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Learn the differences between a startup and a small business to understand which one you are running or planning to establish.
In this age of sky-high startup valuations, with ‘unicorns’ everywhere, running a startup is considered chic. But with endless numbers of startups and small businesses cropping up each day, it is important for you, as a founder, to understand the differences between the two.
All recently established companies are not necessarily startups, nor do they have to be. Small businesses and startups have a few things in common, which is why it is easy to get confused. Primarily, they both offer products or services to generate revenue. But the main difference lies in how they sell and where.
Let’s look at the differences that set startups apart from small businesses.
Difference in aim
The widely accepted definition of a ‘startup’ was created by entrepreneur Steve Blank. According to him, ‘a startup is an organization formed to search for a repeatable and scalable business model.’
Startup founders come up with unique business ideas, raise funding, and work towards proving the business model in the market, which could take months or years. The main aim of a startup is to solve a problem using innovative techniques and technology. Therefore, innovation is the core of a startup.
On the other hand, small businesses are designed for profitability, and not innovation or uniqueness. Small businesses can include anything from your local coffee shop or grocery store to a street vendor.
The main aim of these business owners is to cater to the demand for a specific product or service in a market. These businesses also focus on profitability from the first day, which is directly linked to fixed costs like their initial investment and product inventory. The more money a business spends on inventory, the more it can sell and earn profit.
To help you understand better, let’s look at a simple example. Let’s say a startup and a small business are opened at the same time, both selling apparel. The small business will open a brick-and-mortar store in its target market, and will rely mostly on word-of-mouth and referrals for its sales.
The startup, by contrast, would likely open an ecommerce store, and may use AI and machine learning to offer customized suggestions based on body shape, budget, and allergies among other factors. It may also test out ideas to boost sales, like offering free trials.
This is not to say that a small business does not use the latest technologies. The business may also open its own online store, or sell through ecommerce sites like Amazon. It may also use the latest accounting softwares, put RFID tags on its inventory, and showcase the latest designs from around the world.
The difference is that the small business, from day one of operations, is intended to earn profit. Contrastingly, startups set out to disrupt the market in a major way that has a meaningful impact. Take Facebook for example. Although a multi-billion dollar corporation today, it started out as a startup that revolutionized the way we socialize online.
Difference in growth intent
For a small business, since revenue generation and profitability is the most important goal, growth falls very low on the priority scale. But this does not mean that small businesses never grow to become big corporations.
In simple commerce, the growth of a business is directly linked to investment – the more the proprietors invest, the more they can expand, potentially even into multiple shops. Some small businesses can even grow to become large joint stock companies.
Since startups focus on disrupting and taking over the market, they focus more on growth than profitability. Startups can take years to become profitable, while some startups never become profitable at all.
Take Indian B2B startup Udaan for example. The nearly 5-year-old startup has raised over $900 million in investments, and is yet to reach profitability. Even U.S.-based Tesla, which has become the world’s most valuable automaker, attained profitability only in early 2020 – nearly 17 years after its inception.
Difference in financing
Small businesses require very little initial investment. This initial capital in small businesses is generally invested by the owners and close friends and family members. And, since businesses start generating revenue almost immediately after establishment, they become self-sustaining before too long.
For expansion and growth at a later stage, small businesses generally prefer debt financing. They take small business loans to meet their financing needs. The businesses repay the loans with interest and retain full ownership of their business since they do not offer equity unlike startups.
Although startups are often bootstrapped, they look for large investments almost immediately in order to develop their product or service. Startups generally raise funding from venture capitalists and angel investors in exchange for equity. Some startups have also started using crowdfunding, while others turn to debt financing as well. Attracting investments from high net-worth individuals and family offices is another growing avenue of financing for startups.
Put simply, a business is content with being self-sustainable and growing slowly, while a startup sets out to revolutionize the market with its innovation. Businesses distinguish themselves by offering superior service or product quality in an existing market. Startups, on the other hand, hinge their success on a new and innovative idea that may or may not work, are aggressive about growth, and aim to create new markets.
Understanding the differences between a startup and a business at an early stage will help you decide the kind of company you want to build, and chart out your expectations and growth plan accordingly.