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When you hear the term ‘startup,’ your mind may automatically go to companies like Airbnb, Uber, and TikTok. You might also think that every small business is a startup; however, the two are very different entities. So, what is a startup company vs a small business?
A startup is an organization that searches for an innovative, scalable business model. On the other hand, a small business is an independent person or group of people that sell a product or service. Below, you’ll find information on the differences between a startup vs small business.
The key differentiator of a startup is that it focuses on disrupting markets and driving high revenue growth quickly. Startups are looking to find and execute a new business model that will expand and scale. For this reason, many startups are in the tech space, which is very scalable and far-reaching.
Conversely, small businesses look for long-term, steady growth in a stable market. They’re attempting to be profitable in a market that already exists. For example, bakeries, coffee shops, or digital marketing agencies enter a proven market with a tried and tested product or service.
Startups rely on equity financing by venture capitalists or angel investors to fund their organizations. These investors offer capital in exchange for a share of ownership or equity in the company. For example, on the TV show Shark Tank, startup members get financing, mentorship, and guidance from investors in exchange for a percentage of equity.
While it’s also challenging for small businesses to get funding, the exchange is more transactional. After getting approval from a bank or online lender, small enterprises use debt financings such as a small business loan or business line of credit. They pay more but keep greater ownership of the business.
Since a startup is creating a disruptive product or service, the market isn’t guaranteed. They’re taking a risk that there won’t be a market for the product after rounds of funding, testing, and developing it. The inherent nature of a startup means more added risk than with a small business.
A small business launches a product or service in an already mapped out market, as we’ve discussed. Since someone has already tested the market for viability, it lowers risks and creates more manageable expectations. For example, a Certified Public Accountant (CPA) might start a financial services business around tax season. They know that other small business owners need help with their taxes, so they tap into that market.
The objectives of a startup are to beat out competitors, scale quickly, and disrupt the market. Their innovative business model is concerned with achieving considerable growth to survive. While they might not focus on profiting immediately, they aim to make millions once the business model takes off.
Unlike the ambitious nature of startup founders, most small business owners simply desire to be self-employed and independent. Most small businesses just want to find a market and earn revenue.
Startups are organizations that are designed to be temporary. Once a startup finds the best business model, the organization shifts to focus on executing it. Then, the startup transforms into a company. The transition can be marked by making an initial public offering (IPO) or being bought out by a larger company.
A small business owner may eventually sell the business or pass it to a family member, but until then, the goal is to stay afloat. Their end goal is to steadily increase revenue and have the business be self-sustaining. When considering the end goals of a startup business vs small business, the latter is much more straightforward.
The Founder or CEO of a startup needs to be a visionary who’s willing to try out different business models until they find the best one. The leader needs to be an expert in managing as the startup will rapidly scale. As the startup brings on investors, employees, and stakeholders, the leadership needs to communicate the business model and plan effectively.
The CEO of a small business leads a team to follow the pre-established business plan. They will usually grow the team over time as it scales and grows. In a startup vs small business, the growth is much slower and more stable for a small business.
The exciting part about a startup is that it has the potential to scale into a massive corporation. One of the most successful startups is Uber, which now has a $50 billion market value. Unlike small businesses, there are no restrictions placed on their growth.
The Small Business Administration (SBA) dictates size standards for small businesses in each industry. These standards determine the maximum amount of annual receipts and number of employees. For example, any wholesale business is only allowed to have between 100-250 employees.
If you’re struggling to figure out if your business idea should be a small business or a startup, look back on this article for clarity. When we define small business vs startup, we have to consider many aspects of the two operations. Deciding between a startup vs small business is an essential step towards business success. Knowing which entity your business falls under will prevent you from making costly mistakes and missteps.
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As we’ve discussed at length, a startup is a temporary organization designed to look for a viable business model. A startup is a startup until it is bought by another large corporation or has an initial public offering (IPO), where it sells shares of the company.
A startup is vastly different from any new business venture. In a startup, the founders are looking to disrupt an existing market with an innovative business model. On the other hand, a small business sells a product or service that has already been tested on the current market. Startups are inherently more risky and charter unknown territories, whereas new companies fit into the existing landscape.