The Difference Between Startup And Small Business

History Of The Term Startup

In the past, the distinction between emerging startups and traditional brick-and-mortar businesses was rather vague and undetermined. The term ‘startup’ was used loosely and did not have a universally accepted definition. However, in recent times, the term ‘startup’ is generally used to denote a rapidly evolving enterprise with disruptive objectives, intriguingly, this term was not broadly employed a few decades back. Even as we step into 2021, sections of the corporate world remain entangled in the quest to pinpoint its exact connotation. It’s our goal to dispel this obscurity in this article.

Interestingly, the term ‘startup’ first appeared in Forbes Magazine in 1977, in reference to:

“The OED traces the origins of the term, used in its modern sense, back to a 1976 Forbes article, which uses the word as follows: “The … unfashionable business of investing in startups in the electronic data processing field.” A 1977 Business Week article includes the line, “An incubator for startup companies, especially in the fast-growth, high-technology fields.”

Source: 1977 Business Week (Industr. edn) 5 Sept. : An incubator for startup companies, especially in the fast-growth, high-technology fields.

So, What Exactly Does Startup Mean?

There was a prolonged period when startups were mistakenly equated with small businesses by investors and the public, leading to several misconceptions, especially regarding venture capital approaches. An in-depth comparison between the doctrines of a startup and that of a small business reveals that they have very limited common ground.

A typical startup has an exponential growth projection of approximately ten to fifteen times its size in a relatively short timespan, often within three to five years.

Conversely, a small business is any enterprise defined by a specific employee count based on the industry in which it operates. The primary objectives for these small businesses are achieving profitability and sustaining long-term value. Once a small business starts its journey, the primary focus becomes to gain profit swiftly.

10 Differences Between Startup Companies And Small Businesses

1. Innovation level
   For every startup venture, pushing the boundaries of innovation stands as a crucial objective. These companies aim to shake up the status quo by pioneering efficient new processes, services, or products. In contrast, traditional small businesses may not prioritize innovation, typically adhering to established business norms. As a result, entrepreneurs involved with small businesses usually face less risk.
2. Scope of operation
   The working range and future growth aspirations can largely vary between these two business types. Generally, small businesses grow more cautiously, requiring less capital due to their self-funded nature. This pursuit of stable earnings often restricts their operational range. But startups have wider ambition, striving to seize a substantial market slice by expanding their operational range to its maximum.
3. Growth rate
   The chase of steady profit restricts the expansion rate of small businesses since they often tend not to reinvest all their profits, thereby retaining their small-scale stature. However, startups target reaching massive growth as swiftly as possible. Despite this approach could yield impressive returns, the risk level also notably rises.
4. Profit and Revenue
   Small businesses, being more risk-averse, usually generate profit and revenue faster than startups, albeit the amounts earned are often smaller and steadier due to their limited market share.
   In contrast, most startup companies aspire to grow phenomenally and become a unicorn – a company valued at over a billion dollars. This significant aspiration places immense pressure on the management team and employees and increases the risk of total business failure.
5. Funding Requirements
   Small businesses can launch and sustain themselves using personal savings, loans from friends and family, bank loans, or external investments. The primary goal of such enterprises is achieving self-sustainability, placing a crucial emphasis on prudent debt management to avoid crippling long-term accumulation. In contrast, startups often begin as private projects, ‘bootstrapped’ with personal funds, or aided by the friends, family, and fools (FFF) model. Crowdfunding also provides a viable capital option as numerous platforms now favor this fundraising mechanism. However, due to the high risk involved in their early stage, venture capital firms and funds rarely show interest in startups.
6. Technologies
   Typically, small businesses rely on mature and well-established technologies. Unlike startups, they don’t aim to create entirely new or disruptive innovation. Conversely, startups often base their products or services on a technological solution and usually need to be at the forefront of technological advancement to effectively scale their operations.
7. Lifecycle
   The lifecycle of small businesses and startups differs greatly. While approximately one-thirds of small businesses cease to exist by their third year, startups in the same timeframe have a failure rate exceeding 90%.
8. The management team and employees
   The number of employees for small businesses is often determined by their industry and their profitability goals.
   Conversely, startups need to cultivate leadership qualities from inception if they wish to survive beyond the initial three years. As the startup grows, understanding how to coordinate a large workforce, including directors, managers, and entry-level staff, becomes essential.
9. Lifestyle
   Running a small business generally involves less risk and fewer responsibilities than operating a startup. This makes it easier to strike a healthy balance between personal and professional life. Conversely, the lifestyle of a startup founder can be highly demanding and challenging, with long work hours being the norm.
10. Exit
    The exit plan for most small businesses typically involves transitioning into a family business or selling the venture to an interested party. Startups, on the other hand, typically aspire to move to the next phase via additional fund-raising rounds or an initial public offering (IPO).

Should I Start Up?

At first glance, initiating a startup or a traditional small business might seem quite similar. However, when delving deeper, it becomes evident that their end goals and operational methodologies tend to vary quite significantly.

It’s possible for one type of business to transition into the other, but their initially outlined objectives are usually disparate.

Startups carry visions of modifying the global landscape, whilst smaller, traditional businesses mostly strive to cater to a relatively limited sector of the demographic through their services or products.

Every business model has its own set of strengths and weaknesses, hence pinpointing a clear winner is practically unfeasible. The choice largely depends on the leanings of the founding team – weighing their inclination for stability against the urge to innovate. If you are seeking the equilibrium between personal commitments and career obligations, a traditional small business might be the perfect solution. Conversely, if your ambition gears towards making a paradigm shift in the industry, a startup might align more with your aspirations.