The Difference Between a Small Business and a Startup

You've heard both these terms before: small business and startup. Especially if you live in a tech hub like Silicon Valley, Hong Kong, or New York, you probably even know a few people creating their own startups. However, even though thousands of new startups are established every year in the US alone, many people still don't understand the difference between a startup and a small business. To be fair, I didn't know there was a difference for a while, either.

There's something a bit off when you hear people use the word "startup" in association with small businesses, like restaurants, cafes, hair salons, or dental practices. The reason is, a tech startup (or any startup) and a traditional, new business venture, are different for several reasons. The most notable difference is the way they think about growth.

Defining Startups vs. Small Businesses

First, let's take a look at how to define a startup versus a small business. According to entrepreneur and Silicon Valley legend Steve Blank, a startup is a "temporary organization designed to search for a repeatable and scalable business model." A startup should technically be short for a "scalable startup." A company that's searching to not only prove their business model but to do so quickly, in a way that will have a significant impact on the current market. Mainly, startups form with the intent to become a larger company.

In contrast, a small business is not typically formed with the express intent of scaling up. Small Businesses are capable of operating for years, decades, or even generations without millions of dollars in funding or going public. A small business usually serves a focused, local region of loyal customers. As a result of this, it can be a self-sustaining organization that generates revenue from the first day of opening. Small businesses don't require significant investments and time to formulate a company that works.

The Key Difference Between a Startup and a Small Business

The most significant difference between startups and small businesses is how the two different organizations think about growth. Whereas small businesses can survive by serving a small market with a specific product or service, startups vary primarily because their design is to grow fast. By design, this means that they have a product or service they can sell to a vast market. In just a couple of years, they are going from funding an idea to changing the entire landscape of an industry. For most businesses, this is not the case.

This fast growth is one of the reasons that most startups are in the tech industry. Online businesses can reach a large market more quickly because they traverse time and space. In essence, people can buy from a startup or use its product online, regardless of where it is located. SAAS startups, or software as a service has also become popular in recent years. So whereas startups start with the intent to disrupt and take over an entire market, small businesses aren't out to disrupt an industry but instead attempting to be profitable within it.

Differences in Funding

Funding is another area of difference between small businesses and startups. While it's challenging to find financing for any new business, there are key differences in the approach.

Startups typically look for significant investments immediately, so a startup will work with investors looking to make substantial investments. These investors, such as venture capitalists and angel investors, invest capital in exchange for equity in the company.

On the other hand, small business owners typically seek financing through small business loans to meet their funding goals. These loans, through traditional banks and online lenders, are for smaller amounts of capital, and interest is charged for the funding. Small business owners have to pay back the loans plus interest. At the same time, startups usually repay the financing in the form of equity.

The Risk Factor

Both startups and small businesses have their fair share of risk, however, these risks form in different ways. Startups are often formed because of a founder's need to create something new and disrupt the current market, whether that something new is a product, service, or concept. This means that the amount of work required to create it from nothing is often significantly more than that of a small business, and makes a startup a much riskier prospect.

Small businesses also take on a good amount of risk, but the risk is different. Most small business owners aren't creating something new. Their businesses already have proven business models and maybe tweaking a current recipe for success. Because small businesses are not solely focused on growth, the timescales for success are often much longer. In all, a small business can afford to take things slower to reach its goal, while a startup doesn't have this luxury.

While the approaches to growth, risk, and funding may differ for startups and small businesses, they are relatively similar. In reality, any new company needs to excel at its business model to become successful, and the strategy differs depending on the company's goals and funding.