The term “startup” gets thrown around a lot. Startups have become synonymous with the tech world, venture capitalists, hustle culture, high risks, and big rewards.
But just what is a startup? And what sets a startup apart from a small business? After all, the first step to launching any business is coming up with a great idea– that’s true whether opening a new restaurant or bringing a new medical device to the market.
Yet as an entrepreneur gets their business idea off the ground, it’s worth considering the characteristics of their venture. While a startup is technically a small business, not all small businesses are startups. There are often key differences around company goals, strategies for growth, funding and organizational structures.
What is a small business?
A small business is typically a locally owned and operated entity, like an independent retail store or restaurant. It can operate in just about any industry – a car dealership, small medical practice or local law firm can also be a small business.
The U.S. Small Business Administration (SBA) defines a small business as an independent business with fewer than 500 employees. Yet a vast majority of small businesses have no employees, run only by a single owner. Only 16% of small businesses employ 20 or more people.
In short, small businesses are usually set up to provide goods or services to a specific geographic area. And their main focus is to achieve stability and turn a profit for the owner over the long term.
What is a startup?
Startups are often created with rapid growth and scalability in mind. A founder will launch his or her startup after determining there is a gap in some marketplace they want to fill, or an existing industry they feel they can disrupt by introducing new, innovative products or services. Startups typically prioritize capturing a significant market share quickly, even at the expense of short-term profitability.
A startup often has a flexible and agile organizational structure, where a founder can make decisions quickly and pivot the business if necessary to adapt to market changes. Innovation is likely to be embraced because of the iterative nature of startups and the need to experiment with new ideas or ways of doing business.
Key Differences Between Startups and Small Businesses
Small business owners and startup founders do a lot of the same things. They hire and manage employees. They strategize to increase their market share. They create budgets and forecast future revenues.
But many of the differences between startups and small businesses center on the founder’s intent for the company in its early stages. Startups usually focus on rapid growth and scalability, with a goal to quickly capture market share, while small businesses prioritize stability and profitability over the long term.
Startups often aim to disrupt markets with innovative products or services, identifying gaps and creating new markets. Small businesses usually cater to more established markets, and provide existing products or services with improvements or unique selling propositions.
Business structures and organizational cultures in startups are generally more flexible and agile than in small businesses, allowing for quicker decision-making and adaptation to market changes. Decision-making processes can be slower for small businesses, but this often allows for a more thorough analysis of potential risks and rewards. Small businesses are also more likely to be self-funded or financed through traditional lending institutions than startups, whose founders may have to give up some equity in their company to get funding.
Growth Expectations and Strategies
Startups and small businesses have very different approaches to growth. Startups tend to use aggressive growth strategies. They will often sacrifice short-term profitability in order to gain long-term market dominance. Their objective is to capture significant market share and expand globally.
On the other hand, small businesses typically favor a conservative growth strategy, emphasizing stability and sustainable profitability. They are more likely to be slow and deliberate when planning expansion activities and usually concentrate on serving local or regional markets.
Reason for starting
Startups are often established by entrepreneurs who are targeting large-scale, global markets. They aim to reach a broad customer base and quickly expand their reach.
By contrast, small businesses usually focus on local or niche markets. They are more likely to cater to specific customer segments, and focus on building strong relationships with their customers.
Startups often set their sights on large-scale or global markets. They intend to reach a broad customer base and rapidly extend their influence. Think of a tech startup developing a new app, and scaling up quickly to crowd out competitors.
This approach contrasts with a typical small business, which usually focuses on serving local or niche markets. Small businesses aim to satisfy specific customer segments and prioritize building strong, long-lasting relationships with their customer base.
Startups are often heavily reliant on external funding. Common sources of outside funding include venture capital, angel investment, or crowdfunding platforms. Founders might give up some ownership stake in their startup right off the bat, seeking large amounts of capital to fuel rapid growth and product development.
Small businesses usually depend on more traditional forms of financing, including personal savings and bank loans. There is a greater focus on maintaining a healthy cash flow and financial stability, rather than quickly scaling up.
Startups face a common trade-off. Their business model poses high risks due to their aggressive growth strategies and the inherent uncertainties of the market. However, they also offer high growth potential, scalability and the prospect of substantial returns.
Successful startups may experience what’s known to venture capitalists and other investors as “hockey stick growth,” with the sharp, rapid growth trajectory resembling the shape of a hockey stick. Despite the higher risk and intense competition, these characteristics can attract top talent and bring in new investors who will help drive more innovation.
Small businesses, while facing lower risk levels and offering more predictable income, are not without their challenges. They may face limitations in growth potential and may find attracting top-tier talent more challenging. However, they typically offer greater control over business decisions, providing a degree of stability and a better work-life balance.
Startups often maintain flat hierarchies and encourage a collaborative culture, emphasizing nimbleness and adaptability. This structure allows employees to swiftly respond to changes and make meaningful contributions to the company’s success.
Small businesses, on the other hand, typically adhere to more traditional structures. Defined roles and a focus on stability provide a consistent work environment and clearer progression paths for employees and the owner.
Type of business
Innovation is at the heart of startups. They aim to introduce novel ideas to the market and disrupt industries, with cutting-edge technology and creative problem-solving to set themselves apart from competitors.
While small businesses prioritize operational efficiency and customer retention, they can be innovative, too. They may adopt new technologies or improve processes to enhance their products and services, but typically stay within the confines of their established business model.
Why you need growth planning as a small business or startup
Taking time to understand where your business idea fits is important. It may help you determine the kinds of resources you’ll need to grow your business, how much risk you should take, what reasonable growth goals are, and more.
While it’s important to know these differences, you can apply the Growth Planning method to your business regardless. But examining these aspects of your business will help you answer key questions about where to go next and what you will need to be successful.