History Of The Term Startup
Not long ago there was no clear explanation on how startups differ from traditional small businesses like hairdressers or cleaning companies. The word ‘startup’ was lacking a proper and unambiguous definition. The term these days is widely used to describe a fast-growing and disruptive enterprise, but surprisingly it was not that popular several decades ago. Even in 2021, there are many people in the business world that still do not know the exact meaning of it. We hope here to bring some clarity about it.
The term was first used by the Forbes Magazine in 1977 in the following paragraph:
“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 Is A Startup?
For many years, investors and the wider public considered that a startup is just a small company. This led to many misunderstandings and posed multiple problems to the venture capital strategy formation. The differences between the underlying philosophies of a startup and a small company are so great that they barely have any similarities.
Startups usually expect a significant growth (x10-15) over a relatively short period of time (3-4-5) years.
A small business on the other hand is any kind of enterprise that only has a specific number of employees (defined by the industry in which it operates) and is driven primarily by profitability as well as consistent long-term value. When a small business is starting out, they aim to start generating profit from the very beginning.
10 Differences Between Startup Companies And Small Businesses
- Innovation level
This one is pretty straightforward. All startups aim to disrupt the status quo and to innovate while small businesses do not claim to be doing that – they are just one of the many out there. Entrepreneurs who choose this type of enterprise have a much smaller risk because they are walking on an already beaten path.
- Scope of operation
Small businesses make slower progress than startups and often require much less capital. The limitations are often put by the founder himself (due to self-financing) due to the requirement of constant profitability.
For most startups – the sky’s the limit because they want to grab as big a share from the market as they can.
- Growth rate
Small businesses need a stable profit and this limits their growth rate. They do not reinvest everything that they get from their operations and hence their status as small companies.
Startups aim to scale as fast as they can and although this can bring huge returns, the risk is also substantially higher.
- Profit and Revenue
Due to their risk-averse nature, small businesses tend to generate revenue and profit much faster than startups. That profit and revenue are usually much smaller and stable (the market share is small).
Most startups want to grow explosively and turn into a unicorn (multibillion-dollar company). This puts much higher pressure on the founding team and the risk of losing everything is enormous.
- Funding Requirements
Small businesses can draw resources from private savings, investments from relatives, friends, bank loans, and investor funds. The goal of this type of enterprise is to become self-sufficient which means that in the long term, the founding team should be careful with debt accumulation.
Startups are often run as private projects (perhaps with some help from the triple F – friends, family, and fools) which in the startup world is called ‘bootstrapping’. There is also the opportunity for crowdfunding as many platforms today focus on this type of capital raising. The early stage of such projects is extremely risky and most startups never go further than it. That is why institutional investors (venture capital companies and funds) are rarely interested in startups at that phase.
Small businesses usually rely on the tech that is already mature and developed well enough. They do not try to invent something entirely new or disruptive.
Startups, more often than not, have a technological solution as a product (or service). They focus on offers that are easy to scale (which is not possible with traditional businesses) and hence why they need to be on the cutting edge of technological innovation.
Around one-third of all small businesses end their operations after their third year. This statistic is not bad compared to startups which have more than a 90% failure rate for the same time period.
- The management team and employees
For small businesses, the number of employees is defined by the industry in which they operate and the profitability requirement.
The startup founding team should build and develop leadership skills from the very beginning. That is if they want the enterprise to survive for more than three years. As the startup grows, the team will have to understand how to work with a large number of human resources – directors, managers, entry-level employees, and so on.
The small business usually has much less associated risk and much fewer duties than a startup. This makes it possible to balance personal and professional life in a manner that will not ruin your sanity.
The startup life could be brutal and demanding. Long hours of work are not something. There are even cases where founders get mad from the daily struggle. Due to that many psychologists, psychotherapists, and even psychiatrists are specializing in this type of problem.
Small businesses usually end up either as a family business or being sold to an interested buyer.
Startups try to move to the next stage via another funding round or initial public offering (IPO).
Should I Start Up?
Although both enterprise types may look extremely similar at the beginning of their formation, their end goal and way of operation differ by a wide margin.
There is a way for them to become one or the other, but their overall goals differ.
Startups aim to change the whole world, while small traditional businesses just want to provide services or products to a relatively limited part of the market.
Both entities have their pros and cons so there is no single best choice. It all depends on the founder team’s preferences – whether they are risk-averse or disruptors. If you want a balance between your family and business – the small business may be for you. If you want to be a game-changer, a startup might be your thing.