Although the difference between a startup and a small business is subjective, it often comes down to the company’s growth goals and revenue forecast. Startups focus on disrupting markets and driving top-line revenue at a fast pace. Small businesses, on the other hand, often set their goals on long-term, stable growth in an existing market. Join Virlan to know about the differences.
What is a Startup ?
For the most part, startups focus on fast growth and high-end revenue. They are often identified for using technology in their services, usually relying on raising lots of money from angel investors, venture capitalists and crowdfunding platforms at every stage of their growth.
They can attract the best talent to come and work for them and see their product as changing the world.
But there is more to startups than this. Startups coming in six different forms:
- Lifestyle Startups – Where entrepreneurs live the lifestyle they love. For example, a surfer opening a surf shop so they can fund their own surfing.
- Small Business Startups – Essentially these are just small businesses. Because they are new, they are still startups.
- Scalable Startups – The most typical vision of what we like to think a startup is. These are companies that like to think big. Like Google or Facebook, saleable doesn’t just mean getting bigger, it means world domination.
- Buyable Startups – These are companies that are founded to be bought out. This type of startup has become recognisable to everyone, mostly on the web or mobile app market. It is the pipe-dream of every tech entrepreneur.
- Large Company Startups – Offers new products based on their core products, like sportswear or electronics companies. These startups sustain growth by continuous innovation.
- Social Startups – Instead of wanting to scale-up their enterprises, social entrepreneurs prefer to share wealth or at least create a better world.
A Startup is Temporary
The organizational function of the startup is to search for a repeatable and scalable business model. According to Blank, this means that a startup founder and CEO has three main functions:
- To provide a vision of a business idea or a viable product with a set of features in a startup phase.
- To create a series of hypotheses about all the pieces of the business model: Who are the customers? What are the distribution channels? How do we build and finance the company, etc.
- To quickly validate whether the business plan is correct by seeing if customers behave as your model predicts.
Base on this definition, it stands that once a business model is proven, the function of the organization must shift to produce outcomes of success and execute said model; in many cases removing the agility and innovation that once existed in the early days of the business.
What is a Small Business ?
Perhaps one of the key ingredients in what defines a small business is being small and recognising consistent returns rather than growth as its fundamental goal.
However, depending on what kind of industry it is in, the term small business can be subjective. An engineering company employing hundreds of workers can be termed as a small business in the same way that a marketing company employing just two people can be. It’s not the size of the small business that matters, it’s the company you keep in your industry.
There are benefits to being a small business that larger scale enterprises and many startups do not enjoy.
- Small Businesses have a personal edge – Many small businesses personally invest in the products they sell or the service they offer. There are real people with real jobs working in them. Many customers and clients actually like this. They like to know that their business isn’t supplied by a faceless organisation; they like to know that their suppliers care about what they produce.
- Small businesses have a story – Most small businesses created by hard work and graft and somewhere along the way where problems have been overcome. Success is often hard fought. Customers, clients and lenders can become invested in that story, which in turn generates business.
- Small business can build strong relationships – Generally, people do business with people they like. A small business is run by people and if you can develop relationships with clients and be liked, this can go a long way in providing security for it.
Differences Between Startup vs. Small Business
So, now that you have an overarching sense of what a startup is, let’s dive a little deeper into the characteristics that differentiate a startup from a small business.
1) Growth Intent
One of the biggest differences between a startup vs. small business is the growth intent behind your operations. Startup founders are looking to significantly impact and disrupt the current market with their startup business idea meaning they’re not looking to maintain a small, limited team forever.
Instead, they’re looking to grow—quickly. This is why so many startups found within the tech industry technology has a wide reach, is easily scalable, and can fund fast.
In contrast to this concept of a startup, the SBA defines a small business as a “for-profit business of any legal structure. Independently owned and operated, not nationally dominant in its field.”
Based on this description, the growth intent of a startup is very different from the intent behind most small businesses. Whereas a startup is very literally create for the purpose of growth, this isn’t necessarily the case for a small business.
2) Business Objectives
Tied directly to the growth intent of a startup are its goals and objectives. Again, a startup founder is looking to disrupt the market with their scalable and impactful business model, grow as quickly as possible, beat out competitors, etc.
With a small business owner, on the other hand, this isn’t necessarily the case. To run a small business, you don’t need to disrupt the market or break into a completely new market; instead, you simply need to have the desire to start your own business. And find a market that you can reach effectively. As long as you can do so while earning revenue, you can successfully run your small business.
In this way, whereas startups are typically founded in the tech industry, small businesses are often what we consider “main street businesses“—local coffee shops, grocery stores, auto repair shops, hair salons, plumbers, and more. Although these businesses aren’t disrupting the market, they are the cornerstone of local economies and employment—employing nearly 60 million people in the U.S.
Here, you can see how growth and business goals are intertwined. Startups want to grow with the goal of disrupting the market. Small businesses, on the other hand, are created for the purpose of entrepreneurship and serving a local market. Therefore, aren’t concerned with growth on such a large scale.
3) Difference Between Startup vs. Small Business: End Goals
When you start a small business, it’s very likely that you plan to continue to run that business for some time. Until you eventually pass it on to a family member or sell it to an interested buyer after you retire. Therefore, until that time, your goal is simple to stay in business. With a startup, on the other hand, this isn’t the case.
َA startup is a temporary organization that designed to search for a repeatable and scalable business model.
The startup may change business models multiple times to find the right one. But once it does, the goal of the organization then shifts to execute on that model. At that point, the organization is no longer a startup, and instead, is a company.
Although Blank’s approach may seem philosophical, you can see how it may be applicable in a real-world scenario. When is a startup no longer a startup? Perhaps when they bought by another larger company. Or when they go public with an IPO (initial public offering).
The end goal of the startup is very different to compare white a small business.
4) Funding In Startup & Small Business
Another of the biggest differences between a startup vs. small business? How they’re fund.
Although it will certainly be more difficult for both startups and small businesses to find funding in comparison to more established businesses. Startups are much more likely to turn to and find success with equity financing in comparison to small businesses.
With equity financing, startups can look for angel investors or venture capitalists who are willing to offer large amounts of capital in exchange for equity, or ownership, in the company. Typically, these investors offer minimum amounts of capital in “rounds” and then with each series of funding, the startup gives up equity.
Therefore, as the startup continues to raise money, it may reach a point where it no longer exists as an independent entity.
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.
In contrast, equity financing just doesn’t make sense for most small businesses. Most small business owners don’t want to give up control of their businesses. And most angel investors and venture capitalists only want to work with high-growth-potential startups that are disrupting their industries.
Instead, small business owners usually turn to different forms of debt financing to fund their operations.
5) Level of Risk
Whenever you’re trying to launch a new company, there’s always some level of risk involved. However, when it comes to comparing a startup vs. small business, there is certainly an added level of risk associated with a startup.
The operating principle behind a startup is creating a product or service that can disrupt or significantly impact the market. Therefore, by going through the process to research, raise money, test the product or service, 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, you’re also taking a huge risk. If you don’t succeed, you have a lot to lose.
Although there are also a variety of risks associated with starting a small business—and 20% of them fail within their first year small businesses have the benefit of launching within an already established market. In this way, the risks are much lower. Therefore, can be much more manageable than they are for startup owners.
Finally we can say:
The difference between a startup vs. small business goes beyond our everyday usage of these words. Instead, it’s much more significant for future entrepreneurs. When you’re starting your own company, you can ask yourself “Am I launching a startup or a small business“?