Humble Businesses vs. Startups
Before we can generate and evaluate business ideas, we need to answer the question: what type of business do you want to build? This question is important because many ideas are not bad per se. Instead, they’re just bad if you want to build a particular kind of business.
The two broad types of businesses are: startups and humble businesses. There are many synonyms for these category names. Alternative names for startups are moonshots or “the next Facebook”. Humble businesses are also known as lifestyle businesses, side projects, side businesses, bootstrapped businesses, Cambodia cash businesses, small businesses, companies of one, and ramen profitable businesses. While some of these terms are not exactly synonymous, for our purposes since we’re only talking about the idea stage, they are.
In short: startup ideas aim for hockey stick growth, while humble businesses focus on profit from the start and are happy with linear growth. In fact growth is not the primary concern. Instead, the goal is to provide the owner with a steady, reliable, hazel free stream of income. Formulated differently, while startup founders typically barely manage to have a life outside of work, humble entrepreneurs instead create a business around their life.
Let’s look at a few successful examples:
While startups are certainly more sexy, as a beginner, you should focus on humble business ideas. To understand why, it’s helpful to use a poker analogy.
Focusing on a startup idea is like going all in one a hand before the flop, hoping that you’ll eventually win big. There is this idea that you should aim big because if you then fail your result will still be bigger than if you started with some small goal. This sounds reasonable but doesn’t hold up under closer scrutiny. In most cases, when people aim really, really big, they end up with nothing that works at all.
In contrast, if you have smaller goals, the chances that you’ll produce something that others find useful are much higher. To return to our poker analogy, the humble business strategy is analogous to making smaller bets on solid hands. Of course, there’s no guarantee that you’ll win. But the cost of taking part in the game are nowadays so low that you can play almost indefinitely, while the pot you can win is reasonably large. So the chances are really high that you’ll eventually win enough to sustain yourself. Moreover, the good thing - and is there is where the poker analogy breaks down - is that the game that we call entrepreneurship is not zero sum. Only because you succeed doesn’t mean that others loose. Otherwise we all would still live in caves.
Formulated differently, if you focus on a startup idea it takes a long time, often years, before you can tell whether or not your idea is any good since it is expected that you make no profit in the first years. In particular, there’s no guarantee that your flat revenue curve will eventually turn into a hockey stick. There’s always luck involved. No matter how hard you work and how good your idea is, you’ll probably still fail.
But if you focus on a humble business idea, you get feedback much more quickly and are able to react accordingly. If there’s no profit within the first few month, this is a good sign you should move on to something new. Since you’re not betting everything on one hand and not using outside cash, you can comfortably walk away from any project whenever you want.
Another advantage of humble businesses is that once the profit curve starts to stagnate or you loose interest, you can often remove yourself almost completely from the company and focus on something new. Since humble businesses sustain themselves, there’s no reason to shut them down as long as they make a profit. This allows you to build a diverse set of income streams that, even though each individual stream may not be impressively large, can make you comfortably rich.
It is also worth mentioning that the linear growth of humble businesses can still yield significant results. There are many examples of businesses (e.g. ConvertKit) that started humbly and are nowadays making millions of dollars each year.
A final advantage is that the knowledge and capital that you gather as you build humble businesses allows you to acquire humble businesses. For most people it’s completely unrealistic to buy a startup. Since large sums of capital are invested to build them, the price tags are often staggeringly large. But humble businesses can be surprisingly cheap and buying them is a great way add new income streams. Once you’ve build two or three humble businesses yourself, you’re in a perfect position to estimate the value and how to run a humble business that is up for sale.
With all that said, I feel the need to emphasize that startups are, of course, worthwhile endeavors. They are what really drives humanity forward and I’m certainly not saying that no one should attempt moonshots. Instead, my suggestion is to start by developing some entrepreneurial experience and cashflow by building humble businesses. Once you’re financially independent, you should definitely work on your big dreams. We definitely need more people who think big and are driven by definite optimism.
An important aspect of the strategy I just proposed is that you need to beware of the “deferred life plan”. Most people defer their big goals to some unspecified day that never comes. To avoid that trap, set of a goal like: Once I make $10.000 per month from my humble businesses, I will attempt a moonshot.