What is the difference in-between a startup and a small business? Well, it is quite subjective and not at the same time.
A startup is like that sexy and rich (or sometimes just a wannabe) friend of a friend. The one that everyone was saying that he or she is crazy to think about such quick success and, magically, they have reached it.
A small business is a bit more of a stable business model. It is more like that kid from school who was always very organised and everyone knew that he is going to be quite well off, but he was never too ambitious, so chose a safe and more risk-free route.
On a more serious note, we keep seeing very appealing examples that keep popping up – like Airbnb, Uber, and Snapchat, it’s no surprise that the word “startup” has become so sexy for the youth and it got instantly integrated into the daily vernacular of the business community.
Although, the term “startup”, is now often used interchangeably with “new business,” many people still don’t get the difference between a startup and a small business.
So, what is the difference between these two establishments?
Let’s dive in.
Growth is the main focus
One of the biggest differences in-between a startup and a small business is that startups focus on rapid growth.
Startups come up with an idea, make it happen and scale it as fast as they can. And they do that in a way, that has a significant impact on their provided market. Startups are not focusing on a single idea – they are formed to search not only for a scalable but also repeatable business model. That is why, as we have mentioned before, startups are more exciting and sexy – they have a vision, instead of fixating on a simple money-making solution.
So how to describe a small business? The SBA defines this concept as a “for-profit business of any legal structure, independently owned and operated, not nationally dominant in its field.”
In other words, a small business would be your local coffee shop. Their goal is to make coffee, make money and make people happy – not to beat Starbucks in one year and be the king in the coffee market.
It is all about the business, baby
Here, as you can see, growth and business goals are intertwined.
Startups have the goal to grow to disrupt the market.
On the other hand, small businesses are created for entrepreneurship and serving a local market – and they simply don’t care about growth on such a large scale. They don’t need that.
Startups need to quickly reach the sky, and that’s not going to happen overnight. Far from it, they require initial investments, and those investments won’t return immediate results. Yeah, as we all know, a startup probably won’t be profitable in its first, second, or even third year (and some startups never become profitable).
Majority of the startups focus on the tech industry. It is way easier to fulfil the idea if it is not physical. Startups are typically online or technology-oriented businesses that can efficiently reach a broad market.
To run a small business, on the other hand, you don’t need a big market to grow into. You just need a market.
Ask anyone to name a small business and they might name their local deli, coffee shop, plumber, or electrician. Small businesses are not disrupting an industry, but are attempting to be profitable within it and simply survive.
Startups are thinking ahead
What’s the end goal for a small business?
Well, we are going to repeat ourselves – it’s to survive and stay in business.
Of course, every small business owner has a different intention of what they hope their small business will become—but in general, their owners intend to create self-sustaining and long-lasting small businesses. You know, when you start something like that, you are likely planning to continue to run that business, until you eventually pass it on to your child or another family member, or, simply, sell it to an interested buyer after you retire.
Startups, however, are intended to be temporary, designed to search for a repeatable and scalable business model. The startup may change business models many many times, just to find the right one.
Once it does, the main focus becomes to execute on that model. This is the moment when your baby grows up and turns into an actual human being. It is no longer a startup.
If it all goes as planned, that startup turns into a huge company—experiencing an IPO (initial public offering) event.
Another common goal of a startup is to be bought by a larger company.
In any case, as you can see, the differences in-between startup and small business are quite obvious.
What are another main difference in-between startup and small business?
It is another straightforward one – it is the way they are getting funded.
Yes, when you compare them to big companies, for both, startups and small companies, it is hard to get funded.
But whom would win if there would be only a startup and a small company in the fighting ring?
Of course, startup. Think about it, if you would have the money to invest, what would you choose? A sexy idea that potentially is going to break and rule the market? Or another coffee shop?
Another thing, with equity financing, startups can look for angel investors or venture capitalists, who are willing to offer large sums in exchange for equity, or ownership.
How does it work? Typically, these investors offer minimum amounts of capital in “rounds” and then with each series of funding, the startup gives away equity.
Some startups get involved in it too much and lose their independence. They continue to raise money and reach a point where it no longer exists as an independent entity.
This being said, although equity financing diversifies ownership of the startup, it allows the founders to raise large amounts of capital, as well as earn the mentorship and guidance of the investors.
It all depends on your needs, business model and goals.
Let’s get back to small businesses.
For them, equity financing just doesn’t make sense. And to be fair, it doesn’t make sense for any side of the party. Majority of the small business owners don’t want to give up control of their businesses, and, well, most angel investors and venture capitalists only want to work with companies that have high growth potential and are disrupting their industries. They are not interested in coffee shops.
Instead, small business owners find other ways to fund their endeavours – loans, lines of credit, asset-based financing, etc.
When you think of any company, no matter small or big, they are all taking certain risks.
However, when you compare startup and small business, it almost became like a piece of common knowledge – startup businesses are the ones to take more risks.
As we’ve discussed at length, the operating principle behind a startup is to disrupt the market with an impactful business model.
To take over the market. Just like Godzilla.
We all heard the scary numbers of startup failure. They have to go through the maddening process of research, endless testing of the product or service, hunting for capital etc. you’re taking a huge leap of faith that your startup will succeed and be able to make that impact.
On the other hand, of course, you’re also taking a tremendous risk – if you don’t succeed and fail, you have plenty to lose. Or everything.
Scary thought, right?
It is not that easy for small businesses either. If you look at the statistics, they are not too pretty for small business too, 20% of them fall through within their first year.
But small businesses have an advantage – they have the benefit of launching within an already established market. And as we have mentioned many times before, they are planning on staying quietly in the market, instead of raging and showing everyone how cool they are.
In this way, the risks are much lower and therefore, can be much more manageable than they are for startup owners.
The main takeaway
As you can see, the difference in-between startups and small businesses are much more palpable than most people would initially think.
After reading this, it started makes sense, right?
But why does this difference matter?
At the end of the day, the difference in-between startup and small business go beyond our everyday usage of these words. Instead, it’s much more significant for future entrepreneurs.
When you’re starting your company, you can ask yourself – am I launching a startup or starting a small business?
Now, you’ll be better qualified to set goals, acquire funding, and plan the future of your business.
What are you waiting for? Start now!