It is important to understand that there are differences between a startup company or starting a small business even though both are businesses that have great potential to become major brands or top companies.
In this trend of entrepreneurship where everyone has a side hustle or creating a side hustle and the term startup is flying everywhere.
The name startup sounds more like starting small or a new business or company but there are underlying differences between a startup or starting a small business.
The idea behind a Startup or Starting a small business may be subjective depending on people’s perspective but one of the underlying facts here is that the financial growth and objective goal makes all the difference.
Startups are known for rapid growth and disrupting existing markets and driving top-line revenues while on the other hand small business set long-term goals and consistency in staying afloat without disrupting the existing markets.
Here the differences will be spelled out in clear terms for better understanding and clarity when the terms startup company or starting a small business are used.
Steve Blank in 2010 says “a startup is an organized form to search for a repeatable and scalable business model”
Neil Blumenthal the Co-CEO of Warby Parker defines a startup as a company working to solve a problem where the solution is not obvious and the success isn’t guaranteed.
He believes that Startups are founded by entrepreneurs because also believes that entrepreneurs are those who venture and work in fresh business ideas rather than working on existing businesses or markets.
According to Wikipedia, it explains a small business this way: small businesses are privately owned corporations, partnerships, or sole proprietorship that generates lower annual revenue than regular sized businesses or corporations and they also have fewer staff or employees.
Also, a business can be termed “small” if they can apply for the support of their governments or if they get a preferential tax policy.
Steve Blank gives this analogy that best describes a startup company or a small business in simple terms.
According to Steve Blanks three-minute definition of what separates a small business from a startup, the major differentiating factor is in their top objectives. Most small businesses are driven by profitability and stable long-term value, while startups are focused on top-end revenue and growth potential. This means that a start-up can afford to go for long years without any form of revenue.
Samson and Tony were best friends in college, they both had a dream of starting their own business. Samson’s Father had a shop in the city that was unoccupied. Samson promised his father to pay him to rent after the first three years of operations. He opened an Italian restaurant. He was the head chef in his kitchen. After working 3 years he was in a break-even position and was netting 40% of the profit.
Tony, on the other hand, teamed up with Samson to build and food ordering app, scaled the app across multiple restaurants in the city, and raised seed funding to start a Food Delivery Company. He charged every restaurant 20% of the revenue to deliver. Within the space of 3-years, he grew his company to a 50-million-dollar valuation. Later he sold his business to a bigger brand and made a huge ton of profit.
Based on Steve Blanks definition giving above, the business Samson started is considered as a small business while that of Tony is considered a Start-up.
Five key Things That Defines A Startup Or Starting A Small Business
Growth Plan (A startup or Starting A Small Business)
Startups are defined by rapid growth. Startup founder(s) have a plan to disrupt current and existing markets with their products or service within a very short period.
Startups aim for global impact with the fresh or new ideas that they bring to the table and that’s the reason why many startups are tech-savvy.
Small businesses just want to be in business and make profits to keep afloat because they want to just compete with others in the same industry.
Small business owners do not necessarily have a fresh brand or product, unlike startups that come to disrupt existing markets with their new ideas.
An association of Small Business differentiates it this way:
“In the world of business, the word ‘startup’ goes beyond a company just getting off the ground. The term startup is also associated with a business that is typically technology-oriented and has high growth potential. Startups have some unique struggles, especially regarding financing. That’s because investors are looking for the highest potential return on investment while balancing the associated risks.”
Funding: A startup or Starting A Small Business
Funding for a startup or starting a small business is another huge difference between the two.
It is difficult generally to raise funds either for a startup or small business in comparison to more established companies.
Startups have an advantage because they are willing to go with equity financing, unlike small business owners who may want to retain full ownership of their business.
Equity financing allows startups to look for angel investors or venture capitalist (VC) who can raise large funds or capitals for the startup in exchange for equity or ownership in the company.
The startup can always raise capital in rounds using the equity model until it gets to a point where the startup is no longer an independent entity.
Startups are knowledgeable in sophisticated ways to raise the funds that the company needs to scale.
This model just doesn’t make much sense for small business owners to give up ownership for their businesses.
They turn to loans and are in debts just to raise enough capital to keep them afloat in business and as they grow, they begin to offset their loans and debts.
Risk Analysis Of A Startup Or Starting A Small Business
Startups have a bigger risk when compared to small businesses. Research shows that 80% of startups fail within the first 5 years and also about 20% of small businesses fail in their first year.
Both businesses have risk factors but the risk for Startups is higher because they require large capitals to sail and if they fail, they not only will lose out their investors and partners too.
While in the case of starting small businesses, you run products or services which already have an existing market.
Your exit plan ensures that there will be a steady stream of revenue that allows you to pay off all investors, an (initial public offering) IPO instead of a buy-out, or simply opt for a different strategy—your own funds, or loans and grants, either private or governmental.
Startups generally have an exit plan which is the end goal.
Blank explains the end goal this way: a startup is a temporary organization 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.
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’re bought by another larger company. Or when they go public with an IPO (initial public offering).
Tim Berry puts it this way: “Startups looking for angel investors or venture capital (VC) absolutely need an exit strategy because investors require it. The exit is what gives them a return.”
All startups raise funds using different strategies and venture capitalists look at your end goal or exit strategies to maximize their investment and calculate their return on investment (ROI).
The end goal for startups has three options:
- Turns into a big company
- It may be acquired by a bigger brand
- Go for an IPO.
Small businesses do not need an exit plan or end goal because you own everything. After all, the owner of the small business is responsible for the future of the company.
The end goal for a startup or starting a small business is not the same.
Status For Both Startups or Small Business
the risk factors are higher for startups so they always aim to grow rapidly and hit their end goal or fail out but for small businesses, they remain in business and at a level.
Startups are founded by true entrepreneurs who blaze new trails and are innovative, proven technocrats, and they dream big.
Small business owners are just ordinary people who are masters of their craft and are happy to make a few profits here and there with the traditional business they inherited or a skill they learned.
Startups are much more than just names or titles thrown at a new business but have to do with everything that is needed to achieve the end goal which will ensure that the business grows rapidly and disrupt the current markets.
Small businesses do not require so much risk-taking but just the regular day to day knowledge of how to stay afloat by making enough profits.
When starting a business, you need to be sure if it’s a startup or starting a small business.