Startup vs. Small Business: Differences and Similarities

Have you ever heard that startups are just small businesses in their initial stages? 

This is a myth that has caused confusion when comparing a startup vs a small business. 

The reality is that despite both having the goal to grow and succeed, these two entities are fundamentally distinct in terms of strategies, funding models, and even growth potential. 

And, understanding these differences early is crucial for all business owners.

Let’s begin by highlighting the definition of startups vs small businesses.

Startup vs Small Business: What You Should Know

Before we learn about their specific similarities and differences, it’s only right to understand the definitions between startup vs small business. 

Let’s begin by looking at the formal definition of the term “startup” provided by Startup Commons. 

It states, “A startup is a venture initiated by its founders around an idea or a problem with a potential for significant business opportunity and impact.”

In simple terms, a startup is a newly established company designed to scale rapidly and innovate. These entities often seek to disrupt existing markets or create entirely new ones, leveraging technology to achieve significant growth. 

A small business, on the other hand, is generally defined as a small privately owned corporation, partnership, or sole proprietorship. It’s more established than a startup, with a steady revenue and customer base.

Small businesses usually focus on serving local or niche markets and are typically self-funded or supported by small business loans.To effectively market to these audiences, small businesses can utilize marketing ideas tailored for small businesses.

Startup vs. Small Business: Why Do You Need to Understand the Difference?

Decoding the “startup vs small business” puzzle can help entrepreneurs formulate a clear roadmap for their growth and success.

If you can understand the difference between a startup and a small business, you’ll be able to find answers to critical questions, such as:

• What’s an ideal revenue forecast for your business?
• Do you need to explore passive income streams for added financial stability?
• How can you define success?
• What’s your growth potential?
• What are the right performance marketing strategies for your business?
• Who can be your investors?

The kind of business you consider your company to be will govern everything from your funding methods to your day-to-day operations, services, technology, employees, investments, and plans.

This is why you need to determine the type of business you’re running as early as possible.

Startup vs. Small Business: 5 Areas Where They Differ

Now that you understand why it’s essential to classify your business model accurately, let’s take a look at the key differences in this startup vs small business comparison.

1. Goals

Startups are launched with the aim to grow exponentially in a way that disrupts or changes the existing market. They often have scalable business models that can expand quickly with the right resources. Essentially, a startup measures success in terms of growth metrics, market share, and user acquisition. A successful Saas startups sales strategy often focuses on subscription models, customer retention, and leveraging data-driven insights to optimize user engagement and drive upsells.

On the other hand, small businesses do not have such ambitious objectives. They aim to execute a business idea that is feasible and profit-bearing from day one of launch.

In that sense, most of the companies in the tech industry or online companies usually come under the ambit of startups. Convenience stores and hair salons, on the other hand, constitute small businesses.

While the latter aren’t changing the business landscape, they’re the foundation of local economies. 

In fact, in 2023, small businesses employed a whopping 61.6 million employees (see image below) in the US. This accounted for 45.9% of the entire US. workforce.

Image via the Advocacy at the Small Business Administration

It’s also important to note that most small businesses drive innovation and entrepreneurship, which is the hallmark of booming economies.

2. Growth Intent

One of the best ways to demystify startup vs small business and identify what kind of business you’re running is to figure out your growth intent.

How can you do that?

By inspecting your growth plans. If your aim is to take over established markets with disruptive solutions, you’re probably running a startup. If you plan to expand your number of employees and operations across borders, you can be called a startup owner.

That’s one of the fundamental differences that sets many startups apart from other businesses.

Think about it. What did the vacation rental market look like before Airbnb? How did people commute before the on-demand taxi app, Uber, became popular?

Don’t worry if you haven’t reached heights comparable to these brands. You can still be categorized as a startup if you have plans for exponential growth and to create such long-term value.

Here’s some more food for thought…

Why are most startups in the tech industry? That’s probably because technology can be scaled rapidly and has the potential to disrupt life.

In contrast, small businesses exist in a comfortable space. They don’t have a burning need to reach and impact millions of people. However, if they want to expand their base in a different geography, they can use app localization strategies.

Even the U.S. Small Business Administration (SBA) defines a small business as an independent, for-profit organization that may not be a leading one in its niche.

To operate a small business, you don’t need a huge international or local market or even expansionary plans. You just need a market for your product or service. 

A local deli or plumber is not disrupting the market, but this impactful business model is still helping people and attempting to make a profit or even a stable income therein.

3. Funding Modes

Funding is another key distinction in the startup vs small business comparison.

Startups are more likely to rely on equity funding than small businesses. There are many venture capitalists or angel investors willing to invest huge capital in startups in exchange for a share of ownership or equity in the company.

Typically, an investor offers funds to a startup in multiple “rounds.” After each successive round, the startup’s financial position is assessed and a pre-decided equity share is transferred to the investors.

As the startup continues transferring a part of its ownership, it may cease to exist as an independent entity in a few years. Along with funds, most startup founders expect guidance from their experienced investors. In exchange, they don’t mind relinquishing ownership of their businesses.

However, small business owners are averse to this concept. More often than not, they’re reluctant to transfer business control in exchange for anything. They would instead take high-interest loans or asset financing. 

Besides, they don’t need a significant capital investment like startup founders do.

4. The Severity Level of Risk

Most entrepreneurs understand the kind of risk they’re undertaking when starting a company.  

However, startup owners have to be geared up for an added element of risk, owing to their precarious financial position and aspirational plans of disrupting the market.

We won’t be exaggerating if we say that a startup founder has to take a leap of faith literally every day.

Why so?

Because whether or not their next round of funding comes through, they have to continue investing in research, production, and testing of their product or service.

The risk quotient is high not only for startup founders but also for investors who raise venture capital for startups.

While the former are fuelled by their passion and vision, the latter don’t even have that to keep them going. These people lock valuable capital in a venture, knowing that it may sink or swim in the future.

Now, let’s talk about small businesses.

It would be unrealistic to assume that small businesses operate in a risk-free environment. In fact, nearly 1 in 4 of them don’t make it through their first year in the US. 

But when comparing a startup vs a small business, the latter has a solid advantage. It exists in an established market and has better fund flow. In that sense, a small business owner has a lower risk of failure than a startup owner.

5. End Goals

Moving on, let’s talk about how end goals create a difference between these two — startup vs small business.

When you think of starting a business, selling it for profit is probably the last thing in your mind. If all goes well, you’re likely to run your business till you’re too old to work. Until that time, your main goal is just to stay in business. That’s precisely how a small business owner thinks.

But, with startups, that’s not the case.

A startup is a temporary organization created to explore a repeatable and scalable business model. In this pursuit, it may go through multiple iterations of its business model.

Once it finds the right model, which may be going public through an IPO (Initial Public Offering) or merging with a Corporation, its end goal shifts to executing that business model.

FAQ

Q1. What is the difference between a startup vs. a small business?

A. There are many fundamental differences between startups and small businesses, including:

• Startups have aspirational growth plans whereas small businesses have modest ones.
• A startup owner’s end goal is to make an impact on people’s lives with their products or services. A small business owner aims to run a profitable venture while meeting the demands of their target audience.
• Startups mostly rely on equity funding while small businesses rely on asset funding and lines of credit.
• Startups are associated with a higher level of risk than small businesses.

Q2. Is every new business a startup?

A. No, not every new business is a startup. To qualify as a startup, you need to have:

• A product or service that can make an impact on people’s lives or disrupt the market
• Plans to search for a scalable and repeatable business model

Q3. How long is a business considered a startup?

A. A business can be considered a startup as long as it doesn’t find a scalable and repeatable business model. Once a startup launches an IPO, merges with a larger company, or sells its complete ownership to a Corporation, it can’t be called a startup anymore.

Q4. What are some good startup ideas?

A. For 2024, here are some startup ideas with great earning potential:

• Dropshipping business
• Online fitness app
• Online wellness consultation
• Commercial landscaping and cleaning services
• Box subscription app
• Virtual tutoring service
• Food waste management solutions

Q5. How is a small business defined?

A. The US Small Business Administration defines small business as a for-profit organization, which is operated independently and may not be dominant in its niche. Small businesses can have any legal structure: sole proprietorships, partnerships, or corporations.

Q6. Is LLC a small business?

A. Not all Limited Liability Companies (LLCs) are small businesses.

According to the SBA, to qualify as a “small business,” a company should have a predefined number of employees or average annual receipts, which varies by industry. If an LLC fulfills these regulations, it can be classified as a small business.

You can use SBA’s Size Standards Tool to figure out whether your limited liability company is a small business.

Q7. Why do startups fail?

A. Most startups fail because of:

• Unfavorable market conditions
• Insufficient funding
• Poor leadership and team management
• Business model failure
• Product-market mismatch

Q8. How would you describe a good business?

A. A good business can be described as:

• Agile or adaptive
• Scalable
• Revenue-generating
• Socially-conscious
• Disruptive (if it’s a startup) or consistent (if it’s a small business)

Q9. What are the four types of businesses?

A. The four types of business are:

• Startups
• Small businesses
• Medium-sized businesses
• Large corporations

Q10. What makes a startup successful?

A. While there’s no set formula to make a startup successful, it will help if you have:

• A disruptive business idea
• A feasible business model
• A strong core team
• Sufficient working capital
• Conducive market conditions

Over to You

This startup vs small business comparison highlights distinct differences between the two entities. If you’ve been using each of these terms synonymously, we hope that this post will be an eye-opener.

And, for entrepreneurs who are contemplating launching a startup or a small business, we hope that this startup vs small business information will make a difference when it comes to planning and financing.

Do you have any questions about starting an impactful business? Want to learn more about a startup vs. small business? Feel free to discuss it in the comments below.