Brainstorming a new business idea? When you’re in the planning stages of starting a company, there’s an important piece you’ll need to consider: Whether you’re launching a startup or a small business? While the terms are sometimes used interchangeably, they each have their own distinctions. Here’s what makes each type of business unique.
What’s a startup?
A startup is a type of young company designed to disrupt an industry and quickly gain market share—and generally, the founder seeks funding from outside investors so it can grow quickly. These companies operate like any other, with a person or a group of employees working to produce something. They’re typically an online business or tech company, but their main goal is to grow into a larger, influential company and create a totally new way of offering a service or product.
For instance, Amazon transformed ecommerce, online stores, affiliate marketing, and the dropshipping business, while Airbnb, as a service provider and dual-sided marketplace, transformed the vacation rental market. Zillow made real estate more accessible for buyers and sellers to connect and for realtors to reach a wider audience. LinkedIn also provided accessibility for job seekers and employers recruiting for open roles. Uber created a new way of hiring drivers on-demand, whereas and Canva created a new way of developing social media assets and other types of creative without needing to have a graphic design skill set.
But just like small businesses, startups aren’t all the same. Here are just a few different ways to classify this type of venture:
- Scalable startups, like Facebook, Google, and Amazon, are ultra-focused on quick growth with high demand and profitability.
- Buyable startups are designed specifically to create a new product or service and eventually sell it to another company. Plenty of tech-focused companies and apps, such as WhatsApp, start as buyable startups.
- Social entrepreneurship startups work toward social change and aren’t driven primarily by financial growth, though unlike nonprofits they are for-profit companies. Toms shoe company is one example of a social entrepreneurship startup.
What’s a small business?
A small business is a privately owned company, whether the business structure is a sole proprietorship, partnership, or corporation. Your small business may be a restaurant, food truck, or cleaning service, or it may provide event planning, bookkeeping, landscaping, online courses, copywriting, or email marketing services. It can be in any type of business category, whether you’re creating products, selling them, or offering a service.
While small businesses can have up to 1,500 employees, about 89 percent employ 20 or fewer workers. To be considered a small business, the venture also needs to be for-profit, independently owned and operated, and not be nationally dominant in its field, according to the US Small Business Administration (SBA). Small businesses also tend to sell within a local market and form personal relationships with customers.
Differences between startups vs. small businesses
Startups and small businesses are both companies that may grow and earn a profit, but they differ in the way they go about it. Here are some of the key differences between startups and small businesses.
Growth plans
One of the biggest differences between a startup and a small business is the company’s plans for growth. Generally, startup founders want to scale their businesses as quickly as possible. These companies need significant capital to reach the next level, and growth is critical for attracting investor dollars. Some startups even temporarily set aside profitability in favor of growth, which allows them to capture a bigger market share. Startups can do this because their investors aren’t repaid in the same way bank loans are.
On the other hand, small businesses seek growth by creating reliable, long-term income streams. They often maintain low costs and expenses because their funding is limited and loans must be repaid with capital. And in terms of full-time or part-time employees, small business owners typically maintain a small-sized team indefinitely.
Funding
Startups and small businesses are both typically funded by the entrepreneur or partners in the beginning. The business owners might chip in money from their own savings for startup costs, take out small-business loans from banks, leverage crowdfunding, or accept financial gifts from friends and family.
But successful startups eventually receive additional funding from lenders or other sources like venture capitalists and angel investors. The startup can offer investors (and employees) something the small business might not be able to: equity in the company. Typically, founders offer equity to investors in rounds (seed funding, then Series A, B, C, etc.)—each with specific goals, terms, and pricing. Each round of funding erodes the startup founder’s equity and diversifies the company’s ownership. Notably, shareholders and board members generally have voting rights.
Later on, the founder may decide to raise capital from the public via initial public offering (IPO), sell the startup business, or merge it with another company to scale growth and capital. In contrast, giving up control of their business isn’t usually as palatable for small business owners.
Business goals
Most small business owners plan to continue running their own businesses for the long haul. They might pass the business on to a family member or sell the company when they’re ready to retire. Therefore, a small business’s long-term goal is often to become a profitable business that stays in business. Unlike startups, IPOs are not typically one of the exit strategy options for small businesses.
On the other hand, while startup founders may also run their companies for the long haul, they usually have a different business plan that entails market disruption, shared ownership with many investors for the purpose of fundraising, and an exit strategy that triggers a liquidity event (like an IPO) for the founder(s), employees, and investors. The startup is the earliest phase of this type of company’s growth; it’s the period in which it’s proving its business model with target markets, raising funds, and scaling rapidly.
Risk factors
While there’s some degree of risk with any new venture, a startup generally comes with more compared to a small business.
Startups are often formed based on a totally new concept or product that’s designed to disrupt the market. They may go through several rounds of funding and test several product iterations before finding what works—and success is never guaranteed.
On the other hand, small businesses tend to use fairly proven business models that they can either match or improve on, they launch within established markets, and their small business ideas and practices aim for longevity. These organizations also take a longer approach to growth with target audiences, if at all. So while there are risks involved with starting a small business, they’re generally more manageable than they are for startup owners.
Which type of business is right for you?
When you’re figuring out how you’ll execute your new business idea, it’s important to think about whether you’re a startup entrepreneur or a small-business owner. Making the distinction early in the process will help you know how to define the path for your future successful business. You’ll be able to set growth expectations, research your funding methods, create a plan for a great business with a customer base, and define upfront what “success” means to you.
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