What is the Difference between a Startup and a Small Business

In this part of the world, people generally use the word “startup” and “small business” interchangeably.
For most of them, they think it is the same and we can’t blame them. However not knowing the
difference between these two company types can become a limiting factor in your business growth –
because you are either one or the other. You could be taking bad advice or reading the wrong articles
because what works for one, doesn’t always work for the other.

So what is a startup?

According to Paul Graham, the Co-Founder of YCombinator, “A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.”

He further differentiates between a startup and small business:

Not every newly founded company is a startup. Millions of companies are started every year in the US. Only a tiny fraction are startups. Most are service businesses — restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. A barbershop isn’t designed to grow fast. Whereas a search engine, for example, is.

When I say startups are designed to grow fast, I mean it in two senses. Partly I mean designed in the sense of intended, because most startups fail. But I also mean startups are different by nature, in the same way a redwood seedling has a different destiny from a bean sprout.

That difference is why there’s a distinct word, “startup,” for companies designed to grow fast. If all companies were essentially similar, but some through luck or the efforts of their founders ended up growing very fast, we wouldn’t need a separate word. We could just talk about super-successful companies and less successful ones. But in fact startups do have a different sort of DNA from other businesses. Google is not just a barbershop whose founders were unusually lucky and hard-working. Google was different from the beginning.

To grow rapidly, you need to make something you can sell to a big market. That’s the difference between Google and a barbershop. A barbershop doesn’t scale.

For a company to grow really big, it must (a) make something lots of people want, and (b) reach and serve all those people. Barbershops are doing fine in the (a) department. Almost everyone needs their hair cut. The problem for a barbershop, as for any retail establishment, is (b). A barbershop serves customers in person, and few will travel far for a haircut. And even if they did, the barbershop couldn’t accommodate them.”

It’s easy for you to see the biggest difference between a startup and a small business is their objective. While startups are focused on top-end revenue and growth potential, Small businesses (often termed lifestyle businesses) are driven by profitability and stable long-term value.

Candice Landau make it crystal clear, in her article she explains the…

3 Key Differences Between a Small Business and a Startup

#1. How these entities think about growth

Startups are different from traditional businesses primarily because they are designed to grow fast. By design, this means that they have something they can sell to a very large market. For most businesses, this is not the case.

Generally speaking, to operate a business, you don’t need a big market. You just need a market and you need to be able to reach and serve all of those within your market.

This is one of the reasons, most startups are tech startups. Online businesses can more easily reach a large market because they traverse time and space – people can buy from you or use your product regardless of whether you’re awake or not and whether you’re in Cape Town or New York.

The distinctive feature of most startups is that they are not constrained by these factors.

That said, not all technology companies have a very large market. If you sell software written in Hungarian for Hungarian school teachers, you’ve already got a very select market.

To grow rapidly, you need to make something you can sell to a very big market.

#2. Their relationship with funding

Apart from having different ways of thinking about “growth,” startups seek financial investment differently than most small business operations. Startups tend to rely on capital that comes via angel investors or venture capital firms, while small business operations may rely on loans and grants.

The interesting thing about venture capital is that those providing it tend to have a more active role in whatever company they are backing. While a small business awarded a grant or loan may occasionally need to report back to their bank, a startup with angel backing will probably be getting a bit more help.

They’ll be receiving advice from the investor (after all, the investor is the one taking the biggest risk) and, if you’re young and inexperienced, there’s probably nothing better than a helping hand. This is especially true for those teams or individuals that become a part of an accelerator or incubator program.

#3. Planning for the “end,” or the exit strategy

“Startups looking for angel investors or venture capital (VC) absolutely need an exit strategy because investors require it.

The exit is what gives them a return.” – Tim Berry

Another thing you’ll want to keep in mind is your vision for your business. If you’re pitching for VC funding without an exit strategy, you’re unlikely to get it.

Venture capitalists need an exit strategy as they need to maximize their ROI. If you’d still like to be running the company in 10 years time, you’re probably going to want to ensure that exit plan comes in the form of a steady revenue stream that allows you to pay off investors, an IPO instead of a buyout, or simply opt for a different strategy —your own funds, or loans and grants, either private or governmental.

“Exit strategy” development is a problem you won’t have with your own business, at least not until you’ve made it big or until you change your mind about owning the business. The point is, in a traditional business (not a startup), you don’t need an exit strategy at the start. You’ll be entirely responsible for the future of your company and it will be down to you whether or not you run it for the rest of your life or decide to sell, merge or launch it on the stock market.