SoftBank now holds 18.6% of the company’s shares and has set a requisite of having Grab be listed as an IPO in the soonest time. SMEs, on the other hand, rarely have high-profile investorsor the need for it. Such business models are self-sustaining, growing, and expanding off the direct profit made within the business. However, in most cases, there will be instances of peer-to-peer investment (like fundraising via GoFundMe) or some form of funding from angel investors.
In terms of eventual business processes, break down the potential needs of your enterprise idea. SME’s are suited for ideas that require an extensive operational set-up, as well as demands a robust source of manpower. Ideas that can be realized with a smaller, more versatile team and a slightly more unstructured operations system will be well-fitted in the startup model. Of course, there is also the matter of risk assessment, which indirectly relates to your capital, as well as profit and loss margin. Startups are highly risky businesses, whereby the possibility of not being able to seed the business may result in a closure. SME’s are comparatively more stable, as their first funding is guaranteed. The remainder of its lifespan depends on whether the companyis able to turn a profit selling its products or services.
As we’d explored previously, the final model of your business will rely heavily on your goal. The correct business model will dictate how you will create customer value, how you reach out to your target market, how you will generate revenue, and how your business will remain competitive and relevant in the extended view of things.Whether you choose a startup model or an SME, it is crucial that it fits the purpose, intent, and longevity plans of your business idea.