Every year, hundreds of thousands of startups are established right across the US alone. However, the difference between a startup vs small business is still widely misunderstood. The two types of companies are, however, very different.
Startups were treated by investors as just smaller versions of larger companies for many years. There are some major differences both ideologically and organizationally between these types of companies. From the philosophies behind the companies to the ways they conduct their day-to-day business, startups and small businesses are vastly different.
These differences matter hugely when it comes to investing. The differences between small businesses and startups require very different approaches to funding and key performance indicators. Let’s dive into the precise definitions, and why it is important to understand the differences between them.
What is a Startup?
All of these definitions are relatively fluid and can encompass a large range of different types of companies. There are, however, definite aspects that determine whether or not a company is a startup or not.
Generally speaking, a startup is a business that is right at the beginning of its life but is expecting a significant expansion or growth in the future. Startups tend to be big game-changers.
Startups tend to be founded with the intention to produce a single or limited amount of specific products or services. They differ from small businesses in this way, as often once they create this product, they consider their work done. Many startups are often bought by larger corporations at this point.
They rely on funding from grants or investments from shareholders to develop their product or service. This product or service is generally something that is exciting and has high expectations placed upon it that it will be a hit and change whole industries. Startups are about high stakes – risks are taken, but if they succeed the results will be amazing.
Entrepreneurs who begin a startup should not be afraid of taking risks. There are no guarantees. Many startups are built on the passionate development of an idea that has taken months or even years.
What is a Small Business?
One of the main ingredients that make small businesses what they are, is that they focus on consistent, reliable returns as opposed to consistent growth. This difference in goal is a vital distinction.
On top of that, a small business is any company that has very few employees. They operate on a different scale and focus on remaining sustainable in their business practices for the future.
Whereas a startup may be aiming to be successful later on in the future, a small business is aiming to be a success from day one. They look for modest success that can be maintained, rather than a large success that comes all at once and later on.
They often do not require outside investment in the same way that startups do, as one of their key aims is to raise their own revenue from the beginning.
They tend to focus on a local, regional market, and look to develop their business in a small but reliable way. There is often less major risk involved.
The Main Differences Between a Startup and a Small Business
The U.S. Small Business Administration (SBA) describes small businesses as “independently owned and operated, organized for profit, and not dominant in its field”.
Primarily, startups want to disrupt their chosen market in a major way. They often want to take over the market completely.
They often will not be profitable at first, or even for the first few years. They rely on a powerful vision of a final goal. This vision attracts investors who are willing to stake their money on a big profit further on down the line.
This is in contrast to small businesses. Small businesses often start in response to some demand for either a product or service that is yet to be fulfilled. They also hope to be able to sustain their business and provide that product or service in the long term.
To summarize – mainly, it is the driving force behind the two types of businesses that creates the difference. Startups intend to disrupt the market with a powerful and singular business model. The small business wants to sustain its business over the long term and secure its own niche in the market.
Startups are Temporary
So what other big differences are there behind these two different styles of business model? Put simply: one intends on lasting for a long time, while the other does not.
Startups have a particular method behind their business framework – to find a business model that is repeatable and scaleable. Blank states that because of this, startups have three main functions:
- To have a vision of the end product with a certain set of features
- To determine a set of hypotheses that will guide all aspects of the business model. For example, who are your customers? What distribution channels does your startup have? How will the startup be financed and built?
- To validate quickly and efficiently whether or not the business model is correct by observing how customers react
Startup vs Small Business: Differences in Funding
A majority of small businesses tend to get by on hardly any funding, as they have a focus on profitability from day one built into their business plans. This is the main difference that small businesses have with startups.
However, that does not mean that it is unnecessary for small businesses to obtain funding. They often require it to start out with. The difference is the scale of funding that they look for. Common sources of funding for small businesses include private savings, banking credit, and investments made by friends and family. If a company qualifies as a small business, there is also the option of applying for a small business loan.
While startups often seek funding during most of the course of their lifetimes, small businesses only tend to seek out funding at the beginning. This is because small businesses aim to be profitable as soon as possible, to maintain their business.
Startups often look for funding from places such as angel investors and venture capital firms.
To obtain this kind of funding, startups often need to have a clear plan and show passion for their final goal. As they are built around a single endpoint, this means that startups should have at least a rough idea of how much investment they will need overall. Venture-backed companies often need to see a solid business model with clear plans on how profit will eventually be made.
Startups tend to be begun due to the founder having a new idea and wishing to see it realized. This often means creating a whole new niche for a product or service. Even if that is not the case, then the product or service will be designed to be revolutionary in some way. This all means a huge amount of work and also luck will be required to make the idea work. This introduces much more risk to the startup business model than a more standard small business.
Small businesses also take on risk, but it is of a different kind. Small businesses tend to fit into already established niches – a coffee shop for example. They are not looking to revolutionize the business. The timescales of their success are often longer than startups, as they are not entirely focused on growth as a priority.
Way of Life
The ways in which an entrepreneurs’ private life is combined with their work-life varies between startups and business too.
For startups, the pressure is on immediately due to the large amounts of funding put in by investors. The pressure is there to make a profit as soon as possible. Often, startups are born from passion. This leads to entrepreneurs needing to spend as much time as possible to realize that dream goal. The competition of other startups to get to that revolutionary idea first is also a motivator. This can all mean a lot less private time for the startup owner!
For small businesses, there are fewer risks and more structure. The focus is on building a slow and steady stream of income to support the business in the long term. However, life as a business owner means that work never really ends. Especially at the beginning of a small business, the business owner can spend 24 hours a day maintaining and nurturing their business, before they even make a profit.
Startup vs Small Business – Different in Many Ways.
It is vitally important to recognize the difference between the two business types if you are to succeed in either one!
As we have seen, many of the differences can come down to one point: the relative growth outlook of each.
Startups have a single end goal that may take a long time to reach. There may not be much profit, if any, on the journey to creating the product or service. However, if all goes well, the end profit will be worth the risk and effort.
Small businesses, on the other hand, are designed to last. They fit an existing business style and niche and are meant to make a profit as soon as possible to stay afloat.
So, while there may be some similarities between the two, it’s clear that when it comes to startups vs small businesses, they are as different as night and day!