Everyone desires to do important things in life – to work on important products, establish important companies and carry out tasks that could shake the world and have impacts.
Becoming an entrepreneur is one of the ways to be successful and if you are a business-minded person, chances are that you’ve heard about the two common words ‘small business and startups’ more times than you can recall.
Well, these words are used interchangeably and if you don’t know the differences, you have come to the right place as we will help you differentiate the two and figure out whether your existing venture is a small business or a startup.
Difference Between a Small Business and a Start-Up
A small business can be defined as an independently owned and operated firm, limited in size, has fewer employees and whose revenue depends on the industry.
Any business can be regarded as ‘small’ as long as it can apply for support from the government and qualify for preferential tax, which varies depending on the industry and country it’s operated in.
In many countries, a small business includes retail operations such as small-scale manufacturing, guests houses, grocery stores, photographers and restaurants among others.
The objective of a small business owner to start the business is to make a profit without enjoying unseen risks.
On the other hand, the Co-CEO of Warby Parker, Neil Blumenthal defines a startup as a company dedicated to working in areas where success is not guaranteed and a solution is not evident in order to solve a problem.
Basically, the early stages of a start-up company are tedious because entrepreneurs move from the idea stage and must secure financing, lay the foundation of the business, initiate operations, test and market their idea, a process that requires financing.
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Small business Vs Startup
Steve Blank, serial entrepreneur and Silicon Valley legend simplified the distinction between a startup and a small business based on their top objectives.
He stated that the objective of a startup is top-end revenue as well as growth potential, while that of a small business is to make the profit and maintain a stable long-term value.
Therefore, whereas a startup can survive for long without any form of revenue, a small business cannot survive without revenue.
In order to understand the difference in a more profound way, have a look at these two scenarios.
Steve and Theo were great friends in college and both shared their interests in starting their own businesses.
To get started, Steve made good use of his father’s unoccupied shop and opened an Italian restaurant as the head chef in the kitchen.
Three years later, he was at break-even point making a 40% profit.
Theo joined hands with Steve and used his knowledge to invent a food ordering app which he scaled across various restaurants and with time, he raised money to establish a Food Delivery Company.
Each restaurant paid him 20 percent of the revenue to deliver and in a span of three years, his company expanded to a $50 million valuation and later sold the business to a bigger brand and made even more profit.
Therefore, taking into consideration Steve Blank’s definition, the business that Steve operated can be termed as a small business while that of Theo is a start-up.
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6 Distinguishing Features That Explains Further
To help you grasp the depth of each of the terms in the business world, here are 6 more factors you can think about.
1. Scale
A small business operates within the scope influenced by the business owner and this prevents further innovation and growth of the company. It serves only a limited number of customers.
A startup business focuses on fast growth and scalability and has inspirations to make a difference in the world and avoid disruptive forces to ensure they become leaders in the business domain.
2. Funding
Personal savings are enough for anyone to start a small business. However, a startup requires financial assistance from private means and help from friends and relatives.
If a startup is successful, it is likely to receive additional funding from angel investors, crowd funding opportunities, venture capitalist and initial public offering (IPO).
3. Risk
Starting a business involves running a business model that’s already in the market. For instance, when you start a restaurant, the idea is not new in the market as there are many other restaurants operating in different areas and therefore, a small business involves low risks.
On the other hand, startups are likely to fail within the first five years of operation because your new business ideas might not be approved by the people you want to serve and hence involves bigger risks.
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4. Status
Small business remains constant – it remains small for a long time and the business owner determines how much to hit.
The status of a startup is temporary and due to the high risk involved, it can either fail with time or become a big corporation.
5. Exit strategy
A small business is self-sustaining and this makes it easy to make independent choices on how you want it operated.
However, a start-up has an exit strategy and due to the funding involved, the ownership may diversify and may eventually cease to exist as an independent entity through acquisition or merger.
6. Founder
The founder of a small business may consider starting a business that has been running in the family instead of venturing on something new. Similarly, the founder can sell the business or entrust it to the children or relatives.
On the other hand, establishing a startup is not always a walk in the park and the founder requires professional help from experts.
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Difference Between a Small Business and Start-Up Business (Summary)
Everyone desires to become successful someday but if you want to scale higher, you must understand the distinction of entrepreneur, start-up and small business, and know exactly where you want to venture in.
If you want something that grows faster, scales higher, have something to sell to a large market and shake the industry, a start-up will be a great investment.
However, if you want to be your own boss, make enough profit with low risks, a small business is what you need.
There you have it, the difference between building a small business and building a start-up. What did you think of this post? Let’s have your comments.