Raising money is tough these days. But try asking for money from someone that just saw their portfolio value decline by twenty to forty percent in 2008. Now that is a tough assignment… and what is occurring more often these days as promising startups pitch to individual Angels or Angel associations.

If you plan to reach out to private individuals and contacts, or formal Angel groups, this post has some helpful information – including where to look and how to target your efforts.

We all know 2008 was a tough year for individuals that might be looking to invest in startups. So be aware that adding a risky startup to their portfolio may be hard to stomach for some individual investors. But smart investors know that now offers the opportunity to ‘buy low’ into many very promising startups that are in dire need of important money. Finding the right investor can be a win-win situation for you.

A bit about Angels…

Angel investors represent a crucial piece of the startup infrastructure. According to the Center for Venture Research at the University of New Hampshire and the MIT Entrepreneurship Center, more money is invested annually by angels (approximately $23 billion annually) than venture capital firms (approximately $21.9 billion annually). And so it goes without saying that looking to Angels for startup capital will continue to be crucial, even as money remains tight from other funding sources.

As you are probably aware, Angel Investors are simply individuals who back emerging entrepreneurial investors. (They supposedly get the name “Angels” from the people that used to anonymously give money to Broadway theater productions – known as angels for saving the production.) Generally, angels are willing to invest at an earlier stage of the business compared to VCs or other institutional monies, and will contribute money to help move the company to a stage where it can attract venture capital investment. Funding levels vary greatly, but usually range from $50,000 to $2 million. Oftentimes certain industries or regions will have groups of angels that meet together to listen to presentations of startup businesses to give angels opportunities to decide whether to invest in any of the businesses. Here in the Pacific Northwest, we have several of such associations that are discussed below.

Finding where Angels Gather

The Pacific Northwest is fortunate to have a number of excellent Angel Associations including Alliance of Angels – Seattle, WA, Bellingham Angel Group – Bellingham, WA, Boise Angel Alliance – Boise, ID, Keiretsu Forum – Seattle, WA Oregon Angel Fund – Portland, OR, Puget Sound Venture Club – Bellevue, WA, Seraph Capital Forum – Seattle, WA, Tacoma Angel Network – Tacoma, WA, and ZINO Society – Seattle, WA.  You can find a great deal of information on their websites and oftentimes these groups host sessions to prepare entrepreneurs and aid in preparation of materials required by the associations.  The odds to present your company can be steep — so don’t be surprised if you don’t make the cut.  But be prepared to ask how to improve your materials and resubmit when you may have improved your odds.

After you’ve checked out the familiar parties, you may consider using AngelSoft 3.0 to help find the right Angel Networks or find others in geographies outside of the Pacific Northwest (that could involve travel and may be a challenge, but if you have a connection or a reason to make it worthwhile, consider it). AngelSoft is a website with software that will help point you in the right direction, and for a $250 fee, you can use it to contact multiple angel associations. If you don’t want to pay the fee, then you’ll have access to up to three angel groups. The benefit is that, oftentimes, you can submit the same information rather than having to do multiple submissions to each Association. It is a helpful tool and can help you find targeted Angels too (for example, there are some Angels who specify they are interested in investing in energy-related startups).

In terms of working with Angel Associations, I’ll defer to the experts on this one. Rebecca Lovell of the Alliance of Angels has an excellent post on how to get on the good side (by staying off the bad side) of Angel investors. I will add the following observation which many entrepreneurs don’t realize – an Angel Association is just that: a group of individual investors. Remember that you’ll usually need to convince a number of individual Angels from any given Angel Association or Angel Associations to invest in your business. This isn’t a process whereby the Association votes and decides to depart with the group’s money to you. Presenting to the group is just the first step, with personal meetings with the interested investors following.  For the most part, these are individuals that meet together to listen to pitches but don’t always invest together (probably more accurately, seldom invest together).

Another important thing to note about Angel Associations is that it is helpful to already bring some investors or potential investors to the table before you meet with an Angel group. It is much more attractive to be able to say, “We’ve got five other individual investors that are investing and we are coming to you looking to fill out the round with another $150,000.”

And finally, remember that by flooding the inboxes of angel groups, you won’t win any points. Fit the angel groups into a broader fundraising strategy to maximize the chance of success.

Where else do those pesky Angels fly?

While many businesses find success in going through angel associations, oftentimes the best place to start your search for angel funds is to go to your (and your team’s) personal networks. Remember, Angels are just individual investors – so where better to start than people you already know and who already know you.

One strategy is to start by searching your current advisors, board members, etc. or to search for advisors or board members and try and turn those folks into investors in the business. Oftentimes those personal connections who are willing to invest can then help you further by working to leverage their networks to help pull in others or help you get some ‘ins’ at the angel associations.

Some people are cautious to get their friends or family or colleagues to invest. However, there are times when it makes a great deal of sense. If that is the case, perhaps you can find some peers who are also interested or involved in the industry, technology or space and tap them to be advisers and to contribute some angel capital. That may be a way to help raise additional startup funds.

Another strategy is to find individuals involved in the entrepreneurial community and target them. Let’s suppose you are only looking to raise $250,000, which is most likely too small of an amount for any venture capital fund. However, oftentimes individual venture capitalist may take an interest personally and be willing to invest on their own. Or you may find a successful entrepreneur looking for a new challenge that may take a personal interest in another startup.  So one approach is to do some research on a site like PWC MoneyTree (which is free) or to use one of the other sites that charge to see what VCs or individuals have invested in similar companies.

I like to encourage folks to start with MoneyTree, which is a great, free way to research recent investments in the space. Check out the MoneyTree “Custom Search” function. This search can be used to find out specific companies that received funding in the most recent quarter and their investors.

An example: Let’s say you are just starting an early stage company here in the Pacific Northwest focusing on the Media and Entertainment Industry. So, you would check out any first-stage investments in the Northwest in that Industry. Assuming you wanted to find out who had invested in a seed/startup financing of Northwest companies focusing on Media and Entertainment in the third quarter of 2008, simply input those parameters (Northwest, Early Stage/Seed, Media and Entertainment) and submit the report. The report would give you the following companies: TrackSimple, Inc. and Treemo, Inc. Reading further, you can find that Ignition and another undisclosed fund invested $2.8M into TrackSimple and JK&B Capital invested $500K into Treemo. Check out those investors and target them. Or connect with those companies to see where they focused their efforts. Or expand your search to find all Media and Entertainment investments in Seattle or all Early Stage/Seed investments in companies throughout the US.

Do some research on those folks and see if you can get any leads from there. Again, just setting up an informal or initial meeting with any of these guys may expand your network and lead you to an angel or other funding source. Remember, getting investors (be it angels or VCs) is a networking game. Continue to build your network of believers and the investment will ultimately come.

Good luck with fundraising efforts. If you are looking for seed/angel money, remember that you need to cast your net wide, involve the personal contacts of your team and advisors, and understand that the process may take time. But once you find someone to lead the round (a lead investor) oftentimes the process will start to come together much quicker.

You’ve made your 2009 resolutions, and somewhere between “Be nicer to my in-laws” and “Floss once a week” is your goal of starting a new company.

Here’s to those 2009 resolutions… so what’s next to start that new company of yours?  Well, you need to start… a… new… company.  Okay, so what do you do?  Do you need to file something with someone?  Do you need to hire a board of directors? What should you tackle next?  Fortunately (and unfortunately), you can find lots of advice from lots of people on what to do and not to do.  Some will say definitely do an LLC.  Others tell you to form in Delaware.  Still others say that don’t bother forming a company yet.

So what is it?  If you want to form a new company, what should you do? Well, those “experts” above are probably all correct in some way or for some businesses.  In some cases, you don’t need to form a company for your side-project, but in others it is much better to form a C-Corp over an LLC.  Sometimes a S-Corp is the way to go, while other times it won’t cut the mustard for a new company.  Why you ask?  Well… it depends.  But, because it depends, you should get advice tailored to your business strategy.

Following the masses

Perhaps you’ve heard the statistics that more than half of all US publicly traded companies and more than 60% of the Fortune 500 are incorporated in Delaware. You might have also heard that many VCs prefer to fund Delaware corporations. Maybe someone once told you that “going public” is the easiest as a Delaware corporation. And, to heap on more evidence in favor of Delaware, you may have heard that Delaware has the most “business-friendly laws in the country.”

So, since it seems like most everyone is a Delaware corporation and you would like to raise VC money and go public, then I guess all that evidence just means I should form a Delaware C-corporation too, right?

Not so fast… Before you rush to follow the pack, take a moment to understand why it matters:

1) Your choice affects your tax rates;

2) There are varied cost and fee structures in each state;

3) It may be costly to change entities at a later point;

4) Third parties may prefer or require your company to be organized a certain way; and

5) The “Pain in the Butt” Factor – How easy and simple is it?

How to figure out what choices to make?

Whether you decide to consult with your advisors, your attorney or your accountant to determine the best form for your company or if you decide to forego the advice and go it alone, be sure you make a decision based on an understanding of how your choices affect the business and fit into your business strategy. Spending the time and money up front will help ensure that you make the right choices for your entity.

My two-cents (and take this with a grain of salt because I’m a lawyer): talk to a lawyer or accountant that works with companies like what you hope to become. If you want to build an iPhone application company, talk to a lawyer or accountant that has worked with an iPhone application company. If you want to build a medical device company, find a biotech lawyer and connect with them.

Now I’m not saying you should go right out and HIRE a lawyer or accountant yet.  You may not need to hire anyone… but you should talk to them to help determine IF you should hire someone and to find out their thoughts on how you should start the business.  So just set up an initial meeting and pick their brain about the right approach to starting up.  I’ll say this, I’m nearly always willing to grab a cup of coffee with an entrepreneur… and most startup lawyers or accountants would likely agree.

These initial meetings are helpful for the entrepreneur and for your potential lawyer, accountant or other advisors.  When I talk to an early-stage entrepreneur, I can usually tell when it makes sense for them to hire us now and when it doesn’t.

Either way, I tend to help guide them to think about how to structure their business that matches their end goals so that if, today or down the road, they want to hire us, we minimize the clean-up that needs to be done. If you know you’ll need to seek VC funding this year, I advise one approach and if you just think this will be your side-gig and you won’t need outside money, then I’ll usually guide folks another direction.  As you can see, depends on the facts of the business and the entrepreneur.

There isn’t one right or one wrong approach, and usually lawyers and accountants can usually figure out how to fix a situation that has been structured imperfectly.  But by starting up in the way that best fits your business strategy, you can save yourselves a couple bucks down the road… and who doesn’t want to save a couple bucks from their accounting or legal bills!

Does It Really Matter How We Legally Structure Our Business?

What could happen… We read somewhere that another successful entrepreneur said he was “double-taxed” on his c-corporation. He said that for his second company, he set up an LLC and then later converted the LLC to a c-corporation right before funding. Is this the right approach for us?

What to expect… Remember when considering how to structure your business, there is not one ‘right’ approach. Every new business will have differing timetables, goals, and needs, so it is important to create a legal structure that accounts for this. And while this successful entrepreneur is correct that a c-corporation is subject to double taxation (whereby the corporation is taxed and the dividends distributed are also taxed), not every new venture would benefit from this approach.

Structuring your business is an important first consideration – so be sure to get advice customized to your personal and business plans. While the upsides of using an LLC may avoid double taxation, conversions from an LLC to a C-corporation add additional legal and accounting expenses, and may yield headaches for potential investors. Some new ventures begin as s-corporations (which primarily involve a c-corporation making a filing with the IRS, as well as other structural steps) and later change to c-corporations by revoking that filing. Other businesses may consider creating subsidiaries. Each option has its own set of benefits and drawbacks. Careful up-front planning on your business structure will aid in later efforts of fundraising, equity ownership, and costs for third-party service providers.

In my next posting, I’ll lay out a few “Rules of Thumb” to consider when setting up your new business entity and then we’ll talk about whether to choose Delaware or another state for your business!  Happy resolutions!

Without fail, when I mention that I’m a startup technology lawyer at an event with startup-folks, someone nearly always approaches me and asks, “So I work at [Insert Company Name here], but I’ve got this project or idea I’ve been working on. I’d really like to leave at some point and do that full-time, but I need my job at [Insert Company Name here] to pay the bills for now.  How can I do both?“

It is a great question and one that people really should be thinking about.  Many very successful companies were spun from side-projects or part-time development work in a basement or garage.  One of my favorite stories is about the founder of del.i.cious, that I write about in my book:

Joshua Schachter started his collaborative bookmarking website del.icio.us in 2003 as a personal project simply to allow him (and a few friends…) to tag and share web pages. Schachter had collected links to thousands of web pages he like and didn’t find any thing that could help him organize and share those likes with others. So, he developed del.icio.us in his spare time and started tagging websites to share with others.

But Schachter didn’t even consider himself to be an entrepreneur or a business owner. In fact, Schachter’s full time job as a Morgan Stanley employee. However, the power of the web made del.icio.us a huge hit and by 2005, Schachter felt it was best to incorporate the company as del.icio.us, Inc. Shortly thereafter, Schachter sold the business for an unnamed amount. All this from a little hobby…

At a time like this with funding options somewhat tight, many entrepreneurs are looking for a way to continue to build their product or idea, but keep the regular cash flow of their current job.  Sure, this comes with risks of less time to dedicate to your startup project or idea, but it also allows you to have your cake and eat it too, so to speak…

How to have your cake and eat it too…

So, to the question at hand, if you are employed elsewhere and have a side project or part-time startup, what should you watch for?

First thing to remember is that each situation is unique — each company will have different policies and procedures in place.  So be sure to be cautious.  Carelessness can get you into trouble (and can sometimes get you fired from your employer) if you are using company resources for your startup such as photocopying hundreds of color business plans, doing tests in the company lab or using your company laptop for development work.  So know your company, understand its rules and contracts, and avoid being reckless.

Here is a good set of questions and considerations to think about with respect to your current employer and your startup:

• Are you bound by an employee non-solicitation agreement? Your new startup company should never initiate contact with your former co-workers about any job prospects if you or any other members of your founder team are under a non-solicitation agreement. Disputes regarding employee non-solicitation clauses often focus on who initiated contact and when. If the candidate initially contacted the company about employment prospects, then generally there will be no violation of the non-solicitation clause. As a result, it is critical to maintain documentation establishing how the initial contact was made and when (e.g., an e-mail inquiry from the candidate, an internet application, written notes of a telephone inquiry);
• Are you bound by a customer non-solicitation agreement? Your new startup company should not initiate contact with the customers or clients of your former employer if you are subject to a non-solicitation agreement for the customers of your prior employer. You may announce your new business and your participation, but be cautious about additional solicitation. If a customer does approach you (and not the other way), be certain to document the conversations and keep records as to the formation of the relationship.
• Have you breached your duty of loyalty to your current employer prior to departing? For example, you should not solicit other employees to leave, undertake any work for the recruiting company, or inappropriately take or gain access to any information. If any such improper activity has occurred, you should promptly consult legal counsel to evaluate whether and how the situation may be corrected, and whether it remains feasible to proceed with forming your business and hiring other employees;
• Are their any restrictive agreements in your employment documentation and do you have copies in your files (including confidentiality agreements, non-compete agreements, non-solicitation agreements, etc.)? Soon-to-be founders have a tendency to overlook or “forget about” restrictive agreements, so it is important to be particularly diligent in performing a search on any possible restrictions. Restrictive covenants are often found in confidentiality and invention assignment agreements, offer letters, employment agreements, and stock agreements;
• Have you identified every contractual limitation you would need to observe? For example, if you are bound by a confidentiality agreement, how does the agreement define “confidential information”? What is the scope of any non-competition agreement? What is the scope of any non-solicitation clause?; and
• Have you been careful to not reveal any trade secret information? You should identify, at a high level, the areas of trade secret information that may be considered sensitive and avoid tasks that would jeopardize the trade secret. You should also explore the time duration of the sensitivity, and plan the timing of forming your business in conjunction with these durations. You should then evaluate whether any work duties you had contemplated undertaking in your new startup could create a risk of using or disclosing such sensitive information in the course of the new job.

It may not be what you do, but how you do it

And a final point — remember that as you depart or prepare to depart your current employer that the way you depart may offer a lot about how your current employer will react.  Some former employers can make it very difficult for you (see the case of Torrent Technologies).  In particular, when the transition may involve some intellectual property that has some actual or perceived overlap, be very cautious, and consider talking to a lawyer or other advisor to determine how to proceed appropriately.

And finally, as a general point, be particularly cautious if you are building your startup in an industry or space where your current company is active.  If you wind up leaving later to start a gaming company and you currently work for Microsoft or Real Networks in their gaming divisions, they may watch you more carefully than if you were leaving to start a biotech company.

Remember, it is okay to walk the line between a “company-man” and an “entrepreneur;” just be sure to watch where you step!

This article is an excerpt from my book What Every Engineer Should Know About Starting a High-Tech Business Venture, available now.

]]> http://www.erickoester.com/2008/12/10/fence-riding-startupping-while-employed-elsewhere/feed/ 3 http://www.erickoester.com/2008/12/02/fundraising-in-a-down-economy-try-uncle-sam/ http://www.erickoester.com/2008/12/02/fundraising-in-a-down-economy-try-uncle-sam/#comments Tue, 02 Dec 2008 23:10:17 +0000 admin http://www.myhightechstartup.com/?p=88

I’m sure I’m not saying anything surprising when I say that private money is hard to come by right now.  Angels have likely seen their net worth plummet from a declining stock market and decreasing real estate market.  VC money remains tough and not the approach for many startups anyways.  And, of course, you’d be bootstrapping if you could, but you can’t, so that is why you are looking, right?  So where should you look at a time like this?  Well, spend a few minutes digging around to see if you could qualify for any of the various government programs.

There are countless programs out there and going through them all would take forever, but I’ve listed a few valuable links to check out at the end of this post.  But think about SBIR, SBA, NSF, or countless other government acronyms that may offer you an opportunity to find money that isn’t available elsewhere.

One caveat — these programs may not be a good fit if the money needed overnight to keep the lights on or pay employees on Friday.  These applications can be lengthy, require lots of time and phone calls, and be worse than preparing your college applications.  But, remember this — the government continues to aid small businesses and if you are already battening down the hatches riding out the economic storm, now might be the time for some applications and waiting anyways.

A bit of background on a few government programs.

Federal and state governments offer grant, loan and technical assistance programs designed to promote emerging businesses. Competition for these forms of public sector funding is fierce, and the application process is oftentimes quite arduous. Additionally, the funds usually come with burdensome restrictions on what you can do with the money. Nevertheless, some startups effectively use government funds to advance their business development, so these funding sources shouldn’t be completely dismissed.

One quick point to make: the SBA does not make grants to small businesses directly — they are the arm of the federal government that aids small businesses.  SBA grants go to others who actually help deploy that money.  The SBA does provide backing for loans to small businesses — but those are sometimes difficult for some technology businesses.

Many federal agencies participate in the government’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. The SBIR and STTR are funding programs designed to stimulate technological innovation and fulfill the research needs of the federal government. Businesses are required to meet several criteria to be eligible for grants under either program, including U.S. ownership, for-profit status, and restrictions on number of employees. The SBIR and STTR programs differ in two major ways. First, under the SBIR program, the principal investigator listed on the SBIR application must be employed by the small business at the time of the grant and for the duration of the project. Under the STTR program, there is no such employment requirement. Second, unlike the SBIR, the STTR program requires the small business to be engaged in a collaborative relationship with a non-profit research institution located in the U.S.

• For SBA loan guarantee programs (the SBA will not actually give you the loan, but will guarantee a loan made through a traditional commercial lender), there is not a maximum loan amount and companies are eligible for loan terms that can be up to 25 years. SBA loan guarantee applications tend to approve applicants where the founders have good credit scores, and strong business plan detailing the use of the proceeds from the loan, and evidence that the founder or founders have made personal financial investments.   In Washington state, check out the SBA Loan Fact Sheet or view the list of participating lenders.

• The SBA 504 loan program (sometimes called a “Development Loan”) is designed to assist small businesses with financing of fixed assets, including the purchase of buildings, land, and certain types of equipment. Private institutions will provide the financing for the assets through Certified Development Companies (also known as a CDC). Loans made under the 504 program are generally made at a fixed-rate, long-term basis. The way the Development Loan works is that the private lender institution will lend the company 50% of the total project, a CDC will lend 40% (guaranteed by the SBA), and the company will be responsible for the remaining 10% of the total project cost. The uses are somewhat limited – inventory, debt service, short-lived equipment and machinery aren’t eligible. However, for various projects including building, construction, and facility renovation or retrofitting, these programs will be an option.

• Companies in the importation and exportation business may be eligible for Import-Export Bank Programs, supported by the SBA. Loans for working capital of up to $1.1 million ($1.25 million if combined with an international trade loan) can be guaranteed by the SBA. This program is typically only available for U.S. companies that have been in business for one full year, operate at a profit, and do not exclusively rely on the loan to support the business operations.

Some federal agencies also run venture funding groups. Rather than awarding grants, these groups make investments in emerging businesses. For example, In-Q-Tel is a venture fund run by the CIA that invests in high-tech startups, typically that look to develop technology related to the intelligence community. These venture funds normally produce good returns, and approaching them may be easier than their private sector counterparts.

The US Government also has a preference program for small businesses, so you may be eligible for certain government contracts that are put out to bid. In 2006, small firms won $77 billion in government contracts, or 22.8 percent, of a total of $340 billion in federal government contracts eligible for small business competition.  Check out the SBA on Government Contracting that includes a guide to winning government contracts.

Many U.S. states also offer financial assistance and other support to new startups. These funding programs are usually run through specific agencies or departments based on the relevant subject matter. You should be particularly wary of state funding initiatives to encourage startups in areas where few succeed. Though free money is enticing, it certainly shouldn’t be considered free if it hamstrings your business by forcing you into an unsupportive location.

Here in Washington state, check out the Community, Trade and Economic Development organization that provides a guided search for services, grants and loans.  Also check out the Community and Financial Assistance Unit (CFA).  The Washington Small Business Development Center will provide some free services such as market data analysis, competitive analysis or help identify some sources of capital.  While not direct funding sources, oftentimes the SBDC will be able to guide you through the maze our there.

Where to start looking?

– Start at the SBA website and see what you can learn.

– Visit a Washington Small Business Development Center.

– Identify a federal agency grant program (for example, (1) creating software for defense-related applications, check out the DoD Small Business Programs, or (2) building a life sciences or medical devices company, check out the NIH SBIR programs).

– Visit SBIR Gateway which has a list of resources for SBIR awards.  — Building a company based on technology from a University or high-tech science, visit the National Science Foundation programs

Obviously, not every company is a perfect fit for government funding programs. But you won’t know until you try.  Visit the SBA local offices, meet with a SCORE mentor or just call the SBA helpline at 206-553-7310.  If you have licensed technology from a university, talk to the tech transfer office or professors who are often experts at the grant writing process.  You may have to dig to find someone to help guide you through the process (talk with a favorite college professor who may be a resource), but it may be a good program to consider.

Spend some time looking around (now is better than ever) and checking out the resources available online.  You may find you qualify for a U.S. Government-backed microloan or may find that your product or team would be eligible for the Government Contracting programs.  See what resources are available from a quick google search and you may wind up surprising yourself.

]]> http://www.erickoester.com/2008/12/02/fundraising-in-a-down-economy-try-uncle-sam/feed/ 8 http://www.erickoester.com/2008/08/27/startup-vs-small-business/ http://www.erickoester.com/2008/08/27/startup-vs-small-business/#comments Thu, 28 Aug 2008 06:16:36 +0000 admin http://www.myhightechstartup.com/?p=23

Startup vs. Small Business: What type of business are you forming?

“I’m the CEO of a new startup.”

As a conversation starter, this tends to be a pretty good statement to get someone’s interest peaked.  For some reason, being in the startup business tends to be pretty sexy, as far as business-building goes (wow, never thought I’d use the words startup and sexy in the same sentence, but there you have it).

On the other hand, forming a small business seems to have less of a ring to it.  I’m not sure why, but perhaps it has to do with what I saw on television — the general store owned by Mr. So-and-So or the Repair Shop down the street or insert your own random thought on a small business.

But the truth of the matter is, why does the phrase “startup” conjur up something different than a “small business?”  A startup tends to be a small business, by its very definition.  But oddly enough, they don’t have the same cache.

To Startup or Small Business… that is the question.

So what’s the difference?  In their book Engineering Your Startup, James Swanson and Michael Baird separate the businesses into two categories: (i) Income Substitution Businesses and (ii) Wealth Building Businesses. Generally, a small business will fall in the category of income substitution, while wealth building entities are more likely to be startups.

According to Swanson and Baird,

“people who simply do not want to work for someone else can easily startup a small income-substitution business such as a one-man computer repair service shop.”

This would qualify as an Income Substitution Business.  On the other hand, if you wanted to build a business that would be a national franchise or desired to create software allowing for repairs to be made remotely, then this model would be a wealth building business.

The terms “startup” and “small business” are sometimes used interchangeably, but in practice there is a difference between the two.  According to the Career Action Center,

“a start-up is a small company, most often with a high-tech focus, that is in the early stages of development, creating a product or service, or having a product or service needing manufacturing and/or marketing.  They are looking to grow through possible venture capital funding, initial public offerings (IPOs) or acquisition by larger companies.”

On the other hand, a small business tends to have a more narrow focus and is not limited to high-tech applications.  A small business may not have growth goals similar to a startup and may have no plans to grow larger than its small business size.

Does it matter?

That’s probably the better question here… does it matter if you say you are the forming a startup or a small business?  Perhaps smarter minds would differ, but I happen to think it does matter.  It may not be the difference between success or failure, but it matters.

Here’s why?  The use of the right description of your business and your goals sets the tone for your interactions with outsiders.  It is like knowing the secret handshake or the proper lingo.  Having the handshake and lingo will get you in the door (but don’t plan on staying long if that’s all you’ve got).  Why do most startups incorporate in Delaware?  Sure, there are the practical reasons (cutting edge law, most lawyers know it, ease of filing), but I think one of the other main reasons is it signals to outsiders such as investors, potential employees, executives, partners, etc. that you know what you are doing.

Same goes with the difference between calling your business a small business and a startup.  In all honesty, if you intend to build a business that, in all reality, will employ less than 20 people, most likely your concerns will be different than a technology company intending to build its product or service into the market leader for a market or sub-market.  One isn’t necessarily better (in fact, forming a small business probably is less risky and someone who has run the numbers may tell you that the odds of a successful outcome are higher), but you should probably know what you are planning to do and signal that to outsiders.  This prevents you from hiring the wrong types of folks (i.e. a programmer looking for a long term payout from some booming options) or spending time rubbing elbows with investor-types that aren’t in your wheelhouse.

In addition, small businesses tend to have different financing needs (which can be a good thing) and usually will have a more narrow market, either geographically or in scope.  Below are some of the basic differences between the two types of businesses:

Conclusion: Know thyself.

I’ve seen a number of people who have a business plan for a startup that would be much better off as a small business.  That isn’t to say that I bat 1000% on good ideas… but there are ideas that fit the ‘startup’ mold and those that just probably don’t.  For example, a consulting organization (even one that will consult on high tech issues or use high tech people) probably isn’t a startup in the traditional sense of the word.  The consulting business can prove very successful, create tons of cash flow and may even spin of an interesting technology for a startup.  But, few VCs will fund a pure consulting company.  So spending all the time, energy and resources making a VC-ready business plan for a small business isn’t a good use of time.

So, the long and the short of it is to figure out what type of business you should form based on your experience and idea, not the type of business that is sexier, hipper or sounds better at those elbow-rubbing parties.  A well-run small business may pay off multiple times over from a hot new biotech startup or innovative software startup.  And that’s just the way it goes.

Truth is, each of us probably wants to get into the restaurant on Hollywood Boulevard where all the celebs are hanging out, let’s call it Club Startup.  Yup, Club Startup is the sexy, hot hangout.  Tip the bouncer, give him the handshake and maybe you’ll get in.  Or maybe not.  But don’t go sittin’ in line if you really don’t want to go there.  People like me may be better off not waiting in that line if I’m not going to get in anyways.  Me, maybe I’ll just have Miller Lite…