Every year, hundreds of thousands of startups, including tech startups and early-stage companies, are established right across the US alone.

However, the difference between a startup vs a small business, often seen as a local business or mom-and-pop shop, is still widely misunderstood.

The two types of companies, whether driven by innovation or serving the local economy, are, however, very different.

For many years, startups, especially those seeking venture capital or angel investors, were treated by investors as just smaller versions of larger companies.

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 operations, startups, often aiming for scale and disruption, and small businesses, which might focus more on brick and mortar retail, 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, from seed funding to small business loans, and key performance indicators.

Whether you’re looking at a unicorn aiming for a significant market share or a family-owned business serving Main Street, it’s essential to understand their unique business models and strategies. Let’s dive into the precise definitions, and why it is important to understand the differences between them.

What is a Startup?

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All of these definitions, whether related to tech startups, early-stage companies, or local businesses, 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 a more traditional small business, like a mom-and-pop shop.

Generally speaking, a startup, often driven by innovation and disruption, 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, aiming to pivot or scale rapidly in their market.

Startups, especially those with a Minimum Viable Product (MVP), tend to be founded with the intention to produce a single or limited amount of specific products or services.

They differ from small businesses, which might be more focused on brick and mortar retail, in this way, as often once they create this product, they consider their work done. Many startups, especially those with a unique competitive advantage, are often bought by larger corporations at this point.

They rely on funding from grants, venture capital, or angel investors, and investments from shareholders to develop their product or service.

This product or service is generally something that is exciting, potentially disruptive, 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, like achieving unicorn status, will be amazing.

Entrepreneurs, often driven by entrepreneurship philosophies and business strategies, who begin a startup should not be afraid of taking risks.

There are no guarantees.

Many startups, built on the passionate development of an idea, are bootstrapped or rely on seed funding and have taken months or even years to evolve.

What is a Small Business?

One of the main ingredients that make small businesses, such as mom-and-pop shops or family-owned establishments, what they are, is that they focus on consistent, reliable returns as opposed to consistent growth like many tech startups.

This difference in goal, whether it’s serving the local economy or aiming for market disruption, is a vital distinction.

On top of that, a small business, often seen as a brick and mortar or a local business, is any company that has very few employees.

They operate on a different scale, perhaps more akin to Main Street than Silicon Valley, and focus on remaining sustainable in their business practices, ensuring longevity for the future.

Whereas a startup, potentially driven by a unique business model or aiming for a significant market share, 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, like many unicorns in the startup world.

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, without heavily relying on venture capital or angel investors.

This self-sufficiency is a hallmark of many small business operations.

They tend to focus on a local, regional market, perhaps even being a staple of their community’s Chamber of Commerce, and look to develop their business in a small but reliable way.

Unlike startups, which might pivot or undergo rapid changes, there is often less major risk involved in the steady trajectory of a small business.

The Main Differences Between a Startup and a Small Business

Growth Intent

The U.S. Small Business Administration (SBA), a key resource for many mom-and-pop shops and local businesses, describes small businesses as “independently owned and operated, organized for profit, and not dominant in its field”, differentiating them from startups which might aim for a significant market share or disruption.

Primarily, startups, especially tech startups or those with a unique business model, want to disrupt their chosen market in a major way.

They often want to take over the market completely, aiming for a unicorn status or becoming a game-changer in their industry.

They often will not be profitable at first, or even for the first few years, as they might be in the early stages of developing their Minimum Viable Product (MVP) or undergoing growth hacking.

They rely on a powerful vision of a final goal. This vision, driven by innovation and the potential for scale, attracts investors, such as angel investors or venture capitalists, who are willing to stake their money on a big profit further on down the line.

Snapchat’s growth despite not breaking a profit.

This is in contrast to small businesses, such as mom-and-pop shops or family-owned establishments. Small businesses often start in response to some demand for either a product or service that is yet to be fulfilled in the local economy.

To summarize – mainly, it is the driving force or the underlying entrepreneurship philosophy behind the two types of businesses that creates the difference.

Startups, often driven by innovation and aiming for a significant market share, intend to disrupt the market with a powerful and singular business model, potentially aiming for unicorn status.

In contrast, the small business, deeply rooted in its community or Chamber of Commerce, 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, like a local business, intends on lasting for a long time, serving Main Street for years, while the other, potentially a tech startup, does not.

Startups, especially those in their early stages or seeking seed funding, have a particular method behind their business framework – to find a business model that is repeatable and scalable. Blank states that because of this, startups, with their growth hacking approaches, 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, perhaps pivoting from initial ideas, does your startup have? How will the startup, through angel investors or venture capital, be financed and built?
  • To validate quickly and efficiently, through market research and customer feedback, 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, like mom-and-pop shops or family-owned establishments, tend to get by on hardly any funding, often relying on their local economy or brick and mortar presence.

They have a focus on profitability from day one built into their business plans, ensuring consistent, reliable returns.

This is the main difference that small businesses, with their Main Street focus, have with startups, which might be aiming for disruption or scale.

However, that does not mean that it is unnecessary for small businesses to obtain funding. They often require it to start out with, especially if they’re setting up a retail or physical presence.

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 through institutions like the Small Business Administration (SBA).

While startups, especially those in their early stages or with a unique business model, 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, deeply rooted in their community or Chamber of Commerce, aim to be profitable as soon as possible, to maintain their business and serve their local or regional market.

Startups, on the other hand, often look for funding from places such as angel investors and venture capital firms, aiming to develop their Minimum Viable Product (MVP) or achieve significant market share.

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To obtain this kind of funding, startups, especially those aiming for disruption or with a unique competitive advantage, often need to have a clear plan and show passion for their final goal.

As they are built around a single endpoint, often aiming for a significant market share or even unicorn status, this means that startups should have at least a rough idea of how much investment they will need overall.

Venture-backed companies, whether they’re in their early stages or undergoing growth hacking, often need to see a solid business model with clear plans on how profit will eventually be made and how they might pivot if needed.

Risk Factors

Startups, driven by innovation and potentially aiming to scale rapidly, 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, or developing a Minimum Viable Product (MVP) that stands out.

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, with its growth hacking and potential pivots, than a more standard small business, which might focus on consistent, reliable returns.

Small businesses, like mom-and-pop shops or family-owned establishments serving their local economy, also take on risk, but it is of a different kind.

Small businesses tend to fit into already established niches – a coffee shop or a brick and mortar store, for example.

They are not looking to revolutionize the business or disrupt the market. The timescales of their success, deeply rooted in their community or Chamber of Commerce, are often longer than startups, as they are not entirely focused on growth as a priority but more on sustainability and serving their local or regional market.

Way of Life

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The ways in which an entrepreneurs’ private life is combined with their work-life, whether driven by entrepreneurship philosophies or local business needs, varies between startups and business too.

For startups, especially those in their early stages or seeking venture capital, the pressure is on immediately due to the large amounts of funding put in by investors, such as angel investors or seed funding sources.

The pressure is there to make a profit as soon as possible, potentially aiming for a significant market share. Often, startups are born from passion and innovation.

This leads to entrepreneurs needing to spend as much time as possible to realize that dream goal, perhaps aiming to develop a Minimum Viable Product (MVP) or achieve unicorn status.

The competition of other startups, with their growth hacking strategies, 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, like mom-and-pop shops or family-owned establishments, there are fewer risks and more structure.

The focus is on building a slow and steady stream of income, perhaps from a brick and mortar presence, to support the business in the long term and serve the local economy.

However, life as a business owner, deeply rooted in their community or Chamber of Commerce, 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, ensuring consistent, reliable returns, before they even make a profit.

FAQ about the startups vs small businesses

What’s the primary difference between a startup and a small business?

Well, at its core, a startup is all about scaling and growth, often aiming for a significant market share or even disruption. They’re looking to bring something new or revolutionary to the table.

On the other hand, a small business, like your local coffee shop or a family-owned store, is more about sustainability. They’re serving a local or regional market, and they’re not necessarily looking to reinvent the wheel.

Why do startups seek so much funding?

You see, startups, especially those tech ones, often have this big vision, right? They’re looking to disrupt, innovate, and sometimes even create a new market. To do that, they need funds – for research, development, marketing, you name it.

They might be eyeing venture capital or angel investors. It’s not just about keeping the lights on; it’s about rapid growth and getting to that dream goal before someone else does.

Are all small businesses not interested in growth?

Not exactly! Small businesses, like those mom-and-pop shops, do want to grow. But their idea of growth is different.

They might want to serve more customers in their town or perhaps open a second or third location. They’re not necessarily looking to be the next big tech giant or go global. It’s more about steady, sustainable growth, deeply rooted in their community.

Why do startups have such a high failure rate?

Startups are inherently risky. They’re trying to introduce something new, and that comes with challenges. Market acceptance, competition from other startups, funding issues – there’s a lot that can go wrong.

Plus, they’re often operating in uncharted waters, making big bets on their unique business models or tech. It’s high risk, high reward. But when they succeed? It’s often big.

How do small businesses fund their operations?

Ah, the age-old hustle! Small businesses often start with personal savings, loans from family or friends, or even a small business loan from the bank.

They’re not typically diving into the venture capital pool. They focus on profitability from the get-go, ensuring consistent, reliable returns.

Over time, as they build a customer base and revenue, they reinvest into the business. It’s more grassroots, you know?

Can a small business become a startup?

Interesting question! Technically, yes. If a small business identifies a unique opportunity to scale rapidly or disrupt the market, they might pivot towards a startup model.

They’d then seek larger funding, perhaps from angel investors, and shift their focus to rapid growth and expansion. It’s all about the vision and ambition of the business owner.

What’s the role of innovation in startups?

Innovation is the lifeblood of startups. They’re not just trying to do something better; they’re often trying to do something new.

Whether it’s a groundbreaking tech product, a new service, or a unique business model, innovation drives them. It’s what attracts venture capital and sets them apart in the market. Without innovation, a startup is just… well, a business.

Why do some people prefer small businesses over startups?

It’s a lifestyle choice, really. Running a small business, like a brick and mortar shop, can offer more predictability and work-life balance. You’re deeply connected to your community, and there’s a certain charm in that.

With startups, the stakes are higher. Longer hours, more pressure, but potentially bigger rewards. Some folks love the thrill; others prefer the steady rhythm of a small business.

Do startups always need a lot of employees?

Not always! Some startups begin with just a founder or two, working out of a garage or a small office. As they grow and secure funding, they might hire more.

But the focus is often on lean operations, especially in the early stages. It’s all about being agile, pivoting when needed, and scaling smartly.

How long does it take for a startup to become profitable?

That’s the million-dollar question! Some startups see profits in a few years, while others might take much longer. It depends on the industry, market conditions, competition, and, of course, the startup’s unique value proposition.

But remember, many startups, with their growth hacking strategies and big visions, prioritize growth over immediate profitability. It’s a marathon, not a sprint.

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.

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I'm the manager behind the Upcut Studio team. I've been involved in content marketing for quite a few years helping startups grow.