A startup is often misrepresented as being a new small business, but there are significant differences defining them. Starting a small business isn’t easy, even when there are similar examples to learn from. Bringing a startup to fruition is even more difficult.
While a small business will look to start generating cash quickly, startups might go through many rounds of funding and investment. Their plan might include a budget that doesn’t seek to be profitable for the first few years; they focus instead to carve out a brand new market or to disrupt an industry and gain market share. Look at Uber as a perfect example of a startup.
What is a Startup?
For the most part, startups focus on fast growth and high-end revenue. They are often identified for using technology in their services, usually relying on raising lots of money from angel investors, venture capitalists and crowdfunding platforms at every stage of their growth.
Because of this funding model they can attract the best talent to come and work for them and see their product as changing the world.
But there is more to startups than this. The entrepreneur magazine Lioness sees startups coming in six different forms:
Lifestyle Startups - Where entrepreneurs live the lifestyle they love. For example, a surfer opening a surf shop so they can fund their own surfing.
Small Business Startups - Essentially these are just small businesses, but as they are often treading new ground for their owners and because they are new, they are still startups.
Scalable Startups - The most typical vision of what we like to think a startup is. These are companies that like to think big. Like Google or Facebook, scaleable doesn’t just mean getting bigger, it means world domination.
Buyable Startups - These are companies that are founded to be bought out. This type of startup has become recognisable to everyone, mostly on the web or mobile app market. It is the pipe-dream of every tech entrepreneur.
Large Company Startups - Offers new products based on their core products, like sportswear or electronics companies. These startups sustain growth by continuous innovation.
Social Startups - Instead of wanting to scale-up their enterprises, social entrepreneurs prefer to share wealth or at least create a better world.
What is a Small Business?
Perhaps one of the key ingredients in what defines a small business is being small and recognising consistent returns rather than growth as its fundamental goal.
However, depending on what kind of industry it is in, the term small business can be subjective. An engineering company employing hundreds of workers can be termed as a small business in the same way that a marketing company employing just two people can be. It’s not the size of the small business that matters, it’s the company you keep in your industry.
There are benefits to being a small business that larger scale enterprises and many startups do not enjoy.
- Small Businesses have a personal edge - Many small businesses are personally invested in the products they sell or the service they offer. There are real people with real jobs working in them. Many customers and clients actually like this. They like to know that their business isn’t being supplied by a faceless organisation; they like to know that their suppliers care about what they produce.
- Small businesses have a story - Most small businesses were created by hard work and graft and somewhere along the way where problems have been overcome. Success is often hard fought. Customers, clients and lenders can become invested in that story, which in turn generates business.
- Small business can build strong relationships - Generally, people do business with people they like. A small business is run by people and if you can develop relationships with clients and be liked, this can go a long way in providing security for it.
However, a small business can also have a multitude of different guises too:
Micro Business - A business that operates on a very small scale. They usually have just one or two employees.
Small-Scale Enterprise - Often mistaken for a small business this is a business, corporation or partnership that employs a very small number of workers and a low volume of sales.
Small to Medium Business - Referred to as an SME, it has less than 250 employees and a turnover of less than £40m.
Large Enterprise - Has at least 5000 employees and/or an annual turnover greater than 1.5 billion euros.
Before we take a look at the key differences between a startup and a small business, perhaps the biggest consideration for those looking to start a small business is the differences between being a sole trader or a limited company.
A sole trader is the person in sole charge of their business. They are self-employed and operate in one of the simplest business structures available.
A limited company is a business structure with its own legal identity, separate from its owners, shareholders and those running it.
There are benefits and disadvantages of both. Choosing the right one for you has a lot to do with your business type, how many employees you have and the kind of funding you are likely to require.
The advantages of having a limited company comes with the legal distinction of the business. Not only does it have a protection for its business name, personal assets are not at risk and there are tax benefits to consider.
There are disadvantages to being a limited company too, like the financial responsibilities of directors and filing company accounts every year - although most businesses will pay an accountant to do this for them. Also, all company and director information is also on the public record too - and this won’t appeal to everyone.
Sole Traders, on the other hand, have no such protection for their trading name. But the benefits come with being able to set up their business with little or no administration hassle and being able to file self-assessment tax online. For contractors, this method of setting up a business is one of the most straightforward ways in which to go self-employed.
There are a few disadvantages here as well as financial repayments and responsibilities lie with the owner themselves. However, most sole traders don’t need to risk borrowing significant amounts for their business.
The Key Differences Between a Startup and a Small Business
Startups are often backed by venture capital groups. Getting funding requires startups to clarify growth projections and how the proposed investment will increase the startup’s value. Pitching to venture-backed companies means demonstrating a business model that shows how this growth will be achieved and how it can increase the value of the startup.
Small businesses don’t need to demonstrate such steep revenue projections because it isn’t approaching large venture capitalists whose sole interest is increasing investment wealth. So most of their funding comes from small business loans from the bank or from alternative lenders. Since small businesses usually don’t plan to scale up in the same way as startups, additional rounds of funding aren’t needed either.
Securing funding for startups is much more difficult due to the high number of startups competing for investment and this is the reason why they experience different growth expectations. The medical app Medpad demonstrates this funding difference by trying to secure over £120m for its initial round of investment.
Startups have an essential need for rapid growth. It is an essential principle inherent to how they are funded. At every stage of their growth, more investment is required in order for it to reach the next level. This is why user number metrics are so important to startups as they indicate what percentage of their target market has been achieved and how likely it is to capture an even bigger market share. Profitability isn’t necessarily as important as growth, as investment isn’t something that needs to be paid back in the same way as business loans are. For instance, Facebook and Twitter didn’t see any net profits until they were already well-established companies and had already gone through multiple rounds of funding.
Small businesses also seek growth, but more conservative growth which includes creating reliable, long-term income streams. Unlike startups, small businesses need to ensure costs and expenses remain low because there won’t be further ‘rounds’ of funding available to them; loans need to be repaid with capital and there aren’t many second chances to do so.
What this means is that a startup has a growth-oriented business model whereas a small business employs a more recognisable, traditional business model.
Startups are often formed because of a founder’s need to create something new. That something new could be a new product or a new service or an entirely new way of marketing something. This means that the amount of work required to create it from nothing is often significantly more than that of a small business. This makes it a much riskier prospect.
Small businesses also take on a fair amount of risk by going it alone, but the risk is different. Most small business owners aren't creating something new. Their businesses already have a fairly proven business model to match up to (or improve upon). Because small businesses are not solely focused on growth, the timescales for success are often much longer.
Small businesses can afford to take things slower to reach their goal, startups don’t have this luxury.
The Perception and Reality of Startups and Small Businesses
A startup is often seen as fund-hungry, often appearing fleetingly on our collective consciousness, driven by rapid growth strategies and profits before being consumed or becoming irrelevant due to newer technology.
A small business eschews this for a more reliable business model. Defining their real human story to generate high levels of trust from their customers and become a permanent fixture on the business landscape.
Importantly though, both small businesses and startups both need to prove their ability to excel at their relative business models in order for them to become candidates for funding regardless of their growth aspiration, risk or funding sources.