Are you running a startup or a small business?
This question confuses many.
With the phenomenal growth of companies like Airbnb and Uber, the term “startup” has become more than a buzzword. So much that people use it interchangeably when referring to small businesses as well.
However, there’s a sea of differences between startups and small businesses, both in revenue and growth intent. And, understanding the differences early is crucial for all business owners.
The next section will answer that. Read on…
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 are able to differentiate between these two terms, you’ll be able to find answers to critical questions such as:
- What’s an ideal revenue forecast for your business?
- How can you define success?
- What’s your growth potential?
- What are the right scaling strategies for your business?
- Who can be good partners for you?
The kind of business you consider your company to be will govern everything from your funding methods to your day-to-day operations, technology, employees, investments, and future plans.
Therefore, 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 between startups and small businesses.
Let’s start by looking at the formal definition of the term “startup” given by Startup Commons. According to them, “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 words, startups are launched with an aim to grow exponentially in a way that disrupts or changes the existing market.
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, tech or online companies usually come under the ambit of startups while grocery stores and hair salons constitute small businesses.
While the latter are not changing the business landscape, they are the foundation of local economies. They are responsible for creating millions of jobs (engaging 47.1% of the American workforce) and providing scores of unique products and services.
Image via Oberlo
Moreover, they drive innovation and entrepreneurship – 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?
Inspect your growth plans. If your aim is to take over the market 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 things 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 to grow exponentially and 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.
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 market or expansionary plans. You just need a market for your product or service. A local deli or plumber is not disrupting the market, but they are still helping people and attempting to make a profit therein.
3. Funding Modes
Funding is another area where startups and small businesses differ.
Startups are more likely to rely on equity funding than small businesses. There are many venture capitalists or angel investors who are 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 owners 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 are reluctant to transfer business control in exchange for anything. They would instead take high-interest loans or asset financing.
4. The Severity Level of Risk
Most entrepreneurs understand the kind of risk they are undertaking when they start 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.
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.
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 delusional to assume that small businesses operate in a risk-free environment. In fact, only 50% of them survive five years and more.
But, compared to startups, small businesses have a solid advantage. They exist in an established market and have better fund flow. In that sense, small business owners have a lower risk of failure as compared to startup owners.
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.
According to Steve Blank’s definition, a startup is a temporary organization. It is designed to search for a scalable and repeatable business model. In that quest, it can change business models many times.
Once it finds the right model (which may be going public through IPO (Initial Public Offering) or merging with a Corporation), its end goal shifts to executing that business model.
Q1. What is the difference between a startup and a small business?
A. There are many differences between a startup and a small business, including:
- Startups have aspirational growth plans whereas small businesses have modest ones.
- Startup owners aspire to make an impact on people’s life with their product or service. Small business owners aim 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 life 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 2021, here are some startup ideas with a 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. As mentioned earlier in this article, The U.S. Small Business Administration defines small business as a for-profit organization, which is operated independently and may not be dominant in its niche. It can have any legal structure – a Sole Proprietorship, a Partnership, or a Corporation.
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 industries. 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 or not your LLC 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
- 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:
- 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
As you can see, small businesses and startups differ in many ways.
For people who use these terms synonymously, this post would be an eye opener.
And, for entrepreneurs who are contemplating launching a startup or a small business, the information above can make all the 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.