San José, Costa Rica, since 1956
Doing Business

The different flavors of starting a business

Every time a topic starts to become mainstream, it is common to encounter mixups. In Costa Rica we are in the middle of the business startup mixup and that is causing major confusion to entrepreneurs, policy makers, investors and organizations.

Entrepreneurship is hot right now. Almost 15 years ago, when I started my first small business, leaving a decently paid job to pursuit your own business was very much frowned-upon. There were no incubators and no events glorifying innovation, and we didn’t even know what seed money was. Fast forward to 2015 and the word “startup” yields you 72 articles in El Financiero (the country’s leading business paper). Turn on your TV and you can see Mark Cuban plow half a million dollars in a business after a 10 minute pitch in Shark Tank. Check your Facebook account and you’ll find at least 5 entrepreneurship-related events coming in the next month. Nowadays, even though we still have a long way to go, the path of the entrepreneur is becoming more appealing to young people and middle-aged professionals.

As entrepreneurship hits mainstream media and people start considering making the leap, we can be led to believe that all businesses are created equal. Starting up is hard enough as it is: you are leaving the security of a job, you’ll be working long hours, and you’ll probably have to wear many different hats, some of which perhaps you have never worn before. But depending on the type of business you are planning to get into, you will face very different challenges, and this is something that is overlooked by many. Let’s get into the different flavors of new businesses.

Innovation-based businesses: Everybody wants to be Uber

This is the startup that grabs all the headlines with its impressive growth rates and disruptive effects on the market. And, of course, what’s not to like? You can go from a project in your garage to being acquired by Facebook for $19 billion in less than four years (yes, we’re talking about you, Whatsapp). The catch is that these types of startups are cash-hungry, which requires you to seek considerable investment. They are also sometimes slow to monetize, which implies you’ll have to have the stomach to weather monthly losses on your way to breaking even.

With nonexistent local venture capital in Costa Rica and not exactly the widest cast of angels, these heavy investments are hard to come by. Add to that the small scale of the local market and you’re basically required to think abroad from the get-go if you want to sail in the innovation-based startup boat. Finally, these startups usually require you to build teams with great expertise in different areas: your drive as an entrepreneur and particular industry knowledge certainly won’t be enough.

Traditional businesses: More than good ol’ mom and pop shops

This is the Chinese restaurant in your neighborhood, the bakery on the corner, the bar where you go grab a beer after work. Traditional businesses are said to be the backbone of the economy, and most are owned by individuals or families. Although looked down on by innovation purists and many investors, the truth is there’s money to be made in these type of businesses if you play your cards right – that is, if you think beyond earning your livelihood. After all, Chipotle was once just a fast-food restaurant and Starbucks a coffee shop, right?

These types of ventures don’t necessarily require huge amounts of money to get off the ground (until you start scaling them up fast), which means more independence from investment and somewhat more controlled risk. Although some business acumen is always necessary, the fact that these businesses are more traditional means that there are always good practices readily available to learn from. Growth is certainly slower, but allows the starting entrepreneur to learn and figure things out.

Micro-businesses: The one-man show

The internet and the many different tools and services available to support businesses make it easier than ever for anyone to start a side gig that can turn into a full-blown business. Say your hobby is to arrange friends’ vacations, you are a good photographer, or you can write a killer Excel guide for dummies. There’s nothing to keep you from starting to turn that into a business, run from your own home. You can create a website for free with WordPress, process payments with Paypal, manage mailing lists professionally with Mailchimp, self- publish content (books, guides, audios), and manage your finances with Quickbooks, for a couple of bucks a month.

If you are an expert in any domain, you can start your consulting practice at any given time, provided that you can deliver value to customers with a specific need. In a book called “The $100 Startup,” Chris Guillebeau gathers hundreds of examples of people who started this type of business with little or no money and only their individual work, and turned them into a very nice livelihood and beyond.

Social businesses: Making profits while making good

The notion that any venture aimed at helping a group of people or solving a social problem had to be a nonprofit organization is outdated. Hundreds of examples around the world have shown that sometimes the best way to make a profit is precisely by solving society’s most pressing challenges. Growth with these types of startups is usually triggered more by demand than anything else, but investment or expansion can speed things up.

Besides its social impact, it can act like an innovation-based or a more traditional startup, but the good will aspect of it can earn score big points with investors and customers who are sensible to the subject. Plenty of organizations, including the Costa Rica-based Centro de Intercambio de Conocimientos (Knowledge Exchange Center, or CIC), and private initiatives like that of Chivas, hold competitions to support and fund social startups.

Being aware of the differences between the types of businesses you can start, and the advantages and disadvantages of each, can help entrepreneurs better prepare for the road ahead and make better decisions when making the leap. For policymakers it is also crucial, especially because in Costa Rica today, all government-based support for new businesses is largely tailored to traditional startups (or PYMES). As for investors, having clarity on this can help understand the risk profile, the return horizon and the type of support they can expect to provide to the venture.

 

Randall Trejos works as a business developer, helping startups and medium-sized companies grow. He’s the co-director of the Founder Institute in Costa Rica and a strategy consultant at Grupo Impulso. You can follow his blog La Catapulta or contact him through LinkedIn. Stay tuned for the next edition of “Doing Business,” published twice-monthly.Read more “Doing Business columns” here

 

 

 

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