Nowadays you’ll hear the word “startup” a lot. And the term probably conjures up ideas of hipsters playing ping pong in the office, sipping flat whites on their coffee breaks. Which is true for some businesses, but that’s not what makes them a startup.
Businesses all over the world refer to themselves as startups, though it’s often hard to understand exactly what differentiates a startup from a small business or a new tech firm. In this guide, we’ll look in a bit more detail at what the differences are and why it’s important to understand them for your business.
What is a startup and how is it different from a small business?
If you’re looking for a definition of a startup, it probably goes something like this:
A startup is a company or project begun by an entrepreneur to seek, develop, and validate a scalable economic model.
A pretty good jumping off point. As a founder of a startup most would consider you to be an entrepreneur. And the “scalable” reference is really key. The focus for a startup is about traction and growth, as well as overall revenue – with profits sitting lower on the list for the first year or two at least.
By its nature, a startup is a new venture. That means it’s about making waves in the market, helping customers find out about your business, and starting to build a solid commercial base. The profits will (hopefully) come later, once you’ve managed to establish your business.
A small business, on the other hand, is already somewhat established. Their focus is on financial stability and driving profits, as well as overall growth.
One of the biggest differences between a startup and a small business is the overall mindset of the business. A startup will usually be offering something unique to the market, which means it will often need to test and iterate due to the unknown/unique nature of its product or service.
For a small business, they’re more likely to be operating in an established market with little or no product distinction and following a common approach to maintain its profits. That means it’s a much more stable business operation compared to the innovation process of a startup.
In general, a startup aims to quickly prove its business model and make a significant impact on the market. The idea is to show that it’s a repeatable and scalable business model. Many startups have an end goal of either being bought out by a larger company, or going public by way of an IPO (Initial Public Offering).
In contrast, small businesses aim to achieve consistent returns over a long period of time. They look to operate on a small scale and have the goal of remaining a small business indefinitely.
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Do target markets differ?
In a word, yes. There can be quite a big difference in the target markets of a startup vs a small business. Most notably the scale of the markets they’re aiming for can differ considerably.
Startups are typically tech-orientated and online businesses, as this allows them to more easily reach a large market and ultimately achieve their aim of disrupting it. They cast a wider net with plans of major growth.
A small business will generally operate within an existing market and on a much smaller scale. Small business owners are often content to operate locally, serving the market in their immediate area, e.g. a hairdressing salon or local coffee shop.
Innovation – startups vs small businesses
Innovation is at the heart of most startups. As a startup you’re generally planning to disrupt a market or bring something new to your customers. The same can’t be said for many small businesses.
A small business will embrace an established market without necessarily bringing any innovation with their products or services. A startup wants to achieve the exact opposite.
Funding for startups vs small businesses
Funding is an interesting one. To start with startups and small businesses may well be funded in very similar ways – personal savings, a bank loan, or a loan from friends and family. The difference usually comes at the point of growth.
If you have a startup that’s successful in its early stages, you’re more than likely going to look for additional funding to sustain growth. That could be crowdfunding , business angels, venture capitalists or potentially an IPO.
The key here is, as the startup founder, you lose some of your equity with each round of investment. Startup investors will often want to have some say in how things are run, so the funding source of a startup can influence the overall trajectory of the business.
A small business, however, looks to develop and maintain business independence. A small business owner aims to be their own boss, and that’s reflected in how they manage their funding and finances. They want to grow their revenue to be able to sustain consistent returns
Find out more about funding and finances for your new business.
“I’m not sure how much it matters really, whether you refer to yourself as a startup or a small business. Many people run very successful small businesses and have no aspirations of making them scale – some just aren’t scalable. Whereas a startup is really intended to scale… and if they don’t, they normally die a death.
At the end of the day, don’t get hung up on what you’re calling your business – just get to work and try make it as successful as you can.“
– Eddie Whittingham, FounderRead more
Growth is the key influence on the team size and recruitment efforts of a startup vs a small business. Both will start with a small team, or even the founder working alone, but then the approach may change in reaction to growth and the demands of the business.
In the early stages, a startup will look to react to market and business demands to grow the team to deliver the product or service. A startup’s focus is initially on growth, rather than profit, which can often mean a rapid boost in the size of the team. If your startup establishes a successful business model then you might want to quickly bring new team members on board to sustain rapid growth.
A small business has aims of a smaller scale, sustainable operation and so won’t be so quick to expand the team. The goals of financial independence and consistent returns may require a small expansion of the team, but a small business rarely looks to rapidly expand their workforce.
Unlike startups, for a small business owner, profit is key at all stages. Achieving a sustainable income means consistent streamlining of costs. That means the budget for staff needs to be carefully justified against the performance of the business.
Is my business a startup or small business?
That’s not a question we can answer generically, but hopefully this guide has given you a better idea of how to recognise where you fit. The key is for you to understand where you want your business to go and plan your business strategy accordingly, whether you set up a small scale local business or a startup to sell to a large corporation.
Whatever route you choose, good luck! It’s going to be a challenging but hopefully very rewarding experience. And we’re here to help and offer expert advice along the way.
If you’re looking to find out more about the world of startups and small businesses, check out our hub of helpful resources for starting your own business.
Check out our other articles for more tips, tricks and advice to help your startup succeed.
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