What Is the Difference Between a Startup and a Small Business?

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And why is it important to an entrepreneur?

Startup seems to be a buzzword now, given the thriving startup culture and eyepopping revenue valuations. Now and then, we read incredible stories of exponential startup growth with Bytedance, Airbnb, Stripe, SpaceX, Grab, Canva, Instacart, Databricks and more gaining more traction each day. In fact, it would be safe to say that startups are all the rage right now, with their success stories being one of the most discussed topics. But, behind the success of 40% of start-ups worldwide, there is a story about how the remaining 60% fail.

There is a lot to consider as an entrepreneur. You need to stand out from the crowd with a unique and saleable idea. There are a lot of misconceptions about what businesses can actually be called startups. If you want to gain market traction while retaining profits, you should consider what type of company you want to start first.

Is it a small business or a startup? There’s actually a big difference between small businesses and startups. However, the two terms are not synonymous. Here is some information on the differences between small businesses and startups so that when you’re ready to dive into the market, you’ll know exactly what kind of future awaits your new business venture.

Difference Between a Startup and a Small Business

To better understand the difference between a startup and a small business, we must first get acquainted with the accurate definition of these two entities.

What Is a Startup?

Startups are new companies established to offer a unique and address a specific market need. These solutions frequently stray from the market’s current offering of goods and services, ushering in a brand-new category. They create a market disruption with their unique view of a new potential market and are therefore known as ‘disruptors’. Every time a startup with a novel idea enters the market, they permanently alter the market structure. For example, Space X is totally revolutionizing space travel and its cost.

What Is a Small Business?

Small businesses, on the other hand, start with an already established product line and business model. According to the U. S. Small Business Administration (SBA) small business “is independently owned and organized for profit”.

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What Is the Difference?

Foundation Goal

The foundational goals of startups and small businesses are distinctly different. Start up starts to break into a new market. An entrepreneur seeks to create a repeatable and scalable business model to navigate into a new high potential market.

On the other hand, a small business begins with an established business model to gain profit from the start.

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Financing

Small businesses can start with private funds like personal savings or family loans, debt financing like bank loans or credit lines, or even crowdfunding. The main goal of a small business is to become self-sustaining. According to U. S. Small Business Administration (SBA), “A small business is independently owned and operated.” 

A startup receives its initial funding through “bootstrapping,” which is the founders’ personal, family, or friend’s investment, similar to how a small business does. However, for the next stage, start-ups can resort to seed funding, where high-net-worth individuals like angel investors or venture capitalists channel a large amount of capital. These investors contribute funds in exchange for a specific share of the equity. This is called equity financing. Often, start-ups may have multiple owners. There is no independent owner like small owners. Small business owners generally prefer to be in control of the ownership of their business, unlike start-up founders.

Growth

Startups work by creating a repeatable and scalable business model to break into a new market. They start very small but seek to scale their business first with funding, outreach, and guidance from their investors. They may start with 1-2 people and scale up to employ thousands of people.

A startup can have billions in revenue but still remain a startup. For example, one of the world’s highest valued private startups, Bytedance, from China, reported revenue of $58 billion and nearly 110,000 employees in 2021.

Whereas the United States Small Business Administration (SBA) defines a small business as having revenue ranging from $1 million to over $40 million and employing 100 to over 1,500 people.

Return On Investment

A small business is “organized for profit” like most startups. They can earn ROI at the very beginning of their journey or they may not earn any profit at all for a period.

Products

A small business can begin with a variety of already established products that are ready to sell on the first day whereas a startup can start with a  Minimum viable product  (MVP). An MVP is a basic and minimal version of the ideal product, adorned with its USP features and awaiting feedback for further development.

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Risk Factors

Risk is inherent in business. However, the risk for small businesses is lower than it is for startups.

A startup is a business that has been established but is still in its early stages of development. It can be difficult to see the potential of a new idea, especially if it has not been fully fleshed out or proven. However, startups frequently have enormous potential, which is why investors and entrepreneurs alike are willing to take on the risk associated with a startup venture.

Control Over Business

Since small business owners invest their own capital to fund the business, they have full control over business operations. However, startups raise funds from the public and institutional investors by selling their shares. Hence, these investors have a say in all business decisions. Startup owners are not always aware of the fact that they lose control over their business with funding options like venture capital financing.

To compare the odds, only 32% of small business enterprises shut down in the first three years, whereas for startups, nearly 92% of enterprises shut down in the first three years. Startups face greater risks and competition than small businesses.

Conclusion

Therefore, it is better to understand the difference between a startup and a small business before you venture into the market. You will be able to plan your way forward with more purpose and reason this way.

However, you do not have to plan alone. Un_Standard can help your business stand out in the market by creating a unique design and strategy to highlight your uniqueness to potential customers. We use design and strategy to create successful businesses in the digital world.

Contact us to start your successful journey as an entrepreneur.

About the author

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David is both Agent Provocateur and Chief Executive Officer at Un_Standard. We create strategies for businesses of all sizes that improve customer relationships and help businesses grow. In his spare time, he loves to experiment in the kitchen, collect Scandinavian design, and chase after his two cats, Hallie Tosis and Lester Een.

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