Startup vs Small Business. Are they the same? The short answer is – no. To be a Startup, the Founder has to commit to, and the business model has to enable, a rapid scaling/growth model that ideally culminates in at least a US 1 Billion company valuation followed by an initial public offering (IPO).
Three Differences – Startup vs Small Business
1. Expectations and Rate of Growth
First of all, startups focus on fast growth, focusing on scaling the business and growing it quickly. Startups often scale quickly due to business processes being tech-driven (to be more efficient or automated).
A traditional small business’s growth is comparatively more limited. Firstly, by the product or service itself (for example, a hardware store is only going to reach a particular target market) and perhaps by its geographic location (a small business does not usually prioritize tech, making growth via automation a challenge).
2. How They Are Financed
Startups often seek external funding to accelerate their growth. This means that startups can choose to be funded until they generate their own revenue and become profitable. Therefore, the initial stages often involve pitching to investors. The most common avenues of funding, pursued by startups, include, raising capital from ‘angels’ (affluent individuals who provide capital in exchange for convertible debt or ownership equity), and venture capitalists. When seeking equity funding (giving away options or shares in the business), startup founders may have to consider how investor money will impact their ownership of the business. Don’t forget the risk involved – it may take startups years to generate a profit.
Small businesses, on the other hand, often exist without raising funds from investors. They can be self-funded or financed by family, friends, or a bank loan. Unlike startups, the priority of a small business is to generate regular income with less risk.
3. Nature of the Idea
Finally, the very character of a startup is different from a small business. If you’ve heard the word ‘disruption’, there’s a high chance that the word ‘startup’ was in that sentence as well. Startups are often disruptive – it is almost a prerequisite. Startups tend to produce or operate on products or services that do not yet exist or are drastically changing the delivery of a particular good or service in an industry.
A small business, on the other hand, provides more traditional goods and services (but this is not always the case), for example, grocery stores, travel agents, and hairdressers.
Which Is Right For You?
Startups have been given an almost mythological status thanks to wild success stories, cults of personality, and the entertainment industry. They look exciting – but they’re also filled with risk, and they work better for some types of products and services than others.
Don’t make the mistake of thinking that startups are the only way to get rich. You can still grow a small business into a well-oiled machine that makes money for you while you’re not there. Every restaurant franchise, global law firm, and regional car dealership chain started out as a small business.
Deciding between a startup vs small business has less to do with making money and more to do with the industry you’re in, as well as your own personality, leadership style, and risk tolerance.
Takeaway
Many people who are not familiar with the Startup industry mistakenly call all businesses that get founded a “startup”. The reality is that Startups have nothing in common with small businesses, apart from the obvious, which is that both of them “start up” at some point, before then pursuing entirely different business models.
About The Author
James Spurway is an Angel Investor, Advisor, Mentor, Speaker, former Commercial Pilot, and Author specializing in raising debt and equity funds for pre-seed or early-stage seed rounds for Startups in the Fintech, DeepTech, AgTech, ClimateTech, and AgeTech verticles. He lives in Singapore and has spent the past 30 years living and building businesses in Hong Kong, Vietnam, Germany, Switzerland, Monaco, the USA, Thailand, the Philippines, and Australia, where he was born.
